Benchmark & Index Manipulation
Duties & Investment Advice
Financial Products & Firms – Valuation, Risk, Disclosure and Damages
Benchmark & Index Manipulation
PF2 has worked on over 10 cases and investigations into the potential manipulation of financial market benchmarks and index levels.
These cases have generally focused on allegations made that parties individually, or collusively in concert with others, have tried to influence the levels of certain interest rate, foreign exchange rate, or commodity settings and benchmarks, which are then often used as references for the settling of other trades (including swaps and derivatives).
Australian LIBOR. The Australian Securities and Investments Commission (ASIC) engaged a team of experts from PF2 to consult on its various proceedings against ANZ, NAB and Westpac for unconscionable conduct and market manipulation in relation to each institution's involvement in setting the bank bill swap reference rate (BBSW). PF2 consulted on the application of economic and statistical measures within the bank bill market, and its impact on derivative markets and products. In addition to the analysis of trading data, market movements and considerations of market structure, PF2 assisted in the analysis of technical evidence. The matters concerning ANZ and NAB settled out of court. The Westpac matter proceeded to trial in October 2017. Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited, Federal Court of Australia, VID 197 of 2016; Australian Securities and Investments Commission v National Australia Bank Limited, FCA, VID 604 of 2016; and Australian Securities and Investments Commission v Westpac Banking Corporation, FCA, VID 282 of 2016.
Outside of Australian LIBOR and other LIBOR-related cases, PF2 has worked on other alleged interest rate manipulation cases, commodity price/index manipulation cases, and investigated allegations into the manipulation of the VIX volatility index. For coverage of our research on these cases and themes, visit our research page.
Credit ratings can be a core element of an investor's investment decision, and an important part of the sales process and the disclosures made. Ratings are often among investors' eligibility criteria, and certain minimum rating levels may need to be achieved for deals to close and transactions to take place.
PF2 has worked on over 15 cases concerning the accuracy of the credit ratings provided, asymmetric information in the provision of the credit rating, or allegations of tampering with the ratings process by credit rating agencies or firms seeking advantageous (generally inflated) ratings.
UK-based CPDO Case. PF2 was hired by London-based law firm Stewarts Law LLP, representing certain German, Austrian and Swiss banking, finance and insurance groups in a 'UK first' case seeking recovery from the ratings agency, as well as the arranging bank, for losses caused by AAA-rated complex financial products sold before the financial crisis. The investors purchased 10 year constant proportion debt obligation (CPDO) notes. Experts from PF2 were hired to assist counsel in reverse-engineering and interpreting bank and rating-agency code from pre-crisis models and to provide expertise on market norms as part of the structured finance structuring and ratings process. The case settled out of court.
US CLO Case. PF2 was hired by defendant’s counsel, Brune & Richard LLP, representing private equity firm Patriarch Partners, in a breach of contract action brought by bond insurer MBIA. Plaintiff MBIA had sought over $100 million in a breach of contract action. The structured finance fact pattern was extraordinarily complex and included disputes about rating agency methodology. In issuing his decision in favor of the defendant, the trial judge stated that “[PF2’s expert] was the most authoritative and credible of the experts with respect to the issue of the rating process and the ratability of the [notes].” MBIA Insurance Corporation v. Patriarch Partners VIII, LLC. Case No. 1:09-cv-03255 (NYSD) (read more)
Duties & Investment Advice
PF2 is often engaged when market professionals need to be drawn in to describe market norms, expectations, and best practices. Sometimes, the dispute is about the "intended" language, or distinctions between the plain language of an agreement versus the spirit of the agreement.
Investigation of Adherence to CDO Collateral Eligibility Criteria. PF2 was hired by law firm Kasowitz Benson Torres, representing London-based Astra Asset Management, on a dispute concerning alleged violations by an investment bank of collateral eligibility criteria. Astra argued that the investment bank benefited financially from the allegedly undue risks taken, while Astra and other investors in the Abacus CDO bore the risks associated with the investment decisions. The case settled on the eve of trial, with PF2’s expert positioned as a testifying expert. In the Matter of: The trusteeship created by Abacus 2006-10, Ltd., and Abacus 2006-10, Inc. Court File No. 62-TR-CV-18-39. (Minn.). (read more)
Asset Management / Collateral Management Duties. PF2's expert was hired by counsel representing the claimant in an arbitration proceeding that concerned, among other things, collateral management duties in the context of CLOs. The arbitration panel found in favor of the claimant. Claimant's counsel endorsed PF2's contributions, commenting that "PF2's expert was everything you want in an expert witness: knowledgeable, likeable, and credible. He took extremely complex issues and broke them down into understandable pieces for the fact-finder. We are so thankful that we had PF2 in our corner."
