Massachusetts’ top securities regulator has asked Bank of America to turn over documents related to two CLOs.
“My securities division is investigating these CLOs to determine if the issuer was knowingly overvaluing the assets in the portfolio to get them off their books and onto investors',” Secretary of the Commonwealth William Galvin said in a statement.
The two CLOs, LCM VII LLC and Bryn Mawr CLO II, were structured by BoA and sold to investors in 2007, resulting in losses of $150 million, according to the statement.
BofA didn’t immediately return a call seeking comment.
In January, a Financial Industry Regulatory Authority arbitration panel in Reno, Nevada ordered BofA to pay an investor $1.1 million in damages, plus attorneys fees and other costs, for losses on securities issued by one of the CLOs that is the subject of Galvin’s investigation, LCM VII. BofA provided the sponsor of the deal with a line of credit to purchase loans to be used as collateral. It also marketed the notes issued by the securitization to investors.
An expert witness who testified at the arbitration said that, as the loans were being warehoused for the deal, some of them declined in value. Because of the way the way losses are distributed among different tranches of notes, the junior-most notes that the investor were essentially worthless. They were nevertheless transferred to the securitization trust at their original purchase price – a practice that is standard in the securitization industry.
Thomas Bradley, the lawyer representing the investor, said he was aware of other arbitration cases against BofA involving the two CLOs that had been settled.