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

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