Claims and Bad Faith Law Blog

Fiduciary Duties, Denials, and Universal Disputes.

    An excellent laying bare of the major implications of the allegations against Mr. Bernie Madoff including the possibility of Breaches of Fiduciary Duties was written by Rabbi Wesley Gardenswartz, "The Perfect Response to the Madoff Debacle/Bernard Madoff's Confessed Ponzi Scheme Assaults Four Core Jewish Values" (Boston Globe Online, Sunday, December 28, 2008)..

    With due respect, Rabbi, the implications and in particular the Fiduciary Duties are universal.  See generally Tom Petruno, "Betrayal of Trust a Wall St. Tradition" (Los Angeles Times.com, Saturday, December 20, 2008).

    Many Claims have been made against many persons, see, e.g., McNelly Torres, "Investors' Complaints Against Financial Brokers Soar" (South Florida Sun-Sentinel.com, Saturday, December 20, 2008), archived online as of Friday, December 19, 2008, and many of the accused are denying any Duties let alone their Breaches.  See, e.g., James Mackintosh, Peggy Hollinger and Haig Simonian, "UBS Seeks to Deny Duty Over Madoff Funds" (Financial Times.com, Friday, December 19, 2008), updated and archived as of Saturday, December 20, 2008 under the new headline, "UBS Seeks to Absolve Itself From Madoff Fund Safeguarding Needs".

    Time and the Courts will tell.

HAPPY HOLIDAYS and A HAPPY NEW YEAR to ALL!

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Goldman Markets Munis, Sachs Issues Credit Default Swaps: Conflict?

       It was reported last month that Goldman Sachs caused an uproar in California by recommending credit-default swaps on municipal bonds when Goldman was also the managing underwriter of municipal bonds in California.  See "Goldman Markets Munis, Sachs Issues Credit Default Swaps" on Insurance Claims and Issues, Categories:  Bond Insurance, Market Performance, November 12, 2008 at www.insuranceclaimsissues.typepad.com.

    It is now reported that Goldman Sachs has recommended that its customers purchase credit-default swaps -- from Goldman Sachs, of course -- to protect against the risk of bond defaults in at least 11 States:  Florida, Connecticut, Hawaii, Illinois, Massachusetts, Michigan, Nevada, New Jersey, Ohio,.and Wisconsin in addition to California.

    Goldman Sachs reportedly "has acted as lead managing underwriter [of municipal bonds] in all the states it recommended betting against, except Hawaii."  Joe Mysak, "Goldman Draws Ire For Advising Default Swaps Against New Jersey" (Bloomberg.com, Wed., December 10, 2008).

    Is this a conflict?

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At Least Scrooge Did Not Try to Blame Marley.

    A New York State Senator has reportedly labeled U.S. Bancorp as a "'subprime Scrooge'" for its role in filing foreclosure lawsuits after receiving U.S. Taxpayer Funds.  U.S. Bancorp denies any responsbility.  It says it is only a Trustee "for investment vehicles collateralised by pools of mortgages."  Stacy-Marie Ishmael, "Senator Lambasts 'Subprime Scrooge'" (Financial Times.com, Friday, December 5, 2008).

    A spokesperson for U.S. Bancorp says that the state senator has got the wrong culprit.  It blames the servicer of the loan or mortgage for filing foreclosure lawsuits when people cannot pay their bills.  Id.

   Investors holding 'investment vehicles collateralized by pools of mortgages,' i.e., subprime mortgage securities, are apparently not in accord with this view, however.  As reported in a recent post in this space and in the newspaper report linked in it, investors are suing servicers who have had the audacity to reach settlements with the States in which the servicers agree to ease the terms of the mortgages.

    This actual development did not enter into the theoretical hypothesis of the current Federal Reserve chair, it seems, when Mr. Bernanke reportedly suggested a possible option divorced from reality, that once again Federal Taxpayer Funds could be paid to such people, whereby "the government could share the costs when a loan servicer reduces a borrower's monthly payment."   Joanna Chung, "Bernanke Urges Action on Foreclosures" (Financial Times.com, Friday, December 5, 2008).  Will the Federal Taxpayer under this theoretical option also share the costs when a loan servicer gets sued by an investor?

