Opalesque Industry Update – Boston- and London-domiciled hedge fund firm Cambridge Place Investment Management LLP (CIPM) is suing 15 of the biggest banks in the world with the aim of recovering $1.2bn it lost on subprime mortgages, engaging Wall Street giants in a legal fight that is almost impossible to win, various media reports said.|
CIPM, a specialist in structured credit, had $3.5bn in AuM as at end January ’10, down from more than $9bn at its peak in 2007.
CIPM, which was founded by ex-Goldman Sachs Group bankers Martin Finegold and Robert Kramer, lost at least $1.2bn on subprime mortgages. It filed the lawsuit in Boston, Massachusetts on July 9th, accusing the banks of making untrue statements which resulted to the losses, reported Bloomberg.
Included in the charge sheet are three British banks — HSBC, Barclays and Royal Bank of Scotland – as well as JPMorgan Chase, Citigroup, Credit Suisse, Deutsche Bank, Merrill Lynch, UBS, Goldman Sachs and Morgan Stanley, said the New York Times.
According to the lawsuit, the banks sold securities backed by mortgages from a “small group of now notorious subprime mortgage originators.” CIPM also alleged that the banks “used faulty appraisals, accepted misleading information in loan applications, and violated their own standards for underwriting.”
In total, the banks sold or offered an estimated $2.4bn of residential-backed mortgages to CIPM using “untrue statements,“ the lawsuit said. The Wall Street banks are also accused of not conducting the necessary due diligence and failing to satisfy even their own responsibilities.
New York Times columnist Gretchen Morgenson said the lawsuit provides inside information on the lending practices at the height of the subprime mortgage boom. “Interviews in the complaint with 63 confidential witnesses turned up such gems as Fremont Investment & Loan, which had been based in California, approving loans for pizza delivery men with reported monthly incomes of $6,000, and management at Long Beach Mortgage, also in California, directing underwriters to ‘approve, approve, approve.’
“One Long Beach program made loans to self-employed borrowers based on three letters of reference from past employers. A former worker said some letters amounted to ‘So-and-so cuts my lawn and does a good job,’ adding that the company made no attempt to verify the information, the complaint stated.”
James Cox, a professor at Duke University Law School said the complaint could encourage other investors, including large pension funds, to take similar actions against Wall Street. Cox added that the fact that CIPM filed the case before an investor-friendly Massachusetts state law, instead of under federal law, increases its chances of overcoming some of the difficulties faced by earlier attempts to pin the subprime meltdown on Wall Street.
Gerald Silk, a partner at Bernstein Litowitz Berger & Grossmann LLP, which represents the plaintiff, told ABC News that the Massachusetts investor protection laws "provide us with a powerful weapon to uncover the unscrupulous conduct by the Wall Street banks and recover our client's significant losses."
Meanwhile, this month, Chicago-based Origami Capital, which buys illiquid hedge fund stakes on the secondary market, bought a 40% stake in CIPM’s three remaining funds, the CPIM Structured Credit Fund 20, 1000 and 1500, reported Hedge Fund Alert. All three funds have a combined AuM amounting to $230m. Origami bought the 40% shares for $92m at an undisclosed discount.
The firm suspended three of its five existing funds in 2007 and wound down its $900m London-listed Caliber Global Investment Ltd., which was hit by the subprime problems, but looked into launching a new fund designed to pick up cheap assets in the US mortgage market in November that year, said the FT.
That same month, CPIM cut 20% of its staff.
In September ’08, Caliber Global, the mortgage-bond fund run by Cambridge Place Investment Management LLP, sought the approval of its shareholders to appoint KPMG LLP as the liquidator of the troubled fund.
Shortly after, CPIM developed the Talisman/CPIM European Property Debt Opportunity Fund, a fund which invests in a range of European CMBS, RMBS and other ABS asset classes and other forms of real estate financing to benefit from the current market dislocations in Europe.