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

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