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Court Dismisses Space Coast Suit On CDOs, Allows Amended Complaint
FORT LAUDERDALE, Fla. (3/20/13)--A federal court Monday dismissed without prejudice Space Coast FCU's more than $100 million lawsuit against Wall Street banks and ratings agencies over collateralized debt obligations (CDOs) sold to Eastern Financial Florida CU. However, it will allow Space Coast to amend its complaint to remedy shortcomings in its case.

Space Coast, based in Melbourne, Fla., acquired Miramar, Fla.-based Eastern Financial Florida CU in June 2009 in an emergency merger approved by state regulators. As successor in interest, Space Coast filed the lawsuit in the U.S. District Court for the Southern District of Florida, in Fort Lauderdale. The case involves 12 CDOs sold to Eastern Financial between 2005 and 2007.

"Space Coast's complaint must be dismissed because it does not plead defendants' alleged fraud with particularity, nor does it state a plausible claim for relief," wrote U.S. District Judge James I Cohn in Monday's ruling.

He declined to address other issues raised in the complaint because "Space Coast has not identified any fraudulent statements or omissions that defendants made regarding the specific CDOs purchased by Eastern, the court cannot evaluate defendants' other arguments that depend on those statements or omissions," according to the court document.

Space Coast's complaint alleged that the banks and ratings agencies engaged in six types of systemic fraud by "using knowingly inflated, inaccurate and unreliable credit ratings to sell the rated CDOs" and omitting that:

  • The ratings were the results of secret, out-of-model investments;
  • The ratings for CDOs were graded on a curve;
  • Certain ratings assigned were unreliable guesses instead of educated opinions;
  • CDOs were mispriced in the first quarter of 2007 to dump over-valued mortgage related bonds from their balance sheets onto investors;
  • Secret short sellers had warped CDO assets and priced them so they would fail; and
  • The correlation input used to create the CDOs and rate the notes were inaccurate.
The judge's ruling said the complaint "failed to plead in detail how each defendant defrauded Eastern." But, the judge wrote, "Space Coast may be able to cure these problems by alleging in detail, and with a plausible factual basis, the fraud that each defendant committed in connection with the CDOs owned by Eastern."

Defendants in the suit are: Merrill Lynch and its credit corporation, Merrill Lynch Home Loans; Wells Fargo Securities (former Wachovia Capital Markets); J.P. Morgan Securities (formerly Bear Stearns & Co.); UBS Securities; Barclay's Capital Inc.; Richard S. Fuld Jr., who ran Lehman Brothers at the time; Moody's Investors Service Inc.; and The McGraw-Hill Cos. Inc. (Standard & Poor's Ratings Services).


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