The SEC has taken the first move in bringing fraud charges since the outbreak of the foreclosure crisis. By doing so the message has been sent that other peddlers of similar securities tethered to Wall Street will no longer remain immune from the long arm of the law. All over the country far and wide the net is being thrown to rope in institutional investors who played games with CDOs and burnt their fingers.

M&T Bank filed charges against Deutsche Bank in Buffalo. It was alleged that the executives of the New York branch of this global giant sold to M&T an investment (CDO) named Gemstone VII without informing the buyer of the hidden number of sub-prime loans inside this synthetic security. It was also alleged by M&T that Deutsche Bank remained tight lipped when the AAA rated investment was becoming toxic.

On its part Deutsche Bank has said that in a document running into 300 pages it had given M&T all the necessary details. It filed a motion seeking dismissal of the suit as it had no basis. But the Supreme Court Judge has ruled that the case should continue. M&T has at stake assets worth over $60 billion. Warren Buffet is one of its big shareholders. He lost $80 million in this particular deal. A spokesperson of Deutsche refused to make any comments.

A government worker’s pension fund has sued Morgan Stanley on the island of St. Thomas (Virgin Islands). The allegation was that the financial entity sold a CDO deal named Libertas knowing fully well that it would fail. Because of this the Employees Retirement System of the Government of Virgin Islands lost over $1 billion. It was charged that Morgan Stanley was intentionally defrauding investors by shorting the assets of the CDOs. The complaint stated, “Morgan Stanley was betting the entire investment it was promoting would fail.” A spokesperson of the bank failed to make any comments. In March the bank filed a motion seeking dismissal of the case.
Even prior to the meltdown of the mortgage industry in the early months of 2008, Merrill Lynch was compelled to reimburse Springfield City, Massachusetts over $10 million because of losses in CDO investments. Merrill Lynch has now been taken over by the Bank of America. It has admitted that the sale was improper and done without the permission of the city.

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