Damages Resulting from Investments in CDOs

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Cornerstone Research was retained by counsel representing a brokerage firm that was accused of selling risky, unsuitable collateralized debt obligations (CDOs) to an asset management firm that subsequently declared bankruptcy.

Cornerstone Research was retained by counsel representing a brokerage firm that was accused of selling risky, unsuitable collateralized debt obligations (CDOs) to an asset management firm that subsequently declared bankruptcy. A liquidating trustee (the Trustee) assumed control of the asset management firm’s portfolio and sold most of the CDOs approximately one year after the bankruptcy filing for well below par value. The Trustee then filed a damages claim against the brokerage firm demanding the difference between the purchase price of the CDOs and their eventual liquidation proceeds.

Cornerstone Research worked with Professor Christopher James of the University of Florida to analyze the events that caused the losses on the CDOs. Cornerstone Research analyzed the performance of the CDOs within the overall portfolio of the asset management firm and compared their performance with an appropriate set of benchmarks. Our analysis revealed that at the time of the investment, the CDOs had been composed of high-quality collateral securities with low expected default rates. In addition, at the time of the bankruptcy, the CDOs had generated an overall profit for the asset management firm, outperforming similar securities that were in the firm’s portfolio. Thus, the firm’s bankruptcy filing was not precipitated by losses on the CDOs.

Cornerstone Research analyzed the performance of the CDOs within the overall portfolio of the asset management firm and compared their performance with an appropriate set of benchmarks.

Our analysis also revealed that the CDOs retained most of their value for many months following the bankruptcy filing, with the majority of the losses occurring approximately one year later as the credit crisis of 2008 unfolded. Professor James filed an expert report concluding that because the Trustee had ample time to dispose of the CDOs at reasonable prices but failed to liquidate them until after the markets declined, the losses incurred could not be causally connected to any actions by the defendant. The case settled.

Case Expert

Christopher M. James

William H. Dial/SunBank Eminent Scholar in Finance and Economics,
Warrington College of Business Administration,
University of Florida;
Senior Advisor, Cornerstone Research