Complex Financial Products Litigation

Kasowitz is at the forefront of representing clients in litigation relating to complex financial products, including derivatives, collateralized debt obligations, auction rate securities, credit default swaps, securitized notes, and other financial instruments.  The firm represents corporations and financial institutions that offered or structured these instruments, as well as corporations, hedge funds and individuals who invested in these types of instruments, in litigation and arbitrations throughout the country.

Some of the firm’s high-profile representations concerning complex financial products include:

• MBIA Inc., the world’s largest monoline insurer, in defense of four separate state and federal actions brought by 19 of the world’s largest financial institutions, bondholders and a putative nationwide class represented by several hedge funds – all arising from MBIA’s $5 billion corporate restructuring in 2009.  All of these actions concern complex financial analyses, including 30 to 40 year loss projections for MBIA Insurance’s insured losses on mortgage-backed securities and CDOs (through credit-default swaps and otherwise), and whether MBIA under-reserved for such losses, thus rendering it insolvent at the time of the restructuring.  Currently, the financial institutions’ plenary action is proceeding with discovery.  The financial institutions’ Article 78 proceeding challenging the Superintendent’s approval of MBIA’s restructuring is ongoing, and is currently scheduled for a trial, if necessary, in the second quarter of 2012.  A joint stipulation dismissing the hedge funds’ action was filed in April 2012.  The bondholders voluntarily discontinued their plenary action in October 2011.
• ACA Financial Guaranty Corporation, a monoline bond insurance company now operating in run-off, in an action against Goldman Sachs & Co. for fraud and unjust enrichment in connection with a synthetic collateralized debt obligation known as Abacus 2007-AC1 (“ABACUS”), which Goldman Sachs structured and marketed based on a portfolio of investment securities selected largely by its hedge fund client, Paulson & Co. Inc.  ACA alleges that Goldman fraudulently induced it to take a long position in and provide guaranty insurance for ABACUS by deceiving ACA into believing that Paulson also was to be a long investor in ABACUS when in fact, as Goldman Sachs knew, Paulson intended to take an enormous short position in ABACUS, reaping nearly $1 billion when the portfolio failed.
• Seven Norwegian municipalities in their securities fraud action against Citigroup Global Markets Inc. and Citigroup Alternative Investments LLC alleging that Citigroup misrepresented key elements of complex securities marketed and sold to the plaintiffs, resulting in over $110 million in damages.  The firm defeated Citigroup’s motions to dismiss the case on jurisdictional and pleading grounds.
• Bayerische Hypo- und Vereinsbank AG (“HVB”), the second-largest private German financial institution and second-largest German retail bank, in defense of individual and class actions in state and federal courts throughout the country alleging fraud and RICO claims stemming from certain tax shelter transactions.  The firm also represents HVB in actions against (i) AIG, Inc. and AIG Matched Funding Corporation concerning collateralization obligations under leveraged lease transactions, and (ii) a Colorado government entity in a litigation involving the termination of an interest-rate swap tied to a $500 million municipal bond offering.
• TSL (USA), Inc., an affiliate of National Australia Bank, in two separate actions against Oppenheimer and its affiliates relating to defendants’ misconduct as administrators of two structured finance vehicles, alleging damages of more than $600 million.
• Royal Park Investments SA/NV, an entity created in connection with the Belgian State’s sale of Fortis Bank SA/NV to BNP Paribas S.A. for the purpose of purchasing and managing certain of Fortis Bank’s structured credit risks not assumed by BNP Paribas, in an action against Oppenheimer and its affiliates relating to defendants’ misconduct as administrators of a structured finance vehicle, alleging damages of more than $400 million.
• Loreley Financing, a CDO investor that lost billions of dollars in the collapse of the residential mortgage market in 2007.  Following investigation into possible fraud claims against arranging banks and collateral managers, Kasowitz sued Deutsche Bank in New York Supreme Court for knowingly selling Loreley almost $440 million in collateralized debt obligations backed by residential mortgage-backed securities that Deutsche Bank knew to be far riskier and far more prone to default than it had represented to Loreley.  The complaint alleged that Deutsche Bank used the CDOs to remove troubled assets from its own balance sheet at plaintiffs’ expense, while providing opportunities for short-trading on the part of Deutsche Bank and certain preferred clients.  Shortly after the complaint was filed in October 2011, the case was settled on confidential terms.  Kasowitz then filed an action on behalf of Loreley against Citigroup for $965 million alleging that Citigroup had committed fraud in inducing Loreley to invest in CDOs stocked with assets that had been selected by short investors.  Kasowitz also filed a similar $163 million claim against Wells Fargo Securities (as successor to Wachovia Capital Markets), and a $92 million claims against Bank of America/Merrill Lynch and Morgan Stanley.
• UniCredit Bank AG in an action filed in the United States District Court for the Southern District of New York against Textron Business Services, Inc. and TBS Insurance Agency Services, Inc., the servicer and backup master agent servicer, respectively, for a securitized note program in which notes securitized by insurance agency franchise loans were sold to investors, including UniCredit.  UniCredit alleged that the defendants had failed to properly monitor the subservicer of the notes, which ultimately collapsed after its fraudulent conduct was revealed.  After the depositions of several employees of the defendants, Kasowitz reached a settlement of of the case.
• Chicago Fundamental Investment Partners LLC and CFIP Master Fund Ltd., a billion-dollar hedge fund, in a breach of contract action arising from a $45 million portfolio credit default swap implemented through a credit-linked note trust structure.  The defendants included Citibank N.A., Citigroup Global Markets Inc., and Citigroup Global Markets Ltd. (together, the Citi Defendants).  The case presented several novel issues regarding the interpretation of standard ISDA language employed throughout the CDS market and which parties have standing in a credit-linked note structure.  On the eve of trial, the Citi Defendants settled.
• Caxton International Limited, one of the largest investment funds in the country, in a derivative action against Reserve Management Company relating to a Reserve money market fund that “broke the buck.”  The firm successfully obtained a court order appointing a receiver, and acted as liaison counsel for other hedge fund and corporate investors in reaching a global settlement with the Reserve.
• Royal Bank of Canada in the securities fraud putative class actions instituted as a result of Enron's demise, alleging that RBC participated in Enron's fraud and assisted Enron in misusing various complicated transactions and financial structures so as to overstate Enron's earnings and financial health, including the Newby class action. The firm successfully obtained the dismissal of all claims against RBC.