Structured Product Litigations

During the recent U.S. housing boom, large numbers of subprime mortgages were underwritten with extremely relaxed credit standards. These mortgages were collected and bundled together by investment banks which then securitized the bundled mortgages into various forms of structured including Collateralized Debt Obligations (CDOs), Residential Mortgage Backed Securities (RMBSs), Collateralized Mortgage Obligations (CMOs) and other forms of Asset Backed Securities (ABSs). Within a short time these structured financial products, CDOs in particular, came to be regarded as “safe” investments supported by the credit rating agencies’ imprimatur. By 2004, CDO investments dramatically increased to approximately $157 billion. This level soared even higher in 2005 to $272 billion, and shot past the galaxy with $552 billion in sales by 2007.

The investment banks received tremendous fees from the creation of these structured mortgage related securities; CDOs in particular. The fees for structuring CDOs were about three times higher than for other bonds. They earned billions in simply structuring some deals - this amount does not include the fees generated through trading activities and management fees.

With the advent of the 2007-2008 credit crunch, it became clear that CDOs, like all ABSs, were suffering from a fundamental flaw that caused all tranches of CDOs to be extremely high risk for investors and, eventually, these securities became worth a mere fraction of their original value and generally deemed illiquid.

Asset Recovery Litigations

Over recent years, institutional investors worldwide have suffered severe losses as a result of their investment in subprime mortgage-backed securities. The International Monetary Fund estimates that financial institutions will eventually have to write off more than a trillion dollars in subprime related securities. By the end of 2008, over a half a trillion dollars in losses had already been recognized.

In the United States, pension funds collectively were one of the largest investors in these toxic securities. Beginning in 2007, several of the large public and union based pension funds commenced lawsuits to recoup their losses against the investment banks for packaging and fraudulently selling these caustic securities. The rating agencies are now frequently named as defendants in these actions for granting inflated ratings to increase their own profits. These actions are in varying phases of litigation and it is anticipated that many more actions of this kind will be filed in the future.

Our Process

Our firm works with institutional investors in the United States and abroad to recover their losses sustained as a result of exposure to subprime mortgage-backed securities. The first step in our asset recovery process is to identify the subprime mortgage-backed securities held in our clients’ portfolio and determine the total amount of losses sustained. Typically, these securities are not readily identifiable and an in-depth examination of securities purchased by an investment fund during the past ten years is required to ascertain the fund’s full exposure to subprime mortgage obligations. Due to the lack of transparency of these securities and complexity of the evaluation, we retain the top industry experts to complete this task.

After identifying the toxic securities, we perform a thorough legal analysis and develop our litigation strategy. This includes designating the appropriate venue to file suit. Where possible, we intend to file these claims in state court, rather than federal court, where we believe we will receive stronger results.

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