In addition to issuers of mortgage-backed securities, auditing firms and investment advisors — ratings agencies have become the target of several lawsuits filed by injured investors.
The Securities and Exchange Commission filed a criminal action against Irvine, Calif.-based Brookstreet Securities Corp. and its President and its Chief Executive Officer Stanley C. Brooks on Dec. 8, a press release indicated. The SEC claims that between 2004 and 2007, the defendants systematically sold high-risk mortgage-backed securities to investors with conservative investment goals.
More than 1,000 investors — including seniors and retirees — were sold $300 million in collateralized-mortgage obligations even after the defendants were warned about the dangerous nature of the investments which could become worthless overnight, according to the SEC. As the financial crisis heightened, the defendants allegedly directed the unauthorized sale of CMOs from customers’ cash-only accounts — leading to substantial investor losses.
Two class actions have been filed by purchasers of pass-through certificates issued by Structured Asset Mortgage Investments II Inc. and Bear Stearns Asset-Backed Securities I LLC, according to a statement from the law firms Cohen Milstein Sellers & Toll PLLC and Coughlin Stoia Geller Rudman & Robbins LLP. Among the defendants are officers and directors of Bear Stearns Cos. Inc., J.P. Morgan Chase Inc., underwriter Bear Stearns & Co. Inc., the issuers of the certificates and the ratings agencies that rated the certificates.
The cases alleged that false and misleading statements were made between March 2006 and September 2007. Investors were allegedly misled about underwriting, loan-to-values and debt-to-income ratios.
“By late 2008, the amount of uncollectible mortgage loans securing the certificates began to be revealed to the public and the rating agencies began to put negative watch labels on many certificate classes, ultimately down-grading many,” the statement said. “The delinquency and foreclosure rates of the mortgage loans securing the certificates has grown both faster and in greater quantity than what would be expected for mortgage loans of the types described in the prospectus supplements.”
Ohio Attorney General Richard Cordray filed a lawsuit on Nov. 20 against Fitch Ratings, Moody’s Investors Service and Standard & Poor’s Ratings Service on behalf of Ohio pension and retirement funds, a news release indicated. The ratings agencies allegedly “made misleading evaluations of mortgage-backed securities due, in part, to the lucrative fees they received from the same issuers they were supposed to be objectively evaluating.”
A few days later, Connecticut Attorney General Richard Blumenthal announced plans to sue all three ratings agencies over poor ratings issued in connection with the issuance of subprime MBS, Bloomberg reported. The planned lawsuits are expected to be followed with lawsuits by other states.
A motion to dismiss a $4 billion lawsuit by Bank of America Corp. against Bear Stearns Asset Management was denied by U.S. District Court Judge Paul Crotty in Manhattan, The American Lawyer reported in October. Bear and two former hedge fund managers — Ralph Cioffi and Matthew Tannin — allegedly committed fraud and breach of contract by misleading BoA about the health of two failing hedge funds tied to a $4 billion mortgage-backed securities deal.
A lawsuit filed Oct. 20 in an Alabama federal court by Corporate America Credit Union alleges that U.S. Central credit union — which failed in March — forced it to buy $9 million in worthless securities just before regulators made it write down its MBS by $1.2 billion, the Kansas City Star reported. Named in the lawsuit are former U.S. Central president and CEO Francis Lee, two former officers, the board of directors and the accounting firm of RubinBrown LLP.
Bloomberg reported that MBIA Insurance Corp. is suing Credit Suisse Securities (USA) LLC, DLJ Mortgage Capital Inc. and Select Portfolio Servicing Inc. in New York State Supreme Court in Manhattan. The case revolves around a 2007 residential issuance. MBIA claims it was misled about underwriting on the loans.
More than half of the securitized loans, based on the original loan amounts, have defaulted — allegedly leaving MBIA with $296 million in claims.
Securities and Exchange Commission, Plaintiff, vs. Brookstreet Securities Corp. and Stanley C. Brooks, Defendants.
Case No. SACV09-01431, Dec. 8, 2009 (U.S. District Court for the Central District of California).
Ohio Police & Fire Pension Fund, et al, v. Standard & Poor’s Financial Services LLC, et al.
Case No. 2:09 cv 1054, Nov. 20, 2009 (U.S. District Court for the Southern District of Ohio).
New Jersey Carpenters Health Fund v. Bear Stearns Mortgage Funding Trust 2006-AR1, et al.
Docket No. 08-cv-8093-LTS, Aug. 20, 2008 (U.S. District Court for the Southern District of New York).
Pension Trust Fund for Operating Engineers v. Structured Asset Mortgage Investments II Inc., et al.
Docket No. 09-cv-6172-LTS, July 9, 2009 (U.S. District Court for the Southern District of New York).
MBIA Insurance Corp. v. Credit Suisse Securities (USA) LLC.
Case No. 603751/2009 (New York State Supreme Court, Manhattan).