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

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