Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 1 of ...

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 2 of 36 PAGEID #: 2investment of cash collateral as part of the securities lending program that Wachoviaoperated on SERS’ behalf.2. The practice of securities lending has been aptly described as “Heads, wewin together. Tails, you lose – alone.” See Louise Story, Banks Shared Profits, But NotLosses, N.Y Times, October 17, 2010. This description reflects the fact that firmsoperating securities lending programs, which are typically Wall Street banks, structuredthe relationship so that they stood to share in whatever gains their clients made from theinvestments the banks made. However, their clients, which are typically public andcorporate pension funds, were exposed to the exclusive risk of loss.3. The securities lending concept is relatively simple. In general, aninstitutional investor temporarily loans a security from its portfolio to a broker/dealer tosupport the broker/dealer’s trading activity. In return, the lender of the security receivescollateral, usually in the form of cash, which can then be invested by the lender’s agent,usually a bank, until the security must be returned. Of course, when the security isreturned to the lender, the lender must simultaneously return the collateral to theborrower. If the collateral was in the form of cash, that means any investment of thatcash must be liquidated and the cash collateral returned to the borrower. To the extentthe investment earned any interest or a return to the lender, it is shared between the lenderand the lender’s agent (the bank), purportedly as compensation for administering thesecurities lending program.4. Wachovia, like other firms engaged in securities lending, marketed theirprograms as being a low-risk way to earn small additional returns on securities held in theportfolios of public and private pension funds. Indeed, “these trades were supposed to be2

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 4 of 36 PAGEID #: 48. Defendant Metropolitan West Securities, LLC (“MWS”) d/b/a WachoviaGlobal Securities Lending is a California limited liability company with its principalplace of business in Los Angeles, California.Defendant Metropolitan West has at allrelevant times been a subsidiary of Wachovia Bank.9. Defendant Wells Fargo Bank, N.A. (“Wells Fargo Bank”) is a nationalbank chartered and regulated by the Office of the Comptroller of the Currency with itsprincipal place of business in Sioux Falls, South Dakota. Wells Fargo Bank’s parent,Wells Fargo & Company, acquired Wachovia’s parent, Wachovia Corporation, onDecember 31, 2008. Wells Fargo Bank is registered to do business and does business inthe State of Ohio.III.JURISDICTION AND VENUE10. This Court has subject matter jurisdiction over this action pursuant to 28U.S.C. § 1332 as the parties are citizens of different states and the amount in controversyexceeds $75,000.00, exclusive of interest and costs.11. This Court also has subject matter jurisdiction over this action pursuant to28 U.S.C. § 1331 as the Complaint states a federal cause of action under Section 214 ofthe Federal Investment Advisers Act of 1940, 15 U.S.C. § 80b-14, and this Court hassupplemental jurisdiction over the other claims asserted herein pursuant to 28 U.S.C. §1367.12. This Court is the proper venue for this litigation pursuant to 28 U.S.C §1391 as a substantial part of the event and omissions giving rise to the claim occurred inthis District.4

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 7 of 36 PAGEID #: 7safeguarding the return of principal, minimize the risk of default, and maximizecurrent income within risk parameters defined in the Guidelines.”22. The SLA’s Collateral and Investment Guidelines also set forth certainexpress credit quality standards for any investments Wachovia made on SERS’ behalf,including a prohibition on buying securities falling below certain credit rating thresholdsset by the nationally recognized securities rating organizations, Standard & Poors,Moody’s and Fitch.23. If the credit rating of an investment was later downgraded below theinitially acceptable levels after the investment was made, the Collateral InvestmentGuidelines provided that the Investment Manager (Wachovia) was to make thedetermination whether to dispose of the investment if it is “prudent to do so in light of theinvestment objectives of the Portfolio.”24. The SLA required Wachovia to perform its services in good faith and inaccordance with applicable law. Section 10.1 of the SLA also made Wachovia liable fornegligence, bad faith or willful misconduct.25. For brokering the lending of securities and managing the investmentsmade with the cash collateral, Wachovia received 17% of the Net Income from theinvestments made with the cash collateral during each reporting period.This wassubsequently reduced to 15% effective June 1, 2009 by agreement of the parties.26. Pursuant to the SLA, Wachovia had discretionary authority to invest thecash collateral consistent with the objectives and investment guidelines.Wachoviaoperated as SERS’ investment advisor and as such owed a fiduciary duty of utmost7

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 8 of 36 PAGEID #: 8loyalty to SERS. Wachovia was obligated to place the interests of SERS ahead of itsown interests.27. The Office of the Comptroller of the Currency (OCC) within the U.S.Treasury Department, the regulator of nationally chartered banks like Wachovia,considers securities lending an agency relationship.(Comptroller of the CurrencyAdministrator of National Banks, Custody Services Comptroller Handbook, U.S.Treasury (2002) at 26-36.0 Custodial Lender banks like Wachovia are the agents fortheir principals, the institutions lending the securities, such as SERS. Id. The OCChandbook lists typical investments made by Banks in programs like securities lendingprograms, and the acceptable risks Banks are to take on behalf of the lender funds likeSERS. The investments that are acceptable are similar to investments found in moneymarket funds.28. The Federal Financial Institutions Examination Council (“FFIEC”)Supervisory Policy for Securities Lending Guidelines (“FFIEC Guidelines”) alsodescribes typical investments for the cash collateral obtained in securities lendingtransactions. The FFIEC Guidelines state:Generally, a lender institution will invest cash collateral in repurchaseagreements, master notes, a short term investment fund (STIF), U.S. orEurodollar certificates of deposits, commercial paper or some other typeof money market instrument.[62 Fed. Reg. 40818, July 30, 1997, effective July 30, 1997]29. The FFIEC Guidelines also state that a Bank that acts as an agent(Wachovia) and exercises “discretion in offering securities on behalf of and for thebenefit of customer-owners is acting as a fiduciary.” 62 Fed. Reg. 40817, July 30, 1997,effective July 30, 1997. Accordingly, under FFIEC Guidelines, Wachovia was acting as8

