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

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