Massachusetts' top securities regulator has asked Bank of America to turn over documents related to two collateralized loan obligations.

"My securities division is investigating these CLOs to determine if the issuer was knowingly overvaluing the assets in the portfolio to get them off their books and onto investors'," Secretary of the Commonwealth William Galvin said in a statement.

The two CLOs, LCM VII LLC and Bryn Mawr CLO II, were structured by Bank of America and sold to investors in 2007, resulting in losses of $150 million, according to the statement.

Bank of America spokesman Bill Halldin said the firm was cooperating fully with the subpoenas.

In January, a FINRA arbitration panel in Reno, Nevada ordered B of A to pay an investor $1.1 million in damages, plus attorneys fees and other costs, for losses on securities issued by one of the CLOs that is the subject of Galvin's investigation, LCM VII. B of A underwrote the securitization.

An expert witness who testified at the arbitration said that, as the loans were being warehoused for the deal, some of them declined in value. Because of the way the way losses are distributed among different tranches of notes, the junior-most notes were essentially worthless. The loans were nevertheless transferred to the securitization trust at their original purchase price.

"The issue in the arbitration case was whether the offering document for LCM VII adequately disclosed the fact that the loans being sold into the trust were worth substantially less than what the trust paid for them," said the expert witness, Craig McCann of Securities Litigation and Consulting Group.

"Investors in LCM VII ultimately lost between $75 million and $80 million when the trust was liquidated in October 2008, but $20 million of those losses had already occurred before the CLO was ever sold to investors," he said. "If you consider the other BoA CLO, Bryn Mawr II, investors ultimately lost $150 million when the trusts were liquidated in October 2008, but $35 million of those losses had already occurred before the CLOs were ever sold to investors and those losses, known to BoA at the time of the offering, were not disclosed to investors."

The arbitration panel's decision was not reasoned, but Thomas Bradley, the lawyer for the investor, said he argued that Bank of America violated Nevada securities laws because it made an untrue representation or a material omission. "Under the state statues, that entitles my client to obtain full rescission of his investment, which means he gets his investment loss returned, plus interest at the statutory rate, plus attorney's fees, plus cost. And that's what the panel awarded."

He added, "the significant fact is that when LCM VII closed on July 31, 2007, its market value was $380 million, but the acquisition costs were $400 million. So I argued that at bank should have told Mr. Hayes on day one he was starting under water."

Halldin said Bank of America disagreed with the arbitration panel's decision. He noted that the panel declined to award the investor punitive damages.

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