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 9 of 36 PAGEID #: 9the agent for SERS and owed fiduciary duties to SERS. Among other things, Wachovia’sfiduciary duties to SERS required Wachovia to inform SERS of all material informationthat Wachovia knew or should have known about investments that Wachoviarecommended for SERS cash collateral account.C. The Sigma Finance Investment.30. On or about October 23, 2006, Wachovia invested $25 million of the cashcollateral obtained from lending securities held by SERS in Sigma Finance Corporationmedium term notes (“MTNs”) with a scheduled maturity date of October 23, 2008.Wachovia took this step without consulting with SERS or advising SERS of the potentialrisks associated with the Sigma investment.31. Although it is unique and in its own category, Sigma is closest in form to astructured investment vehicle (“SIV”). SIVs acquire asset-backed securities and otherinstruments, using funds raised primarily by issuing or guaranteeing MTNs andrepurchase agreements (“repo agreements”). Repo agreements involve the sale of assetsto a party, usually a bank, with the intent to repurchase those assets at a later date.However, if the value of the assets decreases, the bank may demand additional assets – amargin call.32. Unlike most SIVs, that were tied to banks and could obtain liquidity fromthose banks in times of low cash flow, Sigma was a stand-alone investment vehicle.When Sigma began to experience financial difficulties in 2007, it began selling assetsoutright and under repo agreements. The repo agreements resulted in margin calls whenthe value of the assets to be repurchased fell below an agreed level. In September 2008,Sigma received margin calls that it did not honor and on September 30, 2008, its board9

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 10 of 36 PAGEID #: 10resolved that it could not continue to operate. On October 6, 2008, receivers wereappointed over Sigma’s assets. Because Sigma had sold so many of its assets due to alack of operational triggers, discussed below, Sigma’s assets consisted of less than $450million in cash while its unpaid secured liabilities were estimated to be approximately$6.2 billion.33. SERS’ collateral cash funds should not have been invested in Sigmaand/or the investments in Sigma should have been sold when Wachovia first knew signsof trouble for Sigma. Sigma had excessive credit and liquidity risk and its uniquestructure without a sponsoring bank or operational triggers failed to provide thesafeguards for investors that are found in most SIVs.34. Wachovia knew that Sigma was similar to an SIV and that SIVs weretypically incorporated off-shore in the Cayman Islands to avoid the regulations applicableto U.S. incorporated investment vehicles. Moreover, Wachovia knew or should haveknown that Sigma was actually considerably riskier than SIVs.35. Wachovia invested SERS cash collateral funds in Sigma even though itwas an unsuitable investment based on the objectives and needs of SERS. Wachoviapurchased Sigma MTNs with a maturity date of October 23, 2008 with funds in the cashcollateral account. Sigma was unsuitable at the time of purchase and even when Sigmabegan to experience problems, Wachovia failed to notify and recommend that SERS sellSigma.Instead, acting in its own interest, Wachovia repeatedly misrepresented thatSigma was a proper and suitable investment.36. It is not entirely clear where Sigma falls in the spectrum of investmentvehicles. Although it is not technically an SIV, Sigma is similar to an SIV. Wachovia10

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 11 of 36 PAGEID #: 11officers testifying in the case The Charlotte-Mecklenburg Hospital Authority d/b/aCarolinas Healthcare System v. Wachovia Bank, National Association d/b/a WachoviaGlobal Securities Lending, et al., Case No. 08 CVS 2779 (N.C. Superior Ct. 2008)(“CHS Litigation”) disagreed as to the definition of Sigma. One officer referred to Sigmaas a “limited purpose finance corporation” and the other referred to it as a “structuredinvestment vehicle [SIV].” Kevin O’Conner Dep., p. 128 and Daniel Murphy Dep., p. 49,respectively. S&P defined Sigma as a “limited purpose finance company.” Although itwas similar to an SIV in operation, Sigma was substantially riskier than the typical SIV,because among other things, Sigma did not have an affiliated bank and it did not haveoperational triggers to control risk. As discussed in detail below, these two features ofmost other SIVs protected investors from the type of losses that were incurred by Sigmainvestors.37. Even the typical SIVs with operational triggers and a sponsoring bank arerisky investment vehicles. SIVs are leveraged financial vehicles that issue short-termasset backed commercial paper (ABCP), MTNs, and long-term capital notes to purchasemedium and long-term assets.A senior financial writer at Bloomberg called SIVsecurities “some of the most confusing, opaque, and illiquid debt investments everdevised.” David Evans, Public School Funds Hit by SIV Debts Hidden in InvestmentPools, Bloomberg, Nov. 15, 2007. SIVs have assets and liabilities that are not carried onthe sponsoring firm’s balance sheets. In addition to being off-balance sheet, SIVs areincorporated in the Cayman Islands, due in part to favorable regulatory laws allowing forreduced reporting requirements.11

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 12 of 36 PAGEID #: 1238. SIVs make money by selling shorter term notes and using the proceeds topurchase medium and long-term assets because the longer term assets that are purchasedtypically pay a coupon rate that is higher than the interest rate on the shorter term notes.The riskier the longer term assets, the greater the profits that can be earned by an SIV.39. SIVs use operational triggers to automatically control risk and manageleverage. If pre-set triggers occur, the management of the SIV may be changed and/orthe activities of the SIV may be limited. Typically, the triggers are cash flow tests,portfolio restrictions and liability limits. Cash flow triggers can be set off by insufficientcredit enhancement, interest rate and foreign exchange risks, insufficient liquidity andexcessive cash outflow. Portfolio restriction triggers are set off when portfolio risktolerance boundaries are exceeded.Finally, an improper mix of liabilities sets offliability restriction triggers.40. Depending on the particular triggers that are tripped, the fund managermay be changed, restrictions may be placed on the issuance of debt and payment of debt,and restrictions may be placed on the investments that could be made by the SIV. In thenormal operational state, the SIV manager is in charge of portfolio management and theSIV is free to pursue investments and issue MTNs and commercial paper. However, ifcertain operational triggers are tripped, the SIV moves into a restricted operational statein which new investments and payment on subordinate capital notes is prohibited. Iffurther triggers occur the SIV is restricted from issuing debt, existing assets can only beexchanged for cash and only senior debt holders can be paid.Finally, upon theoccurrence of the final set of triggers, a receiver is put in charge of portfolio managementand a wind-down of the SIV begins.12