Fiduciary Role and Performance of Trustee. PF2 was hired by US-based counsel to oversee an expert's analysis of the investment decisions and allocations made by a trustee, on behalf of the trust's beneficiaries, and whether the perceived multi-year underperformance of the trust's investments was statistically significant.
CDO Management Case. PF2's expert was hired on a case disputing the adequacy of CDO manager’s resources, and the effectiveness of various (structural) mechanisms on a manager’s incentives, behavior and performance. Prepared expert rebuttal report. Requirement(s): familiarity with (i) CDO management standards; (ii) evolution of managerial behavior and industry practice for the relationships between underwriters and managers, and the potential for improper influence; (iii) relevant market participants’ expectations of CDO managers and their role(s) in the credit selection process; and (iv) deal structures and collateral management fee structures and incentives associated therewith.
Categorization of Assets by Indenture Trustee. PF2 was hired by law firm Jones Day, representing an indenture trustee, on a dispute concerning the most appropriate categorization of certain assets within a CDO, taking into account indenture terminology and market standards and practices. PF2 examined the deal’s language, with all key details redacted, and constructed an independent report contemplating the proper characterization of the securities. PF2's expert also provided testimony by deposition in this case. U.S. Bank National Association v. Barclays Bank plc, et al., Case No. 11-CV-9199 (U.S. District Court, S.D.N.Y.)
Allocation and Sale Techniques in Municipal Bond Markets. PF2 reported to counsel on considerations of market practice and norms in the trading or sale of new-issue state and municipal bonds, and issues of disclosure and the appropriateness thereof.
Financial Products & Firms – Valuation, Risk, Disclosure and Damages
RMBS Trust Analyses. PF2 was hired by a US-based law firm to study the statistical connection between the post-issuance performance of compliant vs. non-compliant loans, as measured by the trustee in the Final Day Exception Report, across various RMBS trusts.
Antitrust Concern Regarding Sovereign and Sub-Sovereign Debt Trading. PF2 consulted on measures of efficiency and liquidity in the primary market for agency securities. PF2 analyzed differences in cited measures, and their respective reliability, including order-book bid-ask spreads and transaction-level data sets.
Damages in the Context of Corporate Debt Investments. PF2 was hired to design and calculate measurements of damages caused to institutional investors (plaintiffs) that invested in corporate bond issues at inflated levels, pre corrective-disclosure of a firm's unsustainable business practices.
Fund Pricing and Asset Allocation Procedures. PF2 consulted on the applicability and extent of damages (if any) to groups of investors, based on a fund manager's pricing, trading and allocation processes. This regulatory matter was settled out of court.
High Frequency Trading (HFT) Damages. PF2 consulted for US-based law firm on the possible damages resulting from an alleged form of market manipulation, argued to move the market for certain government bonds and derivatives thereof. PF2 analyzed market size, market structure, and the estimated movement created by the alleged misconduct.
U.S. Banking Environment Study / TruPS CDOs. PF2 investigated the change in nature and investment conditions within the community and regional bank space generally, and specifically in conjunction with a securitization supported by bank credits.
Crisis-Era Subprime Bond Damages Modeling. PF2 provides various analytical functions relating to the building of models to compare and contrast settlements achieved on related and similar RMBS litigation concerns, under a variety of assumptions.
RMBS Case. PF2 was hired by Bernstein Litowitz Berger & Grossmann, on the plaintiff side of a dispute alleging fraud and other claims arising from plaintiffs’ investment in a portfolio of over $1 billion of triple-A rated residential mortgage-backed securities (RMBS). The case is Dexia SA/NV, et al. v. Bear Stearns & Co. Inc., et al., 12-cv-4761 (S.D.N.Y.) (JSR)
Losses in a Bank's Proprietary Portfolio. Assisted legal team in formalizing the various ways in which risk can be measured and monitored within the context of a large financial institution, and metrics and shortcomings around those measures (and associated disclosures).
