Anatomy of US RMBS Claims

Two governmental reports released this past year confirmed that the issuance and securitization of risky residential mortgage loans were critical factors in causing and fueling the financial crisis. See U.S. Senate Subcommittee on Investigations, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (Apr. 13, 2011); Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, The Financial Crisis Inquiry Report (Jan. 2011). The risks associated with these toxic loans were passed on to investors worldwide when they purchased the resulting residential mortgage-backed securities (“RMBS”) in reliance on misleading offering materials and inflated credit ratings. Investors lost billions when the loans defaulted in massive quantities and the value of the securities plummeted.

To recover their losses, investors began filing lawsuits in 2008 against the banks that sold RMBS or originated, acquired, and securitized the underlying mortgage loans. As more evidence of underwriting violations emerged, lawsuits increased. This past year saw a surge in RMBS lawsuits by large, well-known investors, such as Allstate Insurance Co., American International Group, Massachusetts Mutual Life Insurance Company, the National Credit Union Administration Board, and the Federal Housing Finance Agency, as receiver for Fannie Mae and Freddie Mac. These lawsuits and others have resulted in the issuance of a number of opinions by courts that have defined the parameters for RMBS litigation. This article discusses the developments in RMBS litigation over the past year.

Typical Misrepresentation Claims That Have Been Asserted by RMBS Investors RMBS investors have asserted a variety of claims under federal and state law based on alleged misrepresentations in connection with the sale of the securities. The claims have typically included:

• Claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 (the “1933 Act”):

These claims may be brought only by investors that purchased securities as part of the
initial public offering (rather than on the secondary market or in a private transaction).
See 15 U.S.C. § 77k; Gustafson v. Alloyd Co., 513 U.S. 561, 583-84 (1995). The claims
do not require any proof that an investor relied on the misrepresentation or that a
defendant acted with scienter or even negligence. A Section 11 claim may be asserted
only against those persons identified in the statute (e.g., those who signed the
registration statement and underwriters), 15 U.S.C. § 77k, and a Section 12 claim may
be asserted only against the “sellers” of the securities. Pinter v. Dahl, 486 U.S. 622, 645-
47 (1988). The statute of limitations for Section 11 and 12(a)(2) claims is one year after
the misrepresentation was discovered or should have been discovered in the exercise of
reasonable diligence, and in no event more than three years after the sale. See 15
U.S.C. § 77m.

• Claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (the
“1934 Act”): 

These claims may be brought by any purchaser of securities that can show a
material misrepresentation in connection with a purchase of securities; reasonable
reliance on the misrepresentation; that a defendant acted with scienter; and that the
misrepresentation was the cause of the loss. See Dura Pharms., Inc. v. Broudo, 544 U.S.
336, 341-42 (2005). The statute of limitations is two years after the facts constituting the
violation were discovered or should have been discovered in the exercise of reasonable
diligence, and in no event more than five years after the violation. See 28 U.S.C. § 1658
(b).

• Claims under various state securities laws (or “blue sky laws”):

 A number of states, including California, Massachusetts, Ohio, and Virginia, have blue sky laws that create civil liability for misrepresentations in connection with the sale of securities in that state.
Because the civil liability provisions are typically modeled off Section 12(a)(2) of the
1933 Act, claims do not ordinarily require a showing of reliance or scienter, but they can
be asserted only against the sellers of securities. The statute of limitations for blue sky
claims varies from state to state. For example, California uses the same two-year/five-
year limitations period that appears in the 1934 Act, while Massachusetts provides that
the statute of limitations is four years after the facts constituting the violation were
discovered or should have been discovered in the exercise of reasonable diligence. An
investor may typically assert claims under the blue sky laws of any state in which the
offer originated or the sale occurred.

• Claims for common law fraud or negligent misrepresentation: Finally, RMBS investors
have asserted claims for common law fraud or negligent misrepresentation. The statute
of limitations for these claims depends on which state’s law governs the claims, which is
ordinarily determined by an interest analysis that considers where the injury occurred,
among other factors. The statute of limitations varies widely by state. The California
statute of limitations, for example is three years after the facts constituting the fraud
were discovered or should have been discovered, while the New York statute of
limitations is two years after discovery of the facts constituting the fraud or six years
after the claim accrued, whichever is greater.

The Importance of the Statute of Limitations

The statute of limitations has become an important impediment on the misrepresentation claims that can be maintained by RMBS investors. Two dates are relevant to a statute of limitations analysis – the date when the sale of securities occurred and the date when the facts constituting the claim were discovered or should have been discovered.

RMBS investors have typically asserted claims based on sales of securities that occurred between 2005 and 2007. Because claims under Sections 11 and 12(a)(2) of the 1933 Act are time-barred if brought more than three years after the sale, many courts are dismissing these claims at the pleading stage based on the statute of limitations. See, e.g., Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125, 1130-31 (C.D. Cal. 2011). Some investors have been able to save their claims from dismissal by showing that their claims “relate back” to earlier-filed complaints under the tolling doctrine set forth in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974). Courts will toll the statute of limitations for claims based on RMBS transactions at issue in earlier-filed class actions in which the investor was a putative class member. To receive the benefit of tolling, some courts are requiring an investor to show that its claims are based on not only the same RMBS transactions at issue in a prior class action, but also on the same specific classes (or tranches) of securities at issue, under the theory that each tranche is a separate security. See, e.g., Me. State Ret. Sys. v. Countrywide Fin. Corp., No. 2:10-cv-0302, 2011 WL 4389689, at *4-*5 (C.D. Cal. May 5, 2011). Thus, an investor that purchased securities in Class 2 of the 2006-17 Countrywide transaction, for example, may not receive the benefit of tolling if a prior class action asserted claims only on behalf of purchasers of securities in Class 1. Investors are finding that American Pipe tolling does not cover a majority of their holdings, and they have had to rely on claims other than Section 11 and 12(a)(2) claims for recovery.