   Hmm.  Back to reality.  A trustee in general terms is always an individual or entity that acts on behalf of another, with powers entrusted by the other to her or him or it.  A trustee that does NOT have such delegated powers is simply not a trustee.

    A trustee that fails to act as a fiduciary, however, presents another story.  Perhaps Scrooge blaming Marley for Scrooge's sins is the other story.

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Credit Ratings Agencies and Civil Rights Claims.

    Two Credit Rating Corporations, Moody's Investors Service (a subsidiary of Berkshire Hathaway) and Fitch Ratings, allegedly "enriched themselves by assigning high ratings to bonds backed by mortgages," according to a recently filed complaint.  The junk mortgages allegedly imposed unfair payment terms and were disproportionately sold to African Americans and Latinos who purchased homes across the nation.

    The administrative complaint is a precondition or first step to the filing of a Federal Civil Rights lawsuit.  It is a first-of-its-kind complaint filed by the National Community Reinvestment Coalition with the Federal Department of Housing and Urban Development, it is reported by Kenneth R. Harney, "Civil Rights Complaint Targets Wall Street Rating Firms" (Los Angeles Times Online, Sunday, November 30, 2008).

    There is a related post on www.insuranceclaimsissues.typepad.com. 

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Countrywide Securitization Contracts Breached by Settlements With States?

    Countrywide Financial Corporation was allegedly a mortgage servicing company for the mortgages which backed securities.  One of the holders of those mortgage-backed securities, Greenwich Financial Services, a hedge fund, has sued Countrywide Financial in New York State Court.  The theories of liability are not entirely clear, but breach of contract certainly appears to be one of them.  See Vikas Bajaj, "Fund Investors Sue Countrywide Over Loan Modifications" p. B8, col. 3 (New York Times Nat'l Ed., Business Day Section, Tuesday, December 2, 2008).

    The basis of Greenwich Financial's lawsuit against Countrywide Financial lies in the settlements Countrywide recently reached with many State Attorneys General.  The A.G.'s apparently claimed that Countrywide engaged in predatory lending practices.  Countrwide settled those claims by modifying mortgage terms.  Greenwich claims that Countrywide owes it and other investors a lot of money, as much as $150 Billion, by agreeing with the States to modify mortgage terms to "provide $8.4 billion in relief to borrowers".  Id. 

    Bad Faith perhaps, changed to Good Faith required, back to Bad Faith?  It seems clear now that the mortgage securitization way of life will be shaped or halted in the Courts.

There is a related post on this lawsuit at www.insuranceclaimsissues.typepad.com.

Postscript of Wednesday, December 10, 2008:

This lawsuit is the subject of a post on the New York Times' "DealBook" web log, by "The Deal Professor," Steven M. Davidoff (New York Times Online, Wed., December 10, 2008).  At the end of the post, there is a link to the Greenwich complaint, among other things.

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Health Insurance Companies Reportedly Pursue Profits Beyond Generics, ...

... Urge Policyholders to Overrule Physicians and Obtain Prescriptions for Cheaper Meds.

    Health Insurance Companies have been leaders in making a market for generic medicines.  Their contributions to cost reductions in the provision of medical services are praiseworthy in many respects.

    Now some Health Insurance Companies reportedly may have overstepped.  Major, big time.

    Some Health Insurance Companies are reportedly urging Policyholders to fill their prescriptions with something else besides a generic.  They are reportedly asking their Policyholders to aggressively take ("robust"?  "muscular"?) steps to totally overrule their physicians' medical judgment and demand prescriptions for entirely different, cheaper medicine than what the doctor ordered.  Bob LaMendola, "Doctors, Patients Upset as insurers Push Them to Use Cheaper Drugs" (South Florida Sun-Sentinel.com, Saturday, November 29, 2008).

    Some people in the linked newspaper report are concerned about health and death risks as a result of this practice and procedure.  Are there other risks as well to Policyholders (as if those risks to Policyholders were not great enough), and perhaps to the Health Insurance Companies actually engaging in such practices and procedures?

    A related post can be found on www.insuranceclaimsissues.typepad.com.

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