The risks tied to collateralized debt obligations remains the focal point of Space Coast Credit Union’s lawsuit against several Wall Street banks and credit ratings agencies.
Space Coast spokeswoman Meredith Gibson reiterated the credit union’s position it had when the complaint was initially filed.
“The depiction of the level of risk associated with these investments, and therefore Eastern’s ability to make a sound risk-based decision, is at the heart of the legal action,” Gibson wrote in a statement to Credit Union Times.
According to the credit union’s attorneys with Robbins Geller Rudman and Dowd LLP, “The defendants never accounted for these defective loans when they built and sold the so-called ‘investment grade’ mortgage bonds.”
“Moreover, the suit alleges that all of the ratings that defendants used to sell the securities were graded on a ‘curve’ because the investment banks paid the credit rating agencies more to rate mortgage-related securities than they paid the rating agencies to rate other, less lucrative securities such as government-issued debt,” according to a previous statement from the attorneys.
The $3 billion Space Coast 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 defendants said disclosures and disclaimers explaining the investment risks were issued to Eastern Financial on the 12 CDOs in question.
Space Coast said Eastern Financial suffered a $100 million loss as a result of the CDO investments.