In addition to the date of sale, the date when an investor discovered or should have discovered the facts constituting its claims is important to the statute of limitations. A number of defendants have argued that RMBS investors should have discovered their claims in 2007 and 2008 based on news articles that reported increasing delinquencies and defaults in mortgage loans, borrower fraud, bankruptcies of large lenders, and similar information that defendants have asserted is relevant to underwriting misrepresentations. Courts have consistently rejected these arguments at the pleading stage, especially because almost all of the articles cited by defendants are general articles that do not mention the specific defendants or securitizations at issue in the particular action. See, e.g., Mass. Mutual Life Ins. Co. v. Residential Funding Co., LLC, — F. Supp. 2d –, 2012 WL 479106, at *10-*11 (D. Mass. Feb. 14, 2012); Genesee Cnty. Emps.’ Ret. Sys. v. Thornburg Mortg. Sec. Trust 2006-3, — F. Supp. 2d –, 2011 WL 5840482, at *65 (D.N.M. Nov. 12, 2011). The notable exceptions are the Countrywide cases pending in the multi-district litigation before Judge Mariana Pfaelzer in the Central District of California. She has held, at the pleading stage, that investors in Countrywide RMBS should have discovered their claims by late 2007 or early 2008, and has dismissed claims based on a February 14, 2008 discovery date. See Stichting, 802 F. Supp. 2d at 1137.

Based on these decisions, investors that filed suit in early 2010 have typically been able to maintain claims subject to a two-year discovery statute of limitations, including claims under Section 10(b) and Rule 10b-5. Investors that filed suit in late 2010 or 2011, on the other hand, have faced dismissal of those claims as untimely, especially if the claims relate to Countrywide RMBS. Nevertheless, these investors have been able to maintain claims with lengthier statutes of limitations, including certain blue sky claims and common law fraud claims.

Actionable Misrepresentations That Support a Claim

Investors have supported their misrepresentation claims by alleging different categories of misrepresentations. The categories have typically included misrepresentations about the underwriting standards that were used to originate the underlying mortgage loans, false loan-to-value (“LTV”) ratios for the loans, false owner-occupancy rates for the loans, and false credit ratings for the securities. Courts have typically concluded that investors have stated claims based on misrepresentations about the applicable underwriting standards. Investor have had mixed success with the other categories of misrepresentations.

• Underwriting Misrepresentations: To allege underwriting misrepresentations, investors
have identified specific statements in the offering materials about the applicable
underwriting standards and have alleged that the statements were false because the
banks systematically abandoned those standards. Courts have analyzed whether
investors have alleged a plausible abandonment of underwriting standards for the specific
loans at issue. When an investor has supported its allegations only with reports of
general underwriting violations in the industry, courts have dismissed the claims as
conclusory. See, e.g., N.J. Carpenters Health Fund v. Novastar Mortg., Inc., No. 08 Civ.
5310, 2011 WL 1338195, at *10-*11 (S.D.N.Y. Mar. 31, 2011). When, however, an
investor has supported its allegations with a sharp drop in the credit ratings for the
securities at issue and facts specific to the banks at issue, courts have typically allowed
the claims to proceed. See, e.g., Plumbers’ Union Local No. 12 Pension Fund v. Nomura
Asset Acceptance Corp., 632 F.3d 762, 773-74 (1st Cir. 2011) (“Nomura”); Mass. Mutual,
2012 WL 479106, at *5; Genesee, 2011 WL 5840482, at *68-*69.

Some courts have demanded still more specificity, requiring investors to link the allegations about the banks with the specific mortgage loans at issue. See N.J. Carpenters Health Fund v. Novastar Mortg., Inc., No. 08 Civ. 5310, slip op. at 11-12 (S.D.N.Y. Mar. 29, 2012). To increase the specificity in their complaints, some investors have retained forensic analysis firms with access to certain data for the underlying mortgage loans, and have supported their allegations of underwriting abandonment with an analysis of actual loan-level data. Courts have accepted this analysis at the pleading stage. See, e.g., Mass. Mutual, 2012 WL 479106, at *7; Allstate Ins. Co. v. Countrywide Fin. Corp., — F. Supp. 2d –, 2011 WL 5067128, at *18 (C.D. Cal. Oct. 21, 2011).

• LTV Ratios: Investors also have alleged that the represented LTV for the underlying
loans were false because the property values used to calculate the LTV ratios were
materially inflated. These values were supposed to have been determined by objective
appraisals conducted in accordance with the standards disclosed in the offering materials,
but were instead determined by what value was needed to justify the loan. Courts have
almost universally held that property values and the resulting LTV ratios are opinions that
are actionable only if an investor can allege that the defendant did not honestly believe
the opinion or knew that it bore no reasonable relationship to the actual facts. See, e.g.,
Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 393
(S.D.N.Y. 2010). Investors have been successful by alleging facts sufficient to show that
one of these two bases exists. See, e.g., Mass. Mutual, 2012 WL 479106, at *6-*7.
Investors also have been successful in separating the disclosed appraisal practices from
the resulting LTV ratios and alleging that defendants did not follow the disclosed appraisal
practices, a misrepresentation of fact. See, e.g., id. at *6; Emps.’ Ret. Sys. of the Gov’t
of the Virgin Is. v. J.P. Morgan Chase & Co., — F. Supp. 2d –, 2011 WL 1796426, at *9
(S.D.N.Y. May 10, 2011).

• Owner-Occupancy: Investors have alleged that the owner-occupancy rates for the
mortgaged properties were false because substantially fewer homes were owner-
occupied than what was represented in the offering materials. Investors typically have
not been successful in maintaining claims based on this category of misrepresentation.
Many offering materials disclosed that the owner-occupancy rates were based on the
representations of borrowers regarding their intended use of the property. Courts have
held that when this disclosure appears in the offering materials, there was no
misrepresentation; the offering materials accurately reported the representations of
borrowers. See, e.g., Mass. Mutual, 2012 WL 479106, at *7-*8; Footbridge Ltd. v.
Countrywide Home Loans, Inc., Civ. A. No. 09-4050, 2010 WL 3790810, at *9 (S.D.N.Y.
Sept. 28, 2010).

• Credit Ratings: Finally, investors have alleged that the credit ratings for the securities
were false and misleading because, for example, the ratings were generated based on
outdated models or false information. Investors have attempted to state claims not only
against the banks involved in the securitizations, but also against the ratings agencies.
Credit ratings are considered opinions and are therefore actionable only if an investor
can allege that a defendant did not honestly believe the ratings or knew that they bore no
reasonable relationship to the underlying facts. See Nomura, 632 F.3d at 775. Courts
have typically dismissed claims against the ratings agencies, finding that the facts were
insufficient to show that the ratings agencies did not honestly believe the ratings at the
time they were given. See id.; Genesee, 2011 WL 5840482, at *98. Claims against the
banks involved in the securitizations have met with slightly more success because
investors have been able to allege that these defendants provided the false information
to the ratings agencies and knew the ratings bore no reasonable relationship to the
underlying facts. See, e.g., Allstate, 2011 WL 5067128, at *15-*16.

