NEW YORK (4/28/11)--A lawsuit filed by Space Coast CU Tuesday claims four Wall Street brokerage firms--including Barclays--sold risky collateral debt obligations (CDOs) that they knew would fail to Eastern Financial Florida CU, costing the latter credit union about $150 million and contributing to its collapse. Melbourne, Fla.-based Space Coast CU filed the suit in U.S. District Court for the Southern District of New York in Manhattan against Barclays Capital Inc., Barclays Bank PLC, State Street Global Advisors, State Street Bank and Trust Co., and State Street Corp. The $2.4 billion asset Eastern Financial Florida CU's lost $149.2 million in the CDOs. That precipitated its failure and eventual merger into Space Coast. The $3.17 billion asset Space Coast acquired its assets on June 30, 2009 (News Now
May 4, 2010 and May 26, 2010). In the complaint documents filed with the court, Space Coast alleges that the action "concerns a large international bank swindling a Florida credit union by creating and selling an investment that was a mirror opposite of what it purported to be." The CDO, named Markov CDO I, "was built to fail," the complaint document said. Eastern Financial Florida CU, and all other investors in Markov, lost 100% of their investments. The complaint alleges four material misrepresentations, reinforced by marketing efforts, concerning the Markov, that misled the credit union as to:
* Who selected the collateral assets referenced in Markov; * The bases and methods used to select those collateral assets; * The credit quality of the assets; and * The protections Markov's structure was supposed to provide against losses experienced by the collateral assets.
Space Coast alleged that Barclays and the other defendants created or underwrote a CDO nearly opposite of the one represented. It was built to fail because within the CDO was a rigged bet in the form of a credit default swap (insurance policy) that would pay the defendants if the riskiest collateral assets referenced by Markov failed, Space Coast said. "What appeared to be solid AAA-rated assets were actually junk quality securities," said the complaint filed. It noted that $400 million raised through sales of the Markov notes to the credit union and other investors was reserved to pay off Barclays when the referenced collateral inevitably failed. "At bottom, this is a story of a bank that when faced with losses from subprime related investments, resorted to deception." The complaint termed that the facts surrounding the rigged bets built within the CDO "lay to rest any notions of chance and instead evince deliberate--indeed, malevolent--design." The complaint said the CDO in the case was "materially similar" to the "now infamous, built-to-fail Abacus CDO" sold by Goldman Sachs & Co. and which was the target of a probe by the Securities and Exchange Commission. In April 2010, Goldman settled the investigation for $550 million, the court documents said.