Testifying Expert on Structured Note Program / CLN / Synthetic CDOs. PF2 was hired by Kirby McInerney, representing the plaintiffs in a dispute pertaining to plaintiffs’ investment in over $150mm in notes issued by the program. Plaintiffs allege that defendant(s) engineered the note program, which it marketed as a safe and conservative investment, to fail, investing the money into synthetic collateralized debt obligations linked to risky companies, including subprime mortgage lenders and Icelandic banks, while actively shorting the same assets and betting against their clients. The case is Dandong et al v. Pinnacle Performance Limited et al, 10-cv-08086-JMF-GWG
TruPS CDO Arbitration Dispute. PF2 was hired by Kessler Topaz Meltzer & Check, to opine on appropriate trading levels of trust preferred (TruPS) CDO securities, at certain times leading up to and during the financial downturn. PF2 considered general market conditions and relevant comparables in estimating trading levels for this illiquid, opaque asset class. The parties reached a settlement agreement prior to arbitration.
ABS CDO Case. PF2 was hired by law firm Shearman & Sterling, representing an investment bank that was a defendant on a dispute concerning the structuring and sale of an ABS CDO. PF2 reviewed email exchanges between bankers and market participants, and primarily consulted on market practices in the construction, ramping-up and marketing of ABS CDO securities and warehousing of the collateral, and market standards in the interaction between arranging banks and rating agencies. Case settled out of court.
CDO Case. Working with legal team to help them better appreciate the material conflicts inherent in the structuring and management of a portfolio of CDO securities. Analyzing opportunities for adverse selection of portfolio assets, and the possibility for material omissions, or fraudulent concealment, in the disclosures made.
ABS CDO Case. Engaged by legal team to clarify the importance of certain disclosures made, and the relevance of certain Congressional testimony to the case in point. Considered the effect of the mortgage loan due diligence process on the outcome of RMBS and ABS CDO ratings; and the dependence of the ratings methodologies on the adequacy of the due diligence process.
Loans Secured by Oil Assets. PF2 was engaged to critique the valuation report produced by a UK-based expert, which had sought to estimate the market value of certain loans made against the receivables from European oil assets.
Fund-of-Funds Disclosure Case. Engaged on behalf of California-based defendant in a case disputing the adequacy of disclosures made to investors in a fund. Assisted legal team with product-specific jargon and legal parlance associated with said disclosures.
CDO Case. Consulted on the adequacy of disclosures made to a small financial institution in relation to their purchases of a portfolio that included CDO securities. Analyzed, among other things, the implementation of rating agency methodologies and the eligibility of assets included in the deals’ underlying portfolios. Studied the current performance of the portfolio of bonds. Requirement(s): familiarity with CDO indentures; deep knowledge of rating agency CDO methodologies and the construction of CDO models.
Preferred Securities Case. Acted as consultant to plaintiff on a dispute involving the suitability, relative to the client's requirements, of certain investments made by a large broker-dealer. Requirement(s): broad knowledge of the liquidity concerns inherent across various structured finance asset classes; ability to compare and contrast, from a statistical and market trading-level perspective, the relative performance of similar investments; examination of relevant broker-dealer research; knowledge of the default and recovery characteristics of securities involved in dispute.
ABS CDO Case. Produced expert report that contemplates the relevance of certain bank documents, and communications, to the risk analysis and structuring of an RMBS CDO. China Development Industrial Bank v. Morgan Stanley, case number 650957-2010, New York State Supreme Court (Manhattan) (read more)
The team at PF2 was instrumental in guiding us through the structured finance ratings process, helping us resurrect and interpret the complex computer code delivered to us in this litigation, and rebuilding the credit models that would have been relied on at the time.”
Our testifying experts and research team have asset or deal-level industry experience, having managed, traded, rated, hedged or otherwise negotiated investments in the asset classes involved.
PF2’s expert “was the most qualified and credible of the experts” and “the most authoritative … with respect to the issue of the rating process and the ratability of the [notes].”