MIAMI Four major Wall Street banks, plus ratings agencies Standard & Poor’s and Moody’s Investors Services, last week told a federal court that Eastern Financial Florida CU was a “big boy” and knew full well the risks it was adopting when it invested in $150 million of ill-fated collateralized debt obligations, or CDOs, that helped sink the one-time $2.4-billion credit union in 2009.
Eastern Financial’s assertions, “that is was a sophisticated investor and would make its own assessment of the risks associated (with the CDOs) preclude Plaintiff from alleging the reasonable or justifiable reliance required for its fraud and negligent misrepresentation claims,” claimed the Wall Street entities in separate motions for dismissal, referring to a civil suit brought by Space Coast CU, which acquired the remnants of the huge credit union after its failure. The credit union insisted as a condition of purchase that the CDOs were “suitable and appropriate for it,” the defendants asserted.
In fact, Eastern Financial was one of only two credit unions (WesCorp FCU was the other) authorized to invest in CDOs, and only after it lobbied state regulators that it was sophisticated enough to buy the risky securities.
The suit is filed in the U.S. District Court for the District of Southern Florida, where Eastern Financial, originally the credit union for employees of now-defunct Eastern Airways, was based. The defendants filing separate, but similar motions to dismiss were JP Morgan Chase, Barclays Capital, UBS, Merrill Lynch and the two ratings agencies.
The CDOs, which eventually failed at an astounding rate of 99%, are the center of several major legal disputes, including a civil suit brought by the U.S. Justice Department against S&P, claiming the ratings agency engaged in fraud in rating the investments, which were constructed of mortgage-backed securities.
A federal judge in New York earlier this year dismissed claims brought by Space Coast CU against Barclays Capital for the sale of a smaller, $10 million tranche of CDOs.
In their defense, the Wall Street banks and ratings agencies say Space Coast has failed to make its claims specific the main reason the U.S. District Court for the Eastern District of New York dismissed the Barclays claims.
The defendants also claim Space Coast, which filed the suit in March 2012, waited too long to satisfy the three-year federal statute of limitations on securities claims for purchases made in 2008. Some of the same defendants have successfully used this defense in NCUA’s claims in the failure of the corporate credit unions, with federal courts dismissing NCUA claims against Barclays, Goldman Sachs and Credit Suisse, in recent days.
The defendants all claim that the CDOs were sold to Eastern Financial with a broad array of disclosures and warnings, including term sheets, marketing presentations, and offering prospectuses that provided extensive disclaimers and warnings about the risks, the nature of the subprime loans collateralizing the notes, and the credit ratings assigned to both the collateral and the notes. “Eastern was expressly warned, for example, that the notes it was purchasing were junior to other classes of notes, and there could be no assurance’ that cash flows would be sufficient to make payments on any Class of Notes.’”
The offering materials, said the defendants, “provided express warnings that CDO notes were appropriate only for an investor capable’ of both analyzing risk and bearing the financial consequences’ of risk for an indefinite period of time.’” Prior to buying the notes, Eastern Financial was required to assert its “sophistication” “non-reliance” and “access to information.”