The Future

This past year has seen significant developments in RMBS litigation. Many investors have been able to survive pleading challenges on at least some of their claims. In response, some banks have entered into settlement with investors, including Deutsche Bank’s and Citigroup’s recent settlement with the National Credit Union Administration Board. As discovery in these cases proceeds, there will likely be substantially more settlements.

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SEC Probes Role of Hedge Fund in CDOs

WSJ – By JEAN EAGLESHAM

U.S. securities regulators are investigating hedge-fund firm Magnetar Capital LLC, which bet on several mortgage-bond deals that wound up imploding during the financial crisis, according to people familiar with the matter.

The SEC is investigating hedge-fund Magnetar Capital, which is alleged to have had inappropriate involvement with NIR Capital Management in its managing of CDO assets. Jean Eaglesham reports. Photo of NIR founder Corey Ribotsky by Getty Images.

While Magnetar has faced scrutiny over its role in various collateralized debt obligations, or CDOs, the Illinois firm itself now is a target of an investigation by the Securities and Exchange Commission, these people said.

If the SEC were to file civil charges, it would be its first enforcement action against hedge funds related to CDOs. No decision has been made on whether to file charges, the people said.

“As we have stated publicly and acknowledged many times, the SEC has been investigating a variety of aspects of the CDO markets for some time,” a spokeswoman for Magnetar said in a statement. “We continue to cooperate with the SEC in relation to these inquiries,” the statement added.

Investigators are looking at whether Magnetar had such a strong influence in designing any of the deals that in effect it took over the role of collateral manager, a person familiar with the probe said. The collateral manager has the ultimate responsibility for selecting the assets for the CDO and owes a duty of care to all the investors in the deal. CDOs are based on pools of risky mortgages and other loans and are sold in tranches.A spokesman for the SEC declined to comment.

Magnetar invested $1.5 billion to $1.8 billion into the riskiest slices of CDOs from 2006 to 2007, while betting about twice as much that the mortgage-bond deals would decline in value, according to a person familiar with the firm.

Letter from Rabobank’s Lawyers in CDO Case

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Jason Anthony, a lawyer in the SEC’s structured-products enforcement unit, said earlier this year in general comments about the agency’s scrutiny of CDOs that there was “an awful lot of conduct that’s very troubling.” But he cautioned that the SEC “must find a duty to disclose” before it can file civil charges alleging that investors were misled about a mortgage-bond deal.

Last year, the SEC decided not to charge Magnetar as part of the agency’s enforcement action over a $1.1 billion deal called Squared CDO 2007-1. Magnetar bet against that deal.

J.P. Morgan Chase JPM +4.61% & Co. paid $153.6 million to settle SEC charges that the bank failed to tell Squared investors that Magnetar helped choose assets in the deal. The bank didn’t admit or deny any wrongdoing.

In that case, the SEC concluded that Magnetar didn’t control what investors were told about its role in the deal or have final authority over which assets went into the CDO, according to people familiar with the matter.

The latest scrutiny indicates that SEC officials suspect Magnetar was more actively involved in the creation of other bond deals where the full extent of its participation might not have been adequately disclosed.

In a 2009 lawsuit filed by Dutch bank Coöperatieve Centrale Raiffeisen-Boerenleenbank BA, known as Rabobank, against Merrill Lynch & Co., Magnetar was alleged to have “teamed up” with Merrill to create a $1.5 billion CDO called Norma. The deal tumbled into default in 2008, and the civil court suit in New York was settled by Merrill in 2010 for an undisclosed amount.

A spokesman for Bank of America Corp., BAC +2.20% which acquired Merrill, declined to comment.

In a letter before the settlement, Rabobank’s lawyer said that “Merrill knew NIR had abdicated its asset selection duties to Magnetar, an important Merrill client.” NIR was a reference to NIR Capital Management LLC, a Roslyn, N.Y., firm listed as the collateral manager in deal documents.

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The Rabobank letter said that a Merrill executive in 2006 emailed colleagues: “Dumb question. Is Magnetar allowed to trade for NIR?” The letter also said a Magentar executive sent an email to NIR in which the executive said he wanted to “approve” the assets that went into the Norma deal.

A document setting out fees and other expenses paid to firms in relation to Norma shows Magnetar received $4.5 million. A Magnetar lawyer told the Financial Crisis Inquiry Commission, or FCIC, the money was a “discount in the form of a rebate” on its investment in the CDO, not payment in return for any goods or services. The Rabobank letter was released by the FCIC.

A spokeswoman for Magnetar said that as an investor in CDOs, “our role and interactions did not diminish nor replace the roles of other parties in the transaction, specifically including the role of the collateral manager.” Rejecting the allegations in the Rabobank letter, she added: “It is unfortunate that an unsubstantiated letter from a plaintiff’s attorney is being treated as fact.”

A person familiar with Magnetar’s investment strategy said the hedge-fund firm aimed to profit from pricing discrepancies on assets, rather than taking an overall view on the housing market.

A Merrill lawyer told the FCIC it was common practice during the structured-finance boom for major investors in CDOs to “have input” during the selection of the assets. The FCIC said Merrill told the panel that its “collateral manager made the ultimate decisions regarding portfolio composition.”

The SEC continues to probe Merrill and NIR in relation to Norma, according to people familiar with the matter. A lawyer for NIR and founder Corey Ribotsky said Wednesday: “They did not improperly abdicate any asset selection duties.”

Last year, the SEC filed civil charges alleging Mr. Ribotsky misappropriated more than $1 million in client money. He has denied any wrongdoing in that case, which isn’t related to the SEC’s ongoing investigation.

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Finra Fines Citigroup $3.5 Million For Inaccurate RMBS Data

DOW JONES NEWSWIRES

The Financial Industry Regulatory Authority has fined Citigroup Inc.’s (C) Global Markets group $3.5 million for allegedly posting inaccurate data about deals it was making on mortgage-backed securities during the subprime mortgage and housing market crisis.

Citigroup wasn’t immediately available for comment, but has neither admitted nor denied the charges, Finra said.

The regulatory agency fined the banking giant for allegedly providing inaccurate mortgage performance information, as well as for supervisory failures and other violations in connection with its residential mortgage-backed securitizations, or RMBS.

Finra claims Citigroup posted inaccurate mortgage performance data on its website from January 2006 to October 2007. The bank didn’t remove the information until early May 2012, despite receiving several warnings that it was inaccurate, the regulatory agency said.

“Investors use this data to inform their decisions and in this case, for over six years, investors potentially used faulty data to assess the value of the RMBS,” said Brad Bennett, FINRA’s chief of enforcement.

