Space Coast CU $100 Million CDO Suit Dismissed, Court Permits Amended Complaint
A $100 million collateralized debt obligations lawsuit filed by Space Coast Federal Credit Union against several Wall Street banks and ratings agencies was dismissed without prejudice by a federal court on Monday.
According to a ruling from U.S. District Judge James I. Cohn, the complaint from the $3 billion Space Coast FCU in Melbourne, Fla., had to be dismissed because it did not plead the defendants' alleged fraud with particularity, nor did it state a plausible claim for relief.
Cohn said Space Coast failed to plead in detail how each defendant defrauded Eastern Financial Florida Credit Union, the cooperative it acquired that purchased the CDOs.
However, Cohn said Space Coast still has an opportunity to provide more details “with a plausible factual basis, the fraud that each defendant committed in connection with the CDOs owned by Eastern,” the judge wrote in his ruling.
In its complaint filed in early 2012, Space Coast said the CDOs led to a phony demand for residential mortgage loans, which also led to creating one of the state’s largest housing catastrophes.
Space Coast said creating and selling CDOs revolved around shoe-horning residential mortgage securities into Moody's and S&P's credit rating models to generate investment grade ratings, according to the CU’s suit. Investors were misled because they relied on the credit ratings, the credit union said.
In May 2011, Space Coast filed a suit against Barclays saying the $10 million worth of the firm’s Markov CDOs bought by Eastern Financial were based on riskier synthetic assets. The purchase allegedly led to losses on the entire investment.
Last spring, the Wall Street banks told a federal court judge in Miami that Eastern Financial was warned about the risks associated with CDOs.
“Each of the 12 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.
Among the banks named in the Space Coast suit were Wells Fargo Securities, formerly known as Wachovia Capital Markets, J.P. Morgan Securities, formerly known as Bearn Stearns & Co. Inc., Merrill Lynch and its subsidiary, Merrill Lynch Home Loans, UBS Securities, and Barclay’s Capital Inc. Other defendants named were Richard S. Fuld Jr., former chairman/CEO of Lehman Brothers, and Moody’s Investors Service Inc.