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 13 of 36 PAGEID #: 1341. Sigma did not have operational triggers. Thus, when Sigma finally wentinto receivership, very few assets remained from which investors could recoup theirinvestment.42. As of April 2007, Sigma had a $53.5 billion portfolio, but there were signsof impending doom. From the fourth quarter of 2007 through 2008, the signs of troubleincreased as did the problems for Sigma. By October 2008, Sigma was in receivershipand its assets consisted of less than $450 million in cash while its unpaid securedliabilities were estimated to be approximately $6.2 billion.43. Sigma was not a suitable investment for SERS because of its inherent risksand lack of liquidity.SERS is a public pension fund that has always practicedconservative investment policies, guided by preservation of principal.Sigma wasentirely unsuitable for SERS’ strategies and goals.44. Wachovia’s placement of SERS’ funds in Sigma was inconsistent with theSLA, and the objectives and needs of SERS.The SLA made it clear that SERS’objectives and needs were primarily the preservation of principal and risk-avoidance.Placement of SERS’ funds in Sigma was inconsistent with the key objectives ofmaintaining “adequate liquidity while safeguarding the return of principal” andminimizing “the risk of default.” Placing SERS’ funds into a complex hybrid SIV withsubstantial leveraged interest rate risk is inconsistent with the objectives of safeguardingthe principal in the SERS fund. Wachovia clearly exposed SERS to unsuitable risk levelsthat greatly exceeded the level of risk consistent with SERS’ long-standing riskmanagement investment strategies and the incremental safe income goals of the securitieslending program.13

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 14 of 36 PAGEID #: 1445. Sigma was an unsuitable investment for the SERS cash collateral accountinvestments because, among other things, it contained substantial interest rate risk.Interest rate risk, in general is the risk of a change in the value of a fixed incomeinvestment such as a bond, due to changes in market interest rates. SIVs and Sigma hadsignificant interest rate risk inherent in their structure.46. Companies with significant interest rate risk were not suitable investmentsfor the investment of SERS cash collateral.In deposition testimony in the CHSLitigation, Terry Michael Crow (“Crow”) of Wachovia indicated that derivatives andother esoteric securities were not permitted as investments in the cash collateral accountinvestments primarily to avoid interest rate risk. Crow Dep. P. 30. Sigma’s asset andliability structure guaranteed significant interest rate risk and Sigma’s leverage magnifiedthat risk.47. Sigma was an unsuitable investment for the SERS collateral cash fund dueto the substantial liquidity risk. Most SIVs were sponsored by banks that providedliquidity. Sigma was not sponsored by a bank. Thus when Sigma experienced liquidityproblems, it had to rely almost exclusively on repurchase agreements for liquidity. Ofcourse the sale of securities through repo agreements effectively removes assets fromSigma investors and multiplies the risk and loss for existing Sigma investors.48. Sigma was an unsuitable investment for the SERS cash collateral fundsdue to Sigma’s substantial credit risk. In October 2007, most SIVs relied on repurchaseagreements for only about 2% of their funding and few, if any, used repo agreements formore than 20% of their funding. However, by fall 2008, Sigma had posted nearly $25billion of its $27 billion in assets to lenders in repo agreements. Thus, nearly 93% of14

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 15 of 36 PAGEID #: 15Sigma’s assets were subject to repo agreements and very little was left to distribute afterSigma went into receivership.49. Wachovia also failed to disclose to SERS significant increases in the riskof holding the Sigma investment. In the second half of 2007, it became apparent thatSIVs including Sigma were having problems maintaining liquidity and it was not likelyto get better.These struggles continued throughout 2008 and yet at no time didWachovia recommend that SERS sell the unsuitable investment in Sigma. Wachovia didnot inform SERS that it had obtained bids for Sigma that would have allowed SERS tosell Sigma at no or very little loss.50. Wachovia failed to advise SERS of other material information concerningSigma and misrepresented the increasing risk associated with Sigma. Wachovia failed toadvise SERS of information concerning Sigma that Wachovia had on its own internalwatch lists. When Wachovia did advise SERS concerning Sigma, it portrayed Sigma in afalsely positive light that was in direct contradiction to its own internal belief and actionsthat confirmed that Wachovia knew Sigma was struggling and almost certain to faceliquidity problems in the very near future.51. On December 11, 2007, Daniel Murphy (“Murphy”), Chief OperatingOfficer of Wachovia Global Securities Lending reassured SERS that Sigma was a stronginvestment. Murphy stated that this “Citibank SIV is the largest in the market with TotalPortfolio of $49.7 billion” and assured SERS that “[i]t has no direct subprimeexposure….” Murphy did not advise SERS of the problems that Sigma was havingobtaining funding even though Wachovia knew of the problems at this time.15

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 16 of 36 PAGEID #: 1652. In the first half of 2008, Wachovia knew that Sigma was entirelydependent upon repo agreements for liquidity. In a deposition in the CHS Litigation,O’Conner testified that he assessed Sigma’s access to capital as merely “adequate” inearly 2008 and he knew they were relying on repo financing and the sale of assets forcapital. Moreover, while Wachovia deemed Sigma’s access to capital as “adequate” forother investors, Wachovia itself had already begun taking steps to reduce its ownexposure to risk from investments in Sigma.53. At his deposition in the CHS litigation, Murphy, Wachovia’s ChiefInvestment Officer, stated:Q: With respect to the discussion you were involved in, do you know whyit was decided not to engage in repo transactions with Sigma Finance in2008?A: There were a number of reasons. Sigma wasn’t an approved repocounterparty, the size of the transaction Sigma was looking to do wasprobably well beyond the limitations that we generally had in clientportfolios. Sigma at the time, as we all know, had issues relative to raisingnew liquidity in the market so it was generally not the type of credit wewould, at that point in time, take on as a counterparty, you know.Q: And is one of the reasons they weren’t approved as a repo counterpartythat it was considered by Wachovia Global Securities Lending to be toorisky at this point in time?A: Well, at that point, it generally would not have been the type ofinstitutions that would have been on a regular basis a repo counter party.Repo’s we would do generally with institutions on the street that are inthat business on a regular basis for other reasons. At that particular timeyou also had the added factor that Sigma, and the markets in general haddeteriorated and Sigma in particular, as many issuers, had problems interms of accessing new funding, so yes, it would have been – had wepresented it as a counterparty, that would have been I think certainly aconsideration and may very well had been the primary reason or a reasonfor it not being approved, but we never asked for approval for it so I can’tsay what ultimately the reason for or against would have been. [MurphyDep. P. 39]16