Issuers of RMBS are required to disclose information on the historical performance of similar securities offered in the past, as a way for investors to assess the value and risk associated with their securities and the mortgages on which they are based.

Citigroup’s purported inaccurate information about three subprime, or Alt-A, securitizations may have affected investors’ view of subsequent RMBS, the regulatory group said.

Finra also said the bank allegedly failed to supervise the pricing of mortgage-backed securities, lacked procedures to verify traders’ prices, and didn’t maintain required records, including, for instance, documentation of margin calls leading to the re-pricing of certain securities.

In 2010, Citigroup was fined $75 million by the Securities and Exchange Commission for allegedly misleading investors about $39 billion in subprime-mortgage assets.

-By Kristin Jones; Dow Jones Newswires; 212-416-2208; kristin.jones@dowjones.com

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NEW YORK TIMES: Discord at Key JPMorgan Unit Is Faulted in Loss

From the New York Times

Mark Lennihan/Associated Press

JPMorgan Chase’s trading loss is now said to equal at least $3 billion, and could rise further.

By JESSICA SILVER-GREENBERG and NELSON D. SCHWARTZ

Published: May 19, 2012 199 Comments

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Ever since JPMorgan Chase disclosed a multibillion-dollar trading loss this month, the central mystery has been how a bank known for its skill at risk management could err so badly.

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JPMorgan Chase, via Bloomberg News

Ina Drew resigned as head of JPMorgan’s chief investment office. She was the bank’s fourth-highest-paid officer.

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As early as 2010, the senior banker who has been blamed for the debacle, Ina Drew, began to lose her grip on the bank’s chief investment office, according to current and former traders. She had guided the bank through some of the most rugged moments of the 2008 financial crisis, earning the trust of Jamie Dimon, JPMorgan’s chief executive, in the process.

But after contracting Lyme disease in 2010, she was frequently out of the office for a critical period, when her unit was making riskier bets, and her absences allowed long-simmering internal divisions and clashing egos to come to the fore, the traders said.

The morning conference calls Ms. Drew had presided over devolved into shouting matches between her deputies in New York and London, the traders said. That discord in 2010 and 2011 contributed to the chief investment office’s losing trades in 2012, the current and former bankers said.

“The strife distracted everyone because no one could push back,” said one current trader in the office who insisted on anonymity because of the nature of the issue. “I think everything spiraled because of the personality issues.”

Mr. Dimon has described the trades as “sloppy” and “stupid,” but has not identified the specific mistakes. The trading loss, initially estimated at $2 billion but now said to equal at least $3 billion, is the most embarrassing misstep of Mr. Dimon’s seven-year tenure, and it has also strengthened the hand of regulators in Washington who are in the final stages of writing rules that could reshape the banking industry. In his radio address on Saturday, President Obama urged tighter restrictions on banks’ trading activity.

JPMorgan and Ms. Drew declined to comment. Mr. Dimon is due to make a presentation Monday at an investor conference in Manhattan sponsored by Deutsche Bank. While JPMorgan’s stock has suffered since the disclosure of the loss, the bank’s overall health remains strong, and the company is expected to post a significant profit in the second quarter.

Ms. Drew, 55, resigned as chief investment officer last week. In 2011, she earned roughly $14 million, making her the bank’s fourth-highest-paid officer.

But when the losses were mounting in recent weeks, Ms. Drew’s command of the chief investment office was far different from what it had been during her stellar performance of 2008, according to interviews with more than a dozen current and former traders, bankers and executives at JPMorgan Chase. All insisted on anonymity because the losses were being examined by a host of regulators, as well as the Federal Bureau of Investigation.

In the midst of the financial crisis, for example, Ms. Drew attended the regular morning huddle with traders and forced them to defend positions and outline the risks they would face during the approaching trading day.

“I always thought she was coolheaded and an excellent manager,” said Petros Sabatacakis, a former senior executive at Citigroup who worked with Ms. Drew at Chemical Bank.

Senior executives at JPMorgan said that her success in 2008, even as other banks were sustaining crippling losses, helped forge a sense of implicit trust between Ms. Drew and Mr. Dimon, one reason that he believed her initial assurances last month that the trades were not seriously troubling.

Ms. Drew also enjoyed the confidence of her subordinates, according to former employees. Part of her skill, they said, was her steely resolve. One former trader recalled that Ms. Drew counseled a credit trader who had a large bet in bank-preferred securities, which began to lose money during 2009. Instead of folding, Ms. Drew supported the trader who wanted to hold on, ultimately generating $1 billion in profits.

Ms. Drew’s success during the market crisis in 2008 also left the chief investment office feeling much more confident — too confident, in the eyes of some former employees there.

“When Ina was there, things ran smoothly,” one former trader there said.

But Ms. Drew’s firm hand began to weaken after she contracted Lyme disease. Her absences opened the door for tensions among her deputies to flare into the open. “Look,” one current trader added, “it is a tough place to work.”

Most significant, her deputy in New York was increasingly at loggerheads with her deputy in London who spearheaded the strategy behind the losing bet, Achilles Macris, the current and former traders said.

But there was only so much she could do when she was away, even though some current traders and senior executives at the bank emphasized that Ms. Drew remained vigilant about risky trades throughout her tenure.

“No one could really challenge Achilles’s traders,” a former risk officer said.

Beyond that, the chief investment office was performing well, earning sizable profits for JPMorgan even as other businesses at the bank, like home loans, began to hemorrhage money. Those gains came as the size of the unit’s trades was increasing, but the office’s success blunted questions that were raised about the added risk.

During this time, Mr. Macris gained more latitude to build and expand trades from his desk in London — including the wagers that ultimately went so wrong for the bank.

For example, Althea Duersten, who was Mr. Macris’s counterpart in New York and oversaw North American trading, raised objections to Mr. Macris’s outsize bet but was routinely shouted down by Mr. Macris during conference calls between London and New York, former traders said.

What’s more, the brewing tension between Mr. Macris and Ms. Duersten left traders feeling whipsawed, said one trader in New York who spoke on the condition of anonymity because of the delicate nature of the trading loss within the bank.

At one point, Ms. Duersten called one trader into her office at the New York headquarters and told him that he would report to her, instead of to Mr. Macris, the trader said. “Achilles hit the roof” upon hearing of the meeting, the trader said, adding that he “didn’t know who to listen to.”

Mr. Macris was unavailable for comment, as was Ms. Duersten.

