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Court Papers Undercut Ratings Agencies’ Defense


Published: July 2, 2012

When Cheyne issued its various securities in 2005, Moody’s and S.& P. rated them all investment grade. Even though Cheyne’s portfolio was bulging with residential mortgage securities, some of its debt received the agencies’ highest ratings, a grade equal to that assigned to United States Treasury securities. About two years later, as mortgage losses began to balloon, both agencies downgraded Cheyne’s debt below investment grade, to what is known as junk.

After the institutions that bought Cheyne’s debt sued Morgan Stanley and the ratings agencies, Moody’s and S.& P. immediately mounted a First Amendment defense. But Shira A. Scheindlin, the federal judge overseeing the matter, ruled in September 2009 that it did not apply because the Cheyne deal was a private offering whose ratings were distributed to a small group of investors and not the public at large. Judge Scheindlin agreed with the plaintiffs, who argued that the ratings were not opinions but were misrepresentations that were possibly a result of fraud or negligence.

“The disclaimers in the Information Memoranda that ‘a credit rating represents a rating agency’s opinion regarding credit quality and is not a guarantee of performance or a recommendation to buy, sell or hold any securities,’ are unavailing and insufficient to protect the rating agencies from liability for promulgating misleading ratings,” Judge Scheindlin ruled.

The judge also ruled against the defendants’ motion that documents and depositions generated in the case should be sealed. As a result, e-mails and deposition transcripts were filed with the court on Monday, showing how closely agency officials rating the deal had collaborated with Morgan Stanley, the firm that hired them to rate Cheyne’s securities.

Former Brokers Say JPMorgan Favored Selling Bank’s Own Funds Over Others


July 2, 2012, 9:06 pm

Amid the market volatility, ordinary investors are leaving stock funds in droves.

In contrast, JPMorgan is gathering assets in its stock funds at a rapid rate, despite having only a small group of top-performing mutual funds that are run by portfolio managers. Over the last three years, roughly 42 percent of its funds failed to beat the average performance of funds that make similar investments, according to Morningstar, a fund researcher.

“I was selling JPMorgan funds that often had weak performance records, and I was doing it for no other reason than to enrich the firm,” said Geoffrey Tomes, who left JPMorgan last year and is now an adviser at Urso Investment Management. “I couldn’t call myself objective.”

There is also concern that investors may not have a clear sense of what they are buying. While traditional mutual funds update their returns daily, marketing documents for the Chase Strategic Portfolio highlight theoretical returns. The real performance, provided to The Times by JPMorgan, is much weaker.

Marketing materials for the balanced portfolio show a hypothetical annual return of 15.39 percent after fees for three years through March 31. Those returns beat a JPMorgan-created benchmark, or standard of comparison, by 0.73 percentage point a year.

The actual return was 13.87 percent a year, trailing the hypothetical performance and the benchmark. All four models with three-year records were lower than the hypothetical performance and the benchmarks.

Regulators tend to discourage the use of hypothetical returns. “Regulators frown on using hypothetical returns because they are typically very sunny,” said Michael S. Caccese, a lawyer for K&L Gates.

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