In the latest update in a suit filed by Space Coast Credit Union claiming that the sale of $100 million in collateralized debt obligations led to the collapse of Eastern Financial Florida Credit Union, the defendants said the cooperative knew how risky the derivatives were.
The $3 billion Space Coast Credit Union in Melbourne, Fla., recently filed suit against Merrill Lynch, Wachovia Capital, Barclays Capital, Lehman Brothers’ former CEO Richard Fuld and major U.S. credit rating agencies, Standard & Poor’s and Moody’s, alleging that they conspired to inflate allegedly toxic bonds into investment grade securities using fraudulent credit ratings and that the investment banks dumped those inflated securities onto unsuspecting investors.
The Wall Street banks recently told a federal judge in Miami that Eastern Financial was warned about the risks associated with CDOs.
“Each of the twelve CDOs at issue here was offered pursuant to a separate offering circular. These offering circulars contained page after page of disclosures and disclaimers, explaining to Eastern Financial the nature and risks of the particular CDO investments, the place of each tranche within each CDO, and the credit rating expected to be assigned by the Rating Agencies of each tranche,” according to a joint motion from the banks and ratings agencies to dismiss the suit.
A comment from Space Coast on the latest move from the defendants was not immediately available.
Space Coast had previously said it could identify several ways that the defendants allegedly manipulated the credit ratings, including making out-of-model or manual adjustments to the rating agencies’ credit rating models to obtain better ratings.
Space Coast said the defendants allegedly knew that the credit rating models rested on fraudulent data due to the fact that the investment banks waived defective loans, allowing them to be included in the mortgage securities.