Ms. Drew eventually returned from sick leave and reasserted herself as head of the chief investment office. But instead of sitting one floor above the trading desk, as she had done previously, Ms. Drew, in a reflection of her rising profile, moved upstairs to an office among senior executives on the 48th floor of JPMorgan’s headquarters at 270 Park Avenue.

Ms. Drew was now markedly less hands-on with the trading book than she had been in the past, former employees said.

“It felt like there was a land grab where no one was pushing back because Althea and Achilles both wanted more responsibility,” one of the former traders said.

The situation worsened in early 2011 when Irene Tse, who came from the hedge fund Duquesne Capital Management, took over for Ms. Duersten as head of the North American trading desk.

The chief investment office continued to post healthy profits in 2011, as it had in 2010 and 2009. But the size of its bets continued to grow, and many of the trades assembled by Mr. Macris’s traders were growing more complex, making them harder to exit when market conditions turned against the bank in 2012.

In addition, Ms. Tse was even less equipped to battle Mr. Macris because, unlike Ms. Duersten, she was a newcomer to the firm and first had to find her bearings, the current and former traders said. Before her retirement, Ms. Duersten had been at JPMorgan for over 16 years.

On the conference calls, the yelling continued, only now it was between Ms. Tse and Mr. Macris. Ms. Tse was unavailable for comment.

As the infighting continued, Mr. Macris was supervising Bruno Iksil, now known as the London Whale for the huge positions he amassed in the credit markets.

“No one could sufficiently push back against Achilles, so he and Bruno could do what they wanted,” one former trader said.

Undergirding these trades was a bullish bet linked to an index of investment-grade bonds. Unfortunately for JPMorgan Chase, the market has grown much more anxious about corporate credit in recent months. Now, with losses rising as hedge funds and other investors profit from JPMorgan’s distress, the company is trying to unwind the disastrous trade.

Its architects — Mr. Macris and Mr. Iksil — are both expected, like Ms. Drew, to leave the firm.

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FDIC sues Citigroup, JPMorgan Chase, Bank of America, Credit Suisse, Deutsche Bank, Royal Bank of Scotland, UBS and HSBC.

WASHINGTON (AP) — The government has sued several big banks over toxic mortgage securities they issued that were bought by two small Illinois banks which failed in May 2009.

The Federal Deposit Insurance Corp., which seized the two banks when they failed, filed the civil lawsuits Friday in federal court. The agency named as defendants banks including Citigroup, JPMorgan Chase, Bank of America, Credit Suisse, Deutsche Bank, Royal Bank of Scotland, UBS and HSBC.

The FDIC says the banks made false statements and deceived investors about the risks in the securities backed by pools of home mortgages. The failures of the two Illinois banks, Strategic Capital Bank and Citizens National Bank, cost the deposit insurance fund $169 million and $37.2 million, respectively. The FDIC seeks a total of about $92 million in damages.

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UK Banks massive systematic mis-selling of Interest Rate Derivatives to UK SME Businesses

Banks on brink of swaps ‘mis-selling’ investigation

British banks are facing the prospect of a major investigation by the Financial Services Authority into alleged mis-selling of billions of pounds of complex interest rate hedging products to small businesses.

The Telegraph  reported last week that the FSA has completed their initial review of allegations that banks, including Barclays, Lloyds Banking Group, HSBC and Royal Bank of Scotland, systematically mis-sold interest rate derivatives to businesses.

They have ordered the lenders to provide more information ahead of a decision expected next month on whether to pursue “enforcement action” against them.

The FSA, which began its review following an investigation by The Sunday Telegraph and The Daily Telegraph, said its work already “pointed to concerns about the suitability of some of these products for SMEs and some of the sales practices involved”.

“We have seen hedges that last longer than the duration of the loan they were protecting and sales incentives that incentivised sales of the more complex products,” said a spokesman for the regulator.

“We have requested more information from the banks and are continuing to receive information from customers, which will enable us to determine the extent and severity of poor sales practices. We anticipate concluding this phase of work by the end of June 2012. We will consider what action is appropriate based on our findings including not hesitating to take enforcement action where appropriate.”

Senior bankers were last week warned by Martin Wheatley, the head of the Financial Conduct Authority, that their banks could face a full-scale investigation unless they gave the regulator all the information it needed to conduct its review of the alleged mis-selling practices.

FSA staff have already held meetings with businesses claiming to have been mis-sold interest rate hedges, along with lawyers and financial experts advising potential victims. Stephen Hester, the chief executive of RBS, admitted last week that there had been “mistakes”, but said mis-selling was unlikely to be a big problem for RBS.

“This doesn’t look like a major issue in terms of mis-selling,” he said. “Of course, one naturally feels that if you’ve fixed your interest rate and it has gone down you would, with hindsight, rather not have fixed it, but I think that is a different issue from whether there was mis-selling.”

His comments echoed those of Bob Diamond, the chief executive of Barclays, who when questioned about mis-selling cases at his bank’s annual general meeting last month, told investors that it had received a “very small number” of complaints.

“I can guarantee you in some cases we have made mistakes,” Mr Diamond told a shareholder who claimed he had been mis-sold a hedging product by the bank. “It’s going to happen when we do thousands of transactions. When we make a mistake we’re going to own up to it and we’re going to fix it.”

Barclays has already been forced to apologise to the FSA after The Sunday Telegraph uncovered evidence that the bank had demanded clients withhold information from the regulator over the sale of the controversial products.

The bank had to admit a second serious error weeks later when its confirmed it had mistakenly sold interest rate hedges to some small business clients using a presentation that had only been authorised to be shown to “investment professionals”.

In March, Michael Hockin, the chairman of London & Westcountry Estates, branded RBS a “disgrace” after his business parks company went into administration. Mr Hockin claims his firm’s problems were largely the result of RBS’s sale of a complex hedging product in 2008, just before interest rates were cut.

Several mis-selling cases have already been settled by the banks, though the details of the settlements are subject to court gagging orders.

Barclays and all the other banks have denied they mis-sold interest rate hedges to their customers.

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JPMorgan’s Derivative Losses "only" puts them in 5th place as World’s Biggest Loosers

Biggest Loosers

We note that JPM’s exposure via these trades is estimated to be in the range of USD100Billion and they are having difficulty unwinding these positions which have maturities stretching to 2012 year end.  If equities continue to slide the losses could increase — there is hope yet that JPM could take gold in this race.

