The $3.1 billion Space Coast Credit Union has filed a suit against two investment firms over the alleged misrepresentation of a collateralized debt obligation that the cooperative said led to financial losses.
The Melbourne, Fla.-based credit union claimed that a CDO from Barclays PLC contained assets that were set up to fail. The Barclay Markov CDO is backed by $2 billion of mortgage and other debt, Reuters reported last week. In the Space Coast complaint, State Street Corp., the co-writer of the offer and Markov’s collateral manager, is also named.
Space Coast said Barclay’s CDO resembled one offered by Goldman Sachs that was the subject of a Securities and Exchange Commission fraud lawsuit. In its April 2010 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic CDO that hinged on the performance of subprime residential mortgage-backed securities.
Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, the SEC said. Goldman later acknowledged that its marketing information contained incomplete information and agreed to pay a $550 million fine, the largest SEC penalty ever paid by a Wall Street firm.
In its complaint filed with the U.S. District Court, Southern District of New York, Space Coast said Eastern Financial Florida Credit Union, the financially troubled credit union it absorbed in 2009, bought $10 million of AA-rated notes issued by the Markov CDO. The purchase price was 94.2 cents on the dollar. Space Coast contends that Eastern suffered a loss on the entire investment.
“Barclays chose riskier synthetic assets so as to win its best against them, and chose safer cash assets to ensure that its bet would actually pay off,” Space Coast wrote in its complaint, adding that the evidence “lay to rest any notions of chance and instead evince deliberate–indeed, malevolent–design.”
Because the lawsuit is in progress, Space Coast could not offer additional comments, said Meredith Gibson, a credit union spokeswoman.
Meanwhile, Space Coast joins others who have filed suit against Barclays with similar misrepresentation claims. In November 2010, an Italian bank sued the firm for $120 million for allegedly designing its CDOs to have a much higher risk than their AAA-ratings suggested.