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

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

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