Source (and link) to Wikipedia:   http://en.wikipedia.org/wiki/List_of_trading_losses

#	Nominal Amount Lost	USD FX Rate at time of loss[1]	USD Equivalent at time of loss	USD Inflation to 2007[2]	Real Amount Lost	Country	Company	Source of Loss	Year	Person(s) associated with incident
1	USD 9 bn	1	USD 9 bn	-3.7%	USD 8.67 bn	United States	Morgan Stanley[3]	Credit Default Swaps	2008	Howie Hubler
2	EUR 4.9 bn	1.473	USD 7.22 bn	-3.7%	USD 6.95 bn	France	Société Générale[4]	European Index Futures	2008	Jérôme Kerviel
3	USD 6.5 bn	1	USD 6.5 bn	2.8%	USD 6.69 bn	United States	Amaranth Advisors[5]	Gas Futures	2006	Brian Hunter
4	USD 4.6 bn	1	USD 4.6 bn	27.2%	USD 5.85 bn	United States	Long Term Capital Management[6]	Interest Rate and Equity Derivatives	1998	John Meriwether
5	USD 3.0 bn	1	USD 3.0 bn	-7.0%	USD 3.22 bn	United Kingdom	JP Morgan[7]	Credit default swaps	2012	Bruno Iksil
6	JPY 285 bn	108.78	USD 2.62 bn	32.1%	USD 3.46 bn	Japan	Sumitomo Corporation[8]	Copper Futures	1996	Yasuo Hamanaka
7	BRL 4.62 Bn	1.833	USD 2.52 Bn ;	-3.7%	USD 2.43 bn	Brazil	Aracruz[9] [10]	FX Options	2008	Isac Zagury,Rafael Sotero
8	USD 2 bn	1	USD 2 bn	-8.5%	USD 1.83 bn	United Kingdom	UBS[11]	Equities ETF and Delta 1	2011	Kweku Adoboli
9	USD 1.7 bn[12]	1	USD 1.7 bn	39.9%	USD 2.38 bn	United States	Orange County[13]	Leveraged bond investments	1994	Robert Citron
10	DEM 2.63 bn	1.655	USD 1.59 bn	43.5%	USD 2.28 bn	Germany	Metallgesellschaft[14]	Oil Futures	1993	Heinz Schimmelbusch[15]
11	JPY 166 bn	111.08	USD 1.49 bn	43.5%	USD 2.14 bn	Japan	Showa Shell Sekiyu[16] [17]	FX Forwards	1993
12	JPY 1536 bn	102.18	USD 1.50 bn	39.9%	USD 2.09 bn	Japan	Kashima Oil [17]	FX Forwards	1994
13	HKD 14.7 bn	7.786	USD 1.89 bn	-3.7%	USD 1.82 bn	China	CITIC Pacific[18]	Foreign Exchange Trading	2008	Frances Yung
13	USD 1.8 bn	1	USD 1.8 bn	-3.7%	USD 1.74 bn	United States	Deutsche Bank[19]	Derivatives	2008	Boaz Weinstein
14	GBP 827 mio	1.579	USD 1.31 bn	36.1%	USD 1.78 bn	United Kingdom	Barings Bank[20]	Nikkei Futures	1995	Nick Leeson
15	EUR 1.4 bn	0.923	USD 1.29 bn[21]	20.4%	USD 1.56 bn	Austria	BAWAG [22]	Foreign Exchange Trading	2000[21]	Wolfgang Flöttl,Helmut Elsner[22]
16	USD 1.1 bn	1	USD 1.10 bn	36.1%	USD 1.50 bn	Japan	Daiwa Bank[23]	Bonds	1995	Toshihide Iguchi
17	USD .8 bn	1	USD .8 bn	82.5%	USD 1.46 bn	United Kingdom	Soros Fund[24]	SP 500 Futures	1987	George Soros
18	EUR 0.75 bn	1.473	USD 1.10 bn	-3.7%	USD 1.06 bn	France	Groupe Caisse d’Epargne [25] [26]	Derivatives	2008	Boris Picano-Nacci
19	BRL 2 bio	1.833	USD 1.09 bn	-3.7%	USD 1.05 bn	Brazil	Sadia[9] [10] [27]	FX and Credit Options	2008	Adriano Ferreira,Álvaro Ballejo
20	GBP 0.4 bn	1.638	USD 0.66 bn	29.2%	USD 0.85 bn	United Kingdom	Morgan Grenfell[28]	Shares	1997	Peter Young
21	USD 0.6 bn	1	USD 0.60 bn	39.9%	USD 0.84 bn	United States	Askin Capital Management[29]	Mortgage-Backed Securities	1994	David Askin
22	EUR 0.60 bn	1.371	USD 0.82 bn	0.0	USD 0.82 bn	Germany	WestLB [30]	Common and Preferred Shares	2007	Friedhelm Breuers[31]
23	USD 0.69 bn	1	USD 0.69 bn	15.3%	USD 0.80 bn	United States	AIB/Allfirst[32]	Foreign Exchange Options	2002	John Rusnak
24	DEM 0.47 bn	2.587	USD 0.18 bn	320.6%	USD 0.76 bn	Germany	Herstatt Bank[33] [34]	Foreign Exchange Trading	1974	Dany Dattel
25	CAD 0.68 bn	1.066	USD 0.64 bn	0%	USD 0.64 bn	Canada	Bank of Montreal[35][36]	Natural gas derivatives	2007	David Lee, Kevin Cassidy [37] [38]
26	USD 0.55 bn	1	USD 0.55 bn	9.8%	USD 0.60 bn	China	China Aviation Oil (Singapore)[39]	Oil Futures and Options	2004	Chen Jiulin
27	CHF 0.63 bn	1.451	USD 0.43 bn	27.2%	USD 0.55 bn	Switzerland	Union Bank of Switzerland[40]	Equity Derivatives	1998	Ramy Goldstein
28	USD 0.28 bn	1	USD 0.28 bn	82.5%	USD 0.51 bn	United States	Merrill Lynch[41]	Mortgages (IOs and POs) Trading	1987	Howard A. Rubin
20	USD 0.28 bn	1	USD 0.28 bn	82.5%	USD 0.51 bn	United States	State of West Virginia[42]	Fixed Income and Interest Rate Derivatives	1987	A. James Manchin
30	USD 0.35 bn	1	USD 0.35 bn	39.9%	USD 0.49 bn	United States	Kidder Peabody[43]	Government Bonds	1994	Joseph Jett
31	USD 0.4 bn	1	USD 0.40 bn	20.4%	USD 0.48 bn	United States	Manhattan Investment Fund[44]	Short IT stocks during the internet bubble	2000	Michael Berger
32	EUR 0.30 bn	1.244	USD 0.37 bn	9.8%	USD 0.41 bn	Austria	Hypo Group Alpe Adria[45]	Foreign Exchange Trading	2004
33	USD 0.35 bn	1	USD 0.35 bn	0.0%	USD 0.35 bn	United States	Calyon[46]	Credit Derivatives	2007	Richard “Chip” Bierbaum
34	AUD 0.36 bn	0.854	USD 0.31 bn	9.8%	USD 0.34 bn	Australia	National Australia Bank[47]	Foreign Exchange Trading	2004	Luke Duffy, Gianni Gray, Vince Ficarra & David Bulleen [48]
35	EUR 0.30 bn	0.895	USD 0.27 bn	17.1%	USD 0.31 bn	Belgium	Dexia Bank[49]	Corporate Bonds	2001
36	USD 0.207 bn	1	USD 0.207 bn	43.5%	USD 0.30 bn	Chile	Codelco [50]	Copper, silver, gold futures	1993	Juan Pablo Davila
37	USD 0.16 bn	1	USD 0.16 bn	39.9%	USD 0.22 bn	United States	Procter & Gamble[51]	Interest Rate Derivatives	1994	Raymond Mains
38	USD 0.2 bn	1	USD 0.20 bn	6.2%	USD 0.21 bn	China	State Reserves Bureau Copper Scandal[52]	Copper Futures	2005	Liu Qibing[53]
39	SEK 1230 mio	7.804	USD 0.15 bn	-4.8%	USD 0.143 bn	Sweden	HQ Bank[54]	Equity Derivatives	2010	Fredrik Crafoord,Mikael König,Patrik Enblad
40	GBP 90  mio	1.638	USD 0.15 bn	29.2%	USD 0.19 bn	United Kingdom	NatWest[55]	Interest Rate Options	1997	Kyriacos Papouis
41	USD 0.11 bn	1	USD 0.11 bn	39.9%	USD 0.15 bn	United States	Cuyahoga County,Ohio[56]	Leveraged Fixed Income	1994
42	USD 0.14 bn	1	USD 0.14 bn	-3.7%	USD 0.13 bn	United States	MF Global[57]	Wheat Futures	2008	Evan Dooley
43	USD 0.12 bn	1	USD 0.12 bn	-3.7%	USD 0.12 bn	United States	Morgan Stanley[58]	Credit-index options	2008	Matt Piper
44	USD 0.1 bn	1	USD 0.10 bn	15.3%	USD 0.12 bn	Croatia	Riječka banka(Rijeka Bank)[59]	Foreign Exchange Trading	2002	Eduard Nodilo
45	SEK 630 mio	6.585	USD 0.10 bn	0.0%	USD 0.10 bn	Sweden	Carnegie Investment Bank[60]	Equity Derivatives	2007	Aleksandar Adamovic[61]