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 17 of 36 PAGEID #: 17Thus, by 2008, Wachovia would not enter into repo agreements with Sigma, even whereSigma owned assets as security and would be paid the next day by Sigma. Of courseWachovia did not tell SERS that it deemed Sigma to be such a risk.54. On April 4, 2008, Murphy informed SERS that Moody’s lowered theratings of Sigma from Aaa/P-1 to A/P-2 and had left Sigma on review for possible furtherdowngrade.Murphy also noted that Wachovia anticipated that S&P would alsodowngrade Sigma’s credit rating. Murphy indicated that Sigma’s access to it’s traditionalfunding sources were disrupted in the second half of 2007 and Sigma had operated usingalternative funding sources including $14 billion in repurchase agreement transactionsand asset sales. However, Murphy falsely reassured SERS stating that Sigma’s “assetportfolio remains diversified and is comprised of highly rated securities.”55. Sigma was an unsuitable investment for the SERS cash collateral due tothe complexity and uncertainty associated with Sigma. Safety of principal was thefundamental, single most important investment goal for the SERS cash collateral funds.In the CHS litigation, O’Conner testified that they “would analyze information availableto us in the marketplace as to the credit worthiness of the issuer, which would be theprimary determinant of the safety of principal.” O’Conner Dep. P. 92. And based onWachovia’s own decision to limit its own exposure to Sigma’s risk, it appears thatWachovia did assess Sigma as a risky investment.56. Wachovia did not tell SERS about its internal assessments of the high-riskof Sigma. Instead, Wachovia portrayed Sigma as a low risk investment and even when itwas going down in flames continued to understate the risk associated with Sigma.Wachovia portrayed Sigma as a stable investment that had very little risk and never17

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 18 of 36 PAGEID #: 18informed SERS of the unique characteristics of Sigma that made it far riskier than typicalSIVs.Wachovia portrayed Sigma as a typical SIV even though it had severaldistinguishing characteristics that exponentially increased the risk of Sigma whencompared to SIVs. Sigma’s lack of a sponsoring bank and operational triggers made itsubstantially higher risk than most SIVs.57. Wachovia compounded the losses from investment in Sigma MTNs byfailing to timely liquidate Sigma investments in order to prevent a near total loss whichWachovia knew was possible given Sigma’s lack of operational triggers and sponsoringbank. In 2007, it was widely known at Wachovia that Sigma and SIVs were experiencingsevere financial difficulty and it wasn’t going to get better anytime soon.InsideWachovia, they were taking steps to limit Wachovia’s exposure to losses from Sigma andSIVs. Wachovia would not engage in repo agreements with Sigma and its own moneymarket funds were taking steps to reduce or eliminate exposure to the fledgling Sigma.In late 2007, Wachovia had Sigma on “Restricted” status and did not approve ofinvestment in Sigma for new clients.Wachovia also placed Sigma on a “SpecialSurveillance List.” However, Wachovia failed to take action to limit the exposure ofSERS’ cash collateral funds to losses from Sigma or even advise SERS of the concernsover the financial stability of Sigma in 2007.58. Wachovia failed to notify SERS of Sigma’s liquidity risks prior to makingthe initial investment and when it became clear to Wachovia that SIVs and Sigma werehaving serious liquidity concerns. Wachovia knew that liquidity was a primary concernfor the SERS securities lending cash collateral account. Borrowers of the securities could18

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 19 of 36 PAGEID #: 19return the securities on loan at any time and demand repayment of the cash collateral thatthey had posted as collateral for the securities loan.59. The SLA and federal guidelines for securities lending both make it clearliquidity is a very important fact to consider when investing the cash collateral obtainedfrom lending securities.60. As the broker, agent and fiduciary for SERS, Wachovia should haveinformed SERS of Sigma’s liquidity dangers when the cash collateral funds were firstinvested in Sigma. Wachovia should have also informed SERS in 2007 when it becameobvious that SIVs and Sigma were having severe liquidity risks.61. An October 18, 2007 Reuters report provided insight into how wellWachovia knew what was happening with Sigma and SIVs.Reuters reported thatbeginning in September 2007, several major banks, including Wachovia had discussionsconcerning a bailout plan for SIVs at the urging of Secretary of the Treasury HenryPaulsen. Dan Wilchins, Wachovia to Participate in Bail-Out Fund, Reuters, Oct. 18,2007. The Secretary and banks were concerned that banks were at risk from the potentialdumping of assets by SIVs.The bailout plan was later deemed unnecessary whentwenty-five bank sponsors of SIVs stepped in to provide liquidity for the SIVs that theysponsored. However, Sigma was not among those that would be helped because Sigmadid not have a bank sponsor.62. Although Wachovia knew of the liquidity concerns with Sigma and SIVsin 2007, Wachovia purposely chose not to inform SERS of those concerns. In the CHSLitigation, Murphy admitted that he was aware of the liquidity problems with Sigma in2007. Murphy Dep. p. 175. Wachovia knew these concerns were serious. On September19

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 20 of 36 PAGEID #: 2024, 2007, Wachovia placed Sigma on “Restricted” use with new clients and put it on a“Special Surveillance List.” Further on December 11, 2007, Wachovia refused to investin Sigma for its clients.63. In the fourth quarter of 2007, SIVs and Sigma started to experience dropsin their credit ratings. The severity of the drops were a signal to Wachovia of theimpending doom for Sigma. On December 18, 2007, S&P issued a warning about thefuture financial vitality of SIVs:Standard & Poor’s Ratings Services said today that it considers theoutlook for limited purpose finance companies (LPFCs) to be negative.LPFCs face a similar set of challenges in the marketplace as structuredinvestment vehicles (SIVs), a sector that saw most issuer credit ratingsassigned negative outlooks on Dec. 7. On that day we also assigned anegative outlook to the sole limited purpose finance company that we rate,Sigma Finance Corp. (AAA/Negative?A-1+). At this time Sigma has notbeen placed on CreditWatch with negative implications but rather its longtermoutlook is negative, in line with our overall views for this and theSIV sector, both of which use the short-term funding markets.Standard & Poor’s, S&P Says Limited Purpose Finance Companies Face NegativeOutlook, Abstract S&P Credit Research, December 18, 2007. S&P’s December 18, 2007warning failed to prompt Wachovia to limit SERS’ exposure to risk from Sigma or evento discuss the issue with SERS.64. On December 18, 2007, Moody’s rating service also placed Sigma on“Credit Watch with negative implications.” Wachovia did not advise SERS of eitherStandard and Poor’s or Moody’s warning about Sigma. In fact, Murphy explained that itwas not the policy of Wachovia to inform clients such as SERS of these warnings. In theCHS Litigation Murphy testified:Q. Would a negative credit watch by Standard & Poor’s or Moody’s becommunicated to CHS [the securities lender] as part of the management ofits account?A. Not necessarily, no.20

