Fund sues banks for $1.2 bln loss tied to subprime

* Fund wants to recover $1.2 billion in losses

* Complaint names a dozen investment banks

* Case may spark more investor suits against Wall Street

By Tom Hals

WILMINGTON, Delaware, July 12 (BestGrowthStock) – A hedge fund is
taking aim at the world’s biggest banks in an effort to recoup
$1.2 billion it lost on subprime mortgages, entering a legal
fight where so far Wall Street has largely been unscathed.

The lawsuit against Morgan Stanley (MS.N: ) (Read more about the money market today. ), Goldman Sachs
Group Inc (GS.N: ) and about 10 other banks is one of the biggest
cases of its kind to be filed so far in U.S. courts.

The case cites a sizable number of so-called “confidential
witnesses” quoted in the lawsuit, who said underwriting
standards were abandoned in order to meet demands for mortgages
from Wall Street.

The case could encourage other investors, such as large
pension funds, to bring similar lawsuits against Wall Street.

Law firms representing investors have an inventory of
related cases that they are considering filing, and they will
be following the Cambridge case closely, said James Cox, a
professor at Duke University Law School.

Several aspects of the lawsuit might help it overcome some
of the problems of earlier attempts to pin the subprime
meltdown on Wall Street banks, Cox said. For example, the case
was filed under investor-friendlier Massachusetts state law,
rather than federal law.

Gerald Silk, a partner at Bernstein Litowitz Berger &
Grossmann LLP, which represents the plaintiff, said he believes
the Massachusetts investor protection laws “provide us with a
powerful weapon to uncover the unscrupulous conduct by the Wall
Street banks and recover our client’s significant losses.”

The lawsuit, brought by hedge fund Cambridge Place
Investment Management, centers around residential
mortgage-backed securities (RMBS), which are bonds backed by
home loans. Cambridge invested $2.4 billion in the securities.

When the U.S. housing market began to collapse in 2006 and
2007, many of the RMBS, which were assembled by the banks,
plummeted in value as record number of homeowners fell behind
on their housing payments. The collapse of the RMBS spread
around the globe and helped spark the financial panic of 2008.

Cambridge in 2007 closed its Caliber Global Investment Ltd,
a fund that invested more than $900 million in mortgage
securities.

Goldman Sachs and Morgan Stanley declined to comment on the
lawsuit. Two other defendants, JPMorgan Chase & Co (JPM.N: ) and
Citigroup Inc (C.N: ), also declined to comment.

Investors in subprime securities have faced an uphill
battle in their legal fights. The banks that churned out the
mortgage bonds largely have been able to point to disclosures
that accompanied the securities and have blamed macroeconomic
factors for the investment losses.

As a result, the banks have been able to have most
subprime-related cases dismissed.

The complaint includes a long list of misdeeds unearthed by
Congressional investigations and allegations by confidential
witnesses.

Those include unidentified underwriters and managers at
loan originators who say that lending guidelines were tossed
aside in order to generate enough loans to feed Wall Street
firms.

An underwriter at Option One in Pleasanton, California, was
quoted in the complaint describing how managers would fight for
approval of loans even after fraud had been discovered.

“(Option One) didn’t have to worry about it, because once
they’re done with these crappy loans, they’d sell them off.
They were the investors’ problem.”

Cox said the case could prompt large pension funds to bring
similar cases. Some big public pension funds already have
brought subprime-related litigation, such as a lawsuit filed by
the California Public Employees Retirement System against
rating agencies that assigned what the pension fund has said
were “wildly inaccurate” reports on mortgage securities.

Jill Fisch, a law professor at the University of
Pennsylvania Law School, said the subprime-related cases have
lacked a smoking gun, and the Cambridge lawsuit may, too.

“It looks like they are saying Morgan Stanley should have
done more due diligence,” she said. “That kind of stuff is hard
to prove.”

The complaint comes just days after Liberty Mutual
Insurance Co sued Goldman Sachs, accusing the investment bank
of fraudulently misleading it into buying the now “virtually
worthless” preferred stock of mortgage financing company Fannie
Mae (FNMA.OB: ). For details, see [ID:nN09158452]

The Cambridge case was also brought against units of Credit
Suisse AG (CSGN.VX: ), HSBC Plc (HSBA.L: ), Barclays Plc (BARC.L: ),
Royal Bank of Scotland Plc (RBS.L: ), Deutsche Bank AG
(DBKGn.DE: ), UBS AG (UBSN.VX: ) FBR Capital Markets Corp (FBCM.O: ),
Bank of America (BAC.N: ) and GMAC LLC. Barclays and Deutsche
Bank declined to comment and the others did not return calls
for comment.

The case is Cambridge Place Investment Management Inc v
Morgan Stanley & Co Inc et al, Suffolk Superior Court,
Commonwealth of Massachusetts, No. 10-2741
(Editing by Gary Hill)

Fund sues banks for $1.2 bln loss tied to subprime