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Legal Blunder for Goldmans – Accidentally Released – and Incredibly Embarrassing – Documents Show How Goldman et al Engaged in ‘Naked Short Selling’

By Matt Taibbi — Link here to the story in Rolling Stone.

It doesn’t happen often, but sometimes God smiles on us. Last week, he smiled on investigative reporters everywhere, when the lawyers for Goldman, Sachs slipped on one whopper of a legal banana peel, inadvertently delivering some of the bank’s darker secrets into the hands of the public.

The lawyers for Goldman and Bank of America/Merrill Lynch have been involved in a legal battle for some time – primarily with the retail giant Overstock.com, but also with Rolling Stone, the Economist, Bloomberg, and the New York Times. The banks have been fighting us to keep sealed certain documents that surfaced in the discovery process of an ultimately unsuccessful lawsuit filed by Overstock against the banks.

Last week, in response to an Overstock.com motion to unseal certain documents, the banks’ lawyers, apparently accidentally, filed an unredacted version of Overstock’s motion as an exhibit in their declaration of opposition to that motion. In doing so, they inadvertently entered into the public record a sort of greatest-hits selection of the very material they’ve been fighting for years to keep sealed.

I contacted Morgan Lewis, the firm that represents Goldman in this matter, earlier today, but they haven’t commented as of yet. I wonder if the poor lawyer who FUBARred this thing has already had his organs harvested; his panic is almost palpable in the air. It is both terrible and hilarious to contemplate. The bank has spent a fortune in legal fees trying to keep this material out of the public eye, and here one of their own lawyers goes and dumps it out on the street.

The lawsuit between Overstock and the banks concerned a phenomenon called naked short-selling, a kind of high-finance counterfeiting that, especially prior to the introduction of new regulations in 2008, short-sellers could use to artificially depress the value of the stocks they’ve bet against. The subject of naked short-selling is a) highly technical, and b) very controversial on Wall Street, with many pundits in the financial press for years treating the phenomenon as the stuff of myths and conspiracy theories.

Now, however, through the magic of this unredacted document, the public will be able to see for itself what the banks’ attitudes are not just toward the “mythical” practice of naked short selling (hint: they volubly confess to the activity, in writing), but toward regulations and laws in general.

“Fuck the compliance area – procedures, schmecedures,” chirps Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill Pro), when a subordinate worries about the company failing to comply with the rules governing short sales.

We also find out here how Wall Street professionals manipulated public opinion by buying off and/or intimidating experts in their respective fields. In one email made public in this document, a lobbyist for SIFMA, the Securities Industry and Financial Markets Association, tells a Goldman executive how to engage an expert who otherwise would go work for “our more powerful enemies,” i.e. would work with Overstock on the company’s lawsuit.

“He should be someone we can work with, especially if he sees that cooperation results in resources, both data and funding,” the lobbyist writes, “while resistance results in isolation.”

There are even more troubling passages, some of which should raise a few eyebrows, in light of former Goldman executive Greg Smith’s recent public resignation, in which he complained that the firm routinely screwed its own clients and denigrated them (by calling them “Muppets,” among other things). 

Here, the plaintiff’s motion refers to an “exhibit 96,” which refers to “an email from [Goldman executive] John Masterson that sends nonpublic data concerning customer short positions in Overstock and four other hard-to-borrow stocks to Maverick Capital, a large hedge fund that sells stocks short.”

Was Goldman really disclosing “nonpublic data concerning customer short positions” to its big hedge fund clients? That would be something its smaller, “Muppet” customers would probably want to hear about.

When I contacted Goldman and asked if it was true that Masterson had shared nonpublic customer information with a big hedge fund client, their spokesperson Michael Duvally offered this explanation:

Among other services it provides, Securities Lending at Goldman provides market color information to clients regarding various activity in the securities lending marketplace on a security specific or sector specific basis.  In accordance with the group’s guidelines concerning the provision of market color, Mr. Masterson provided a client with certain aggregate information regarding short balances in certain securities.  The information did not contain reference to any particular clients’ short positions.