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 21 of 36 PAGEID #: 21Q. Okay would that be in the discretion of Wachovia Global SecuritiesLending?A. It would not – unless it was a contractual requirement, it would nothave been something that we would have done as a matter of policy.Murphy Dep. p. 186.65. Wachovia only provided SERS with minimal communication and onlywhen expressly required by the terms of the SLA. With respect to investors outside ofthe securities lending program, Wachovia sent them a letter informing them of theconcerns with Sigma, SIVs and the marketplace.66. In contrast to the information provided to other investors, Wachovia didnot inform SERS of concerns over Sigma or SIVs. And even when Wachovia providedthe minimal communication advising SERS of a credit downgrade, Wachovia made norecommendation or even attempt to discuss how to best manage risk exposure associatedwith Sigma.In fact, Wachovia intentionally understated the importance of eventsrelating to Sigma in the minimal communications to SERS.67. On April 7, 2008, S&P issued a long-term downgrade of Sigma fromAAA to AA-, a five level downgrade.A New York Times article following thedowngrade explained the grave circumstances underlying the downgrade:Gordian’s Sigma Finance Corp. must refinance $20 billion of debt bySeptember in a market where even the biggest banks are struggling toborrow, according to Moody’s Investors Service. Moody’s cut the $40billion fund’s Aaa rating by five levels to A2 last week because of concernabout Sigma’s ability to weather the credit crunch. Standard & Poor’sdowngraded Sigma yesterday to AA- from AAA. The inability to replacethe debt may cause Sigma to dissolve.Neil Unmack and Sree Vidya Bhaktavasalam, Pioneers of Structured Invesment Fight forSurvival of Flagship Fund, The New York Times, Apr. 8, 2008. Again, Wachovia failed21

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 22 of 36 PAGEID #: 22to make recommendations or even discuss the serious financial posture of Sigma withSERS.68. On April 23, 2008, a Wachovia subsidiary, Evergreen Investments,advised Wachovia’s securities lending team of its concerns about Sigma risk exposure:In sum, our Evergreen and SMA exposure is scheduled to mature in < 3weeks. Although we remain anxious, based on available cash, modestback-up bank facilities, and capital cushion available for any necessaryasset sales, we continue to believe we will be paid. However, Sigma’sliquidity condition is clearly becoming increasingly strained. Marketconditions continue to make repo reliance a dangerous game…. Sigma isrunning out of repo eligible assets. As a result Sigma will be increasinglyrelying on asset sales… Finally, committed bank liquidity facilities arebeginning to mature and it’s unlikely that any will be renewed… We thinkMoody’s and S&P will downgrade Sigma from Aaa/AAA very soon.CHS Litigation Deposition Exhibit 216. Accordingly, Wachovia’s securities lendingteam was warned about future downgrades of Sigma and Sigma’s over reliance on repoagreements. Evergreen was “anxious” about its Sigma investments that were to mature inMay 2008. And even though SERS’ Sigma MTNs were not scheduled to mature untilOctober 2008, Wachovia failed to inform SERS of any of the concerns that Evergreenhad clearly conveyed to Wachovia. Again Wachovia failed to act as SERS’ investmentadvisor.69. On July 14, 2008, Moody’s downgraded Sigma from A2 to A3. OnAugust 5, 2008, Citigroup analysts stated that Sigma was “walking a tight rope” byrelying on repo agreements for funding, and that a withdrawal of repo counterpartyfunding would not give Sigma “much room to maneuver.” Again, Wachovia failed tomake recommendations or discuss concerns with SERS. In other words Wachovia failedto act as SERS’ investment advisor.22

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 23 of 36 PAGEID #: 2370. On July 17, 2008, Brian Gorman (“Gorman”) of Wachovia advised SERSthat Moody’s downgraded Sigma to A3 from A2, and kept the rating under review forpossible further downgrade.” Gorman stated that SERS “currently holds $25mm SigmaFinance, with a maturity of 10/23/08.”Gorman made no suggestions orrecommendations concerning Sigma. Again, Wachovia failed to fulfill its duties asSERS’ financial advisor.71. In August 2008, rather than inform SERS and other securities lendingclients of the seriousness of the increasing risk of Sigma investments, when Wachoviadid provide information to its securities lending clients, it greatly understated theseriousness of the problems at Sigma. Wachovia did not explain the risk associated withSigma’s reliance upon repurchase agreements and asset sales, including, among otherthings, that such risks could cause investors to lose all or substantially all of theirinvestment in Sigma if it went into receivership after having sold or given up as collateralmost of its assets.72. On September 10, 2008, Deutsche Bank Securities made a bid for SigmaFinance October paper, stating that “hearing there is a seller of some SIGFIN 10/23/08FRNs. We are willing to pay $92.00 for $100MM and potentially take more size.” Inresponse to this bid, a Wachovia employee asked if they should tell the clients. However,O’Connor stated:They have the liquidity to pay off the September. And our holding comesright up. There is no debt maturing between 9/30 and 10/23, according toBloomberg. At the end of August, the book of value of the capital notesamounted to more than $3 billion, supporting some $27 billion assets (thisused to be a $55 billion program!), i.e. more than 11% subordination.However, Sigma’s available liquidity facility could be dramaticallyreduced after September, in the context of which, we could rely on assetsales to make us whole.23

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 24 of 36 PAGEID #: 24CHS Litigation Dep. Ex. 51. Wachovia never informed SERS that it could sell its SigmaMTNs at this time. Moreover, Wachovia’s position to hold the Sigma investment wasnot in the best interest of SERS or likely to aid in achieving SERS’ objectives of ensuringsafety of principal. To take a gamble on full payment through a winding down of Sigmawas completely inapposite to SERS’ objectives. At a minimum, Wachovia should haveexplained the risks and consulted with SERS about the possibility of selling the notes toeliminate the risk of continuing to hold what was an unsuitable investment from theoutset.73. On September 12, 2008, S&P reduced Sigma’s long-term debt to A fromAA-. At this time, Wachovia had a bid for Sigma but failed to convey the bid to SERS oreven discuss how to best address the risk from Sigma with SERS. Although Wachoviarepresented it would be SERS’ securities lending department and advisor – and was beingpaid quite well for doing so – Wachovia never gave SERS advice or even sharedinformation with SERS about the increasing risk associated with Sigma.74. Wachovia was SERS’ investment agent pursuant to the SLA and by law,and yet failed to advise SERS or even share information that SERS needed to make itsown decisions concerning Sigma.Even when Wachovia had bids for Sigma andknowledge of Sigma’s financial troubles, it did not ask SERS if it should sell Sigma ormake any recommendations with respect to Sigma.As SERS’ investment advisor,Wachovia should have never advised SERS to invest in Sigma as it was not a suitableinvestment for SERS’ objectives for the cash collateral funds. Moreover, as it becamemore and more obvious what an unsuitable investment Sigma was for the SERS cashcollateral funds, Wachovia should have advised SERS to sell Sigma and reduce their24

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 25 of 36 PAGEID #: 25exposure risk to Sigma. SERS properly relied on Wachovia as its investment agent toprovide it with advice and pass along important information that was necessary to assessthe true risk associated with Sigma.75. As of September 15, 2008, there were still active bids for Sigma.Wachovia did not tell SERS about the bids. Nor did Wachovia inform SERS that it wasstill possible to sell the Sigma notes.76. By September 22, 2008, the market for Sigma was either nonexistent orsignificantly deteriorated. Sigma held $110 million in Lehman debt and nobody waswilling to take on such risk after the collapse of Lehman. JP Morgan Chase, HSBC andthe Royal Bank of Scotland pulled repo agreements from Sigma. Wachovia had let thetime for disposing of Sigma pass without even discussing the option with SERS.77. Wachovia’s notable failures to report to SERS include: Failure to report material information concerning the ongoing financialviability of Sigma in 2007; Failure to advise SERS of Sigma’s lack of operational triggers and howthe absence of those triggers could affect what remains of Sigma’s assetsin the event that Sigma went into receivership; Failure to advise SERS that unlike most SIVs, Sigma did not have asponsoring bank that could provide liquidity as did other sponsoringbanks during the credit crunch; Fitch’s statement that it was considering lowering the ratings on Sigma’s$31.6 billion in Senior Notes and $2.3 billion in commercial paper; Wachovia’s failure to timely inform SERS that in December 2007, Sigmawas placed on the “Special Surveillance List”, “Credit Watch Negative”list, and “Outlook Negative Watch List”; Fitch’s withdrawal of its rating on Sigma on January 28, 2008, becauseSigma refused to provide Fitch with the information necessary toaccurately rate Sigma;25

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 26 of 36 PAGEID #: 26 Moody’s placement of Sigma’s Senior Notes on review for downgrade onFebruary 27, 2008, and corresponding statement that Sigma’s reliance onrepo agreements increased the risk associated with Sigma; S&P’s March 18, 2008, statement that they were considering a downgradefor Sigma lowering its AAA rating; Failure to inform SERS that Wachovia had bids for Sigma in May 2008and discuss whether SERS should sell Sigma at that time – particularly inlight of Wachovia’s knowledge of Sigma’s struggles; Wachovia’s failure to inform SERS in June 2008 that Wachovia knewSigma was “operating on a day to day basis”; Wachovia’s failure to inform SERS in June 2008 that it had placed Sigmaon an internal “Credit Watch List”; Wachovia’s failure to timely inform SERS that in August 2008, creditorsof Sigma sought advice concerning the ability to recover theirinvestments if Sigma was unable to pay the $8.6 billion of debt maturingby September 30, 2008; Wachovia’s failure to inform SERS that on August 11, 2008, Sigmacreditors formed a committee to assess Sigma’s ability to pay its debts;and Wachovia’s failure to inform SERS that on August 21, 2008, it receivedbids on Sigma that were in the low 90s.78. On October 1, 2008, Sigma ceased trading and appointed a receiver towind down the investment vehicle. On October 2, 2008, Gorman advised SERS thatSigma’s “financial situation deteriorated precipitously over the past 2 days” ultimatelyleading to a Sigma announcement on October 1, 2008 that it had ceased trading andexpected the appointment of a receiver and would not be making any further payments tocounterparties. Gorman’s representation that Sigma’s “financial situation deterioratedprecipitously over the past 2 days” was, of course, false. Sigma’s financial situation hadbeen deteriorating since the middle of 2007. However, Gorman was attempting to coverthe fact that Wachovia had failed to timely advise SERS of the deteriorating financialsituation at Sigma for all that time.26

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 27 of 36 PAGEID #: 2779. Throughout 2009, Wachovia continued to mislead SERS throughencouraging updates that a recovery rate range of 60-70% of par value was likely.However, on November 17, 2010, SERS received a distribution of $1,261,962.98 fromSigma’s receivers, meaning that SERS sustained a loss of $23,738,037.02 on the Sigmainvestment.V. WACHOVIA’S OTHER IMPROPER INVESTMENTS80. In addition to the improper Sigma investment, Wachovia also investedcash collateral from the securities lending program in other improper investments. Aswith Sigma, Wachovia either never should have made these investments or Wachoviashould have liquidated them before SERS sustained the losses complained of herein.81. Below is a chart of the non-Sigma improper investments (collectively, the“Other Investments”) and the loss sustained by SERS with respect to each of them:Counter Party-Issuer Cusip Description Purchase Date Sale Date LossArran Residential Mortgage Funding 04271AAA9 ARRMF 2007-3A A1B 06/19/2007 06/18/2010 ($1,596.24)Credit Suisse Mortgage Capital Certificates 22545RAA4 CSMC 06-TF2A A1 11/29/2006 6/22/2010 ($201,217.67)Credit-Based Asset Servicing and Securitization 1248MHAA0 CBASS 07 SP2A1 06/29/2007 06/18/2010 ($130,438.43)Indymac NIM Trust SPMD 45669HAA7 IMNIM 2007-B 6/22/2007 06/18/2010 ($1,296,594.95)Morgan Stanley ABS Capital I 61755CAA0 MSAC 2007-HE6 A1 5/31/2007 6/22/2010 ($1,154,904.42)Option One Mortgage Securities Corp NIM Trust 68389CBH3 OONIM 2005-2A NIM 5/26/2005 4/27/2010 ($1,930,031.15)Option One Mortgage Securities Corp. NIM68403AAA5 OONIM 07-CPI NOTE 3/12/2007 6/18/2010 ($429,342.59)TrustOption One Mortgage Securities Corp. NIM68403GAA2 OONIM 07-3 NOTE 4/30/2007 6/18/2010 ($710,853.41)TrustRAAC Series 74919VAA4 RAAC 06 SP4 A1 12/08/2006 6/18/2010 ($4,087.11)TOTALS ($5,859,065.97)27