You can draw your own conclusions from that answer, but it’s safe to say we’d like to hear more about these practices.

Anyway, the document is full of other interesting disclosures. Among the more compelling is the specter of executives from numerous companies admitting openly to engaging in naked short selling, a practice that, again, was often dismissed as mythical or unimportant.

A quick primer on what naked short selling is. First of all, short selling, which is a completely legal and often beneficial activity, is when an investor bets that the value of a stock will decline. You do this by first borrowing and then selling the stock at its current price; then, after the price drops, you go out, buy the same number of shares at the reduced price, and return the shares to your original lender. You then earn a profit on the difference between the original price and the new, lower price.

What matters here is the technical issue of how you borrow the stock. Typically, if you’re a hedge fund and you want to short a company, you go to some big-shot investment bank like Goldman or Morgan Stanley and place the order. They then go out into the world, find the shares of the stock you want to short, borrow them for you, then physically settle the trade later.

But sometimes it’s not easy to find those shares to borrow. Sometimes the shares are controlled by investors who might have no interest in lending them out. Sometimes there’s such scarcity of borrowable shares that banks/brokers like Goldman have to pay a fee just to borrow the stock.

These hard-to-borrow stocks, stocks that cost money to borrow, are called negative rebate stocks. In some cases, these negative rebate stocks cost so much just to borrow that a short-seller would need to see a real price drop of 35 percent in the stock just to break even. So how do you short a stock when you can’t find shares to borrow? Well, one solution is, you don’t even bother to borrow them. And then, when the trade is done, you don’t bother to deliver them. You just do the trade anyway without physically locating the stock.

Thus in this document we have another former Merrill Pro president, Thomas Tranfaglia, saying in a 2005 email: “We are NOT borrowing negatives… I have made that clear from the beginning. Why would we want to borrow them? We want to fail them.”

Trafaglia, in other words, didn’t want to bother paying the high cost of borrowing “negative rebate” stocks. Instead, he preferred to just sell stock he didn’t actually possess. That is what is meant by, “We want to fail them.” Trafaglia was talking about creating “fails” or “failed trades,” which is what happens when you don’t actually locate and borrow the stock within the time the law allows for trades to be settled.

If this sounds complicated, just focus on this: naked short selling, in essence, is selling stock you do not have. If you don’t have to actually locate and borrow stock before you short it, you’re creating an artificial supply of stock shares.

In this case, that resulted in absurdities like the following disclosure in this document, in which a Goldman executive admits in a 2006 email that just a little bit too much trading in Overstock was going on: “Two months ago 107% of the floating was short!”

In other words, 107% of all Overstock shares available for trade were short – a physical impossibility, unless someone was somehow creating artificial supply in the stock.

Goldman clearly knew there was a discrepancy between what it was telling regulators, and what it was actually doing. “We have to be careful not to link locates to fails [because] we have told the regulators we can’t,” one executive is quoted as saying, in the document.

One of the companies Goldman used to facilitate these trades was called SBA Trading, whose chief, Scott Arenstein, was fined $3.6 million in 2007 by the former American Stock Exchange for naked short selling.

The process of how banks circumvented federal clearing regulations is highly technical and incredibly difficult to follow. These companies were using obscure loopholes in regulations that allowed them to short companies by trading in shadows, or echoes, of real shares in their stock. They manipulated rules to avoid having to disclose these “failed” trades to regulators.

The import of this is that it made it cheaper and easier to bet down the value of a stock, while simultaneously devaluing the same stock by adding fake supply. This makes it easier to make money by destroying value, and is another example of how the over-financialization of the economy makes real, job-creating growth more difficult.

In any case, this document all by itself shows numerous executives from companies like Goldman Sachs Execution and Clearing (GSEC) and Merrill Pro talking about a conscious strategy of “failing” trades – in other words, not bothering to locate, borrow, and deliver stock within the time alotted for legal settlement. For instance, in one email, GSEC tells a client, Wolverine Trading, “We will let you fail.”

More damning is an email from a Goldman, Sachs hedge fund client, who remarked that when wanting to “short an impossible name and fully expecting not to receive it” he would then be “shocked to learn that [Goldman’s representative] could get it for us.”

Meaning: when an experienced hedge funder wanted to trade a very hard-to-find stock, he was continually surprised to find that Goldman, magically, could locate the stock. Obviously, it is not hard to locate a stock if you’re just saying you located it, without really doing it.

As a hilarious side-note: when I contacted Goldman about this story, they couldn’t resist using their usual P.R. playbook. In this case, Goldman hastened to point out that Overstock lost this lawsuit (it was dismissed because of a jurisdictional issue), and then had this to say about Overstock:

Overstock pursued the lawsuit as part of its longstanding self-described “Jihad” designed to distract attention from its own failure to meet its projected growth and profitability goals and the resulting sharp drop in its stock price during the 2005-2006 period. 

Good old Goldman — they can’t answer any criticism without describing their critics as losers, conspiracy theorists, or, most frequently, both. Incidentally, Overstock rebounded from the  2005-2006 short attack to become a profitable company again, during the same period when Goldman was needing hundreds of billions of dollars in emergency Fed lending and federal bailouts to stave off extinction.

Anyway, this galactic screwup by usually-slick banker lawyers gives us a rare peek into the internal mindset of these companies, and their attitude toward regulations, the markets, even their own clients. The fact that they wanted to keep all of this information sealed is not surprising, since it’s incredibly embarrassing stuff, if you understand the context.

More to come: until then, here’s the motion, and pay particular attention to pages 14-19.

UPDATE: Well, I guess I shouldn’t feel too badly for the lawyer who stepped on this land mine. For Morgan Lewis counsel Joe Floren, karma, it seems, really is a bitch.         

Read more: http://www.rollingstone.com/politics/blogs/taibblog/accidentally-released-and-incredibly-embarrassing-documents-show-how-goldman-et-al-engaged-in-naked-short-selling-20120515#ixzz1vbweUyX8

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Vincent Tchenguiz – v. SFO — 3-day hearing in High Court commences today

A three-day judicial review hearing in the English High Court commences today. The hearing will address the propriety of the SFO’s actions in obtaining  search warrants against Vincent Tchenguiz and his brother. Vincent is suing the SFO for  in excess of GBP 100 in damages as a result of the “botched” investigation.

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