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 28 of 36 PAGEID #: 2882. Wachovia made each of the Other Investments using its own discretionand without consulting or advising SERS. The Other Investments were either improperat the time they were made or they became improper – and should have been liquidated –before SERS sustained significant losses.83. As a result of Wachovia’s breach of contractual, fiduciary and other dutiesowed to SERS, SERS sustained cumulative losses of $5,859,065.97 on the OtherInvestments.VI.FIRST CAUSE OF ACTION: BREACH OF CONTRACT84. Plaintiff repeats and re-alleges each and every allegation contained aboveas if fully set forth herein.85. Exhibit A to the SLA, Collateral and Investment Guidelines, sets forth theobjectives and permissible investments for Wachovia’s investment of SERS cashcollateral funds. “Key objectives for managing Investment Account Assets” includedmaintaining “a diversified portfolio of credit-quality instruments and [t]o maintainadequate liquidity while safeguarding the return of principal….” Wachovia violatedthese objectives by purchasing Sigma and the Other Investments and holding them evenafter Wachovia knew that doing so would not achieve the objectives in the Collateral andInvestment Guidelines.86. The Collateral and Investment Guidelines also specified permissible typesof investments. The unique structure of Sigma rendered it an impermissible investment.The Collateral and Investment Guidelines did not permit investment in MTNs issued by alimited purpose finance company. Moreover, Sigma’s unique structure made it a high28

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 29 of 36 PAGEID #: 29risk investment that clearly did not conform to SERS’ objectives and maintainingliquidity and “safeguarding the return of principal.”87. Wachovia also breached the SLA by negligently performing its investmentduties. Section X, 10.1, Standard of Care, of the SLA makes Wachovia expressly liablefor “negligence, bad faith or willful misconduct….” Wachovia also held itself out as anexpert investment advisor that would become SERS’ investment department with respectto the investment of the cash collateral. Moreover, the standard of care was heightenedby the fact that Wachovia was operating in a fiduciary capacity to SERS. Pursuant toSection X, 10.1 of the SLA, Wachovia was liable for costs, expenses, damages, and feesas a result of failing to fulfill its duties.88. Wachovia’s investment of cash collateral funds in Sigma and the OtherInvestments and continued holding of Sigma and the Other Investment even when it wasknown to Wachovia that additional losses would result was at a minimum negligent andmore likely bad faith or willful. Wachovia also breached its duties by failing to sharewith SERS the knowledge it possessed concerning Sigma’s serious financial difficultiesin 2007 and 2008, and discussing the options with SERS.89. SERS suffered substantial losses as a result of Wachovia’s breach of theSLA.VII.SECOND CAUSE OF ACTION: BREACH OF FIDUCIARY DUTY90. Plaintiff repeats and re-alleges each and every allegation contained aboveas if fully set forth herein.91. A fiduciary relationship arose between Wachovia and SERS, imposingduties of loyalty, impartiality, good faith, fair dealing, due candor, and diligence on29

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 30 of 36 PAGEID #: 30Wachovia in connection with its investment of cash collateral, by virtue of the followingindependent grounds:(a)Wachovia acted as SERS’ agent in lending its securitiesand investing cash collateral received in exchange for such securities on SERS’ behalf inaccordance with the SLA’s Collateral and Investment Guidelines;(b)SERS granted Wachovia significant discretion to select andmanage investments made with cash collateral in accordance with the SLA’s Collateraland Investment Guidelines, giving rise to a fiduciary relationship between Wachovia andSERS;(c)SERS reposed trust and confidence in Wachovia and reliedon Wachovia to advise and inform it in connection with the investment of cash collateral.Wachovia, in turn, exercised a position of superiority and influence over SERS; and(d)Wachovia was a federally registered investment advisorand undertook to advise, counsel and protect SERS’ interests in the management of itssecurities lending program, giving rise to a fiduciary relationship between SERS andWachovia.92. As financial advisers to SERS, Wachovia was a fiduciary to SERS andwas required to act with the highest obligations of good faith, loyalty, fair dealing, duecare and candor. Through the acts complained of herein, Wachovia breached thesefiduciary duties owed to SERS. Wachovia acted in its own interest in choosing to investcash collateral funds in Sigma and the Other Investments.Investment of the cashcollateral in Sigma and the Other Investments was not in the best interest of SERS.30

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 31 of 36 PAGEID #: 3193. Wachovia breached its fiduciary duties owing to SERS by failing toproperly assess the risk in investing in Sigma and the Other Investment and whetherSigma and the Other Investments satisfied the investment objectives of SERS. Wachoviaalso breached its fiduciary duties by failing to timely sell the Sigma MTNs when it wasknown to Wachovia that Sigma was experiencing severe financial problems that were notlikely to improve. Wachovia even failed to share its knowledge of Sigma’s true financialcondition with SERS. Selling SERS’ interest in Sigma may have affected the paymenton the Sigma notes held by Wachovia itself. Thus, having SERS hold the Sigma MTNswas only beneficial for Wachovia and not SERS.94. As a direct, proximate and foreseeable result of Wachovia’s breach offiduciary duties owing to SERS, the Plaintiff has suffered substantial damages.VIII. THIRD CAUSE OF ACTION: CLAIM PURSUANT TO SECTION 215FOR VIOLATION OF SECTION 206 OF THE INVESTMENT ADVISERS ACT95. Plaintiff repeats and re-alleges each and every allegation contained aboveas if fully set forth herein.96. Plaintiff sets forth this claim pursuant to Section 215 of the InvestmentAdvisers Act of 1940, 15 U.S.C. § 80b-15. Wachovia was an “investment adviser” toPlaintiff pursuant to the Investment Advisers Act of 1940. As a fiduciary, Wachovia wasrequired to serve Plaintiff in the manner consistent with the fiduciary standards set forthin Section 206 of the Investment Advisers Act, 15 U.S.C. § 80b-6, that governs theconduct of investment advisers.97. Wachovia through its agents, breached its fiduciary duties to the Plaintiffby engaging in a deceptive scheme, practice and course of conduct pursuant to which itknowingly and/or recklessly engaged in acts, transactions, practices and course of31

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 32 of 36 PAGEID #: 32business that operated as a fraud upon the Plaintiff. As explained above, Wachovia failedto disclose the true nature of the Sigma investment because Wachovia was not concernedabout the risk of loss – contrary to the primary objective of SERS which was to minimizethe risk of loss. Wachovia did not share in the losses and therefore was not concernedthat Sigma was a complex investment vehicle that contained a variety of risks that wereinconsistent with investments suitable for the SERS cash collateral account. Even whenit became apparent that Sigma was in severe financial trouble, Wachovia did not adviseSERS to sell Sigma because Wachovia did not share in the losses related to Sigma.98. The purpose of investing the SERS cash collateral funds in Sigma was toenrich Wachovia at the expense of SERS. Wachovia is liable for the wrongs complainedof herein as a direct participant in the breach of fiduciary duties to SERS. Wachovia wasalso liable for the wrongful conduct of its advisors because Wachovia was in a position ofauthority over and did control the actions of its advisors.99. Wachovia had a duty to disseminate accurate and truthful information withrespect to the investments that it chose for the SERS cash collateral and to act inaccordance with the objectives of SERS and fiduciary duties owing to SERS. In fact,Wachovia acted in derogation of its fiduciary duties by investing SERS cash collateralfunds in Sigma and the Other Investments and in failing to advise SERS of materialinformation known to Wachovia concerning the risk and financial stability of Sigma andthe Other Investments. Wachovia had a duty to provide unbiased financial advice toSERS. In fact, Wachovia’s financial advice was motivated by its own interests and notthose of SERS.32

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 33 of 36 PAGEID #: 33100. As a result of Wachovia’s breaches of fiduciary duties SERS has beendamaged and is entitled to rescission, recovery of costs and/or other remedies.IX. FOURTH CAUSE OF ACTION: VIOLATION OF THE OHIOSECURITIES ACT101. Plaintiff repeats and re-alleges each and every allegation contained aboveas if fully set forth herein102. Wachovia was at all relevant times an “investment adviser” as that term isused in R.C. 1701.01(X)(1).103. As an investment adviser under Ohio law, Wachovia owed fiduciary dutyto SERS, including duties of loyalty, impartiality, good faith, fair dealing, due candor,and diligence.104. Pursuant to R.C. 1707.42(B), Wachovia is liable to SERS, as aninvestment adviser to SERS, for any damages resulting from any violation of Chapter1707 of the Ohio Revised Code.105. Among other things, the Ohio Securities Act prohibits persons frommaking any untrue statement of material fact or omitting to state a material fact necessaryto make the statements made not misleading in light of the circumstances under which thestatements were made “in the solicitation of clients or prospective clients.”R.C.1707.44(M)(3).106. Among other things, the Ohio Securities Act prohibits making or causingto be made “any false representation of a material and relevant fact” in any oral or writtenstatement made for purposes of “advising for compensation, as to the value of securitiesor as to the advisability of investing in, purchasing or selling securities.”R.C.1707.44(B)(5).33

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 34 of 36 PAGEID #: 34107. Wachovia violated its fiduciary duties to SERS under the Ohio SecuritiesAct and Wachovia also violated R.C. 1707.44(M)(3) and R.C. 1707.44(B)(5) in advisingSERS regarding the suitability of the Sigma investment and the Other Investments.108. As a result of Wachovia’s violations of the Ohio Securities Act,including breaches of fiduciary duties arising thereunder, SERS has been damaged and itis entitled to recover from Wachovia all damages available to SERS under the OhioSecurities Act.X. FIFTH CAUSE OF ACTION: NEGLIGENT MISREPRESENTATION109. Plaintiff repeats and re-alleges each and every allegation contained aboveas if fully set forth herein.110. Wachovia, in the course of its business, supplied false informationregarding the Sigma investment and the Other Investments to SERS for the guidance ofSERS in its business transactions.111. Wachovia failed to exercise reasonable care and competence in obtaininginformation about the Sigma investment and the Other Investments and communicating itto SERS.112. Wachovia at all relevant times intended SERS to rely on the information itprovided to SERS regarding the Sigma investment and the Other Investments andWachovia knew that SERS, as Wachovia’s client, was relying on information supplied byWachovia.113. SERS justifiably relied on information provided by Wachovia inpurchasing and retaining the Sigma investment and the Other Investments.34

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 35 of 36 PAGEID #: 35114. Wachovia’s negligence in obtaining and communicating informationregarding the Sigma investment and the Other Investments caused damage to SERS.XI.REQUEST FOR RELIEFWHEREFORE, Plaintiff prays for relief and judgment, as follows:A. Awarding compensatory damages in favor of Plaintiff in an amount to beproven at trial, including interest thereon;B. Awarding rescission of the Sigma investment and the Other Investmentsincluding all costs and fees paid by the Plaintiff;C. Awarding such other and further relief as this Court or a jury may deemjust and proper, including any extraordinary equitable and/or injunctive relief aspermitted by law or equity to attach, impound or otherwise restrict Defendants’assets to assure that Plaintiff has an effective remedy;D. Awarding Plaintiff its reasonable costs and expenses incurred in thisaction, including counsel fees and expert fees; andE. Such other and further relief as the Court may deem just and proper.XII.JURY DEMANDPursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiff demandsa jury trial on all issues so triable.RICHARD CORDRAY,ATTORNEY GENERAL OF OHIOCLIMACO, WILCOX, PECA,TARANTINO & GAROFOLI CO.,L.P.A.By: /s/ Patrick G. WarnerJohn R. Climaco (0011456)jrclim@climacolaw.comJohn A. Peca (0011447)japeca@climacolaw.comScott D. Simpkins (0066775)sdsimp@climacolaw.comPatrick G. Warner (0064604)pwarner@pwarnerlaw.com55 Public Square, Suite 1950HAHN LOESER & PARKS LLPBy: /s/ David J. MichalskiAlan S. Kopit (0031965)ask@hahnlaw.comDavid J. Michalski (0063802)djm@hahnlaw.com200 Public Square, Suite 2800Cleveland, OH 44114Phone: (216) 621-0150Fax: (216) 241-282435

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 36 of 36 PAGEID #: 36Cleveland, Ohio 44113Phone: (216) 621-8484Fax: (216) 771-1632Special Counsel to the Attorney Generalof The State of Ohio and the SchoolEmployees Retirement SystemSpecial Counsel to the Attorney General ofThe State of Ohio and the SchoolEmployees Retirement System36