According to documents obtained by IFR Markets, the DASH II Funding Corp. ABS CDO, managed by Asset Allocation Management (AAM), overpaid equity investors by $3.084 million on June 15, 2002. Downgrades in two FEP Receivables 12-b1 fee deals were missed, which would have triggered an overcollateralization test subsequently cutting off the equity payment.
According to a letter from trustee JPMorgan dated September 27, 2002: "A Class A Noteholder first advised the Collateral Administrator (J.P. Morgan Chase) of the errors in the June Note Valuation Report on September 10, 2002. On the other hand, Asset Allocation has a different view of when the errors were found. AAM claims that errors in the rating classifications of securities in DASH II, including the FEP deals, were reported to JPM in July, but JPM did not correct the errors until Sept. 11 in conjunction with the September quarterly payment calculation."
JPM did not return phone calls regarding AAM's statement that fault for the mishap lies with the trustee.
In a letter from AAM dated Sept. 12 to investors, the firm said it will take the following steps to improve procedures to avoid any future miscalculations:
* Formally review the information and calculations from the trustee for accuracy.
* Effective immediately, review each monthly trustee report and compare the information with [AAM's] internal records.
* As part of the review, verify the Moody's rating on each and every security in the portfolio.
* In the future, no monthly report will be sent from the trustee until [AAM] has verified the information as outlined and provided a written confirmation to the trustee.
According to Barry Atkins, a member of the board at AAM, equity investors were not upset regarding the overpayment and "having to give the money back." Meanwhile, a well-regarded DASH II debt holder in Europe said it is still not clear to him when the equity investors will return the overpayment and his firm is furious over the debacle. The investor added that all have a share in the blame for the situation: the former DASH management team, AAM, and the trustee.
Information detailed above was faxed from a Kinko's in Chicago to IFR Markets from an anonymous "DASH investor" accusing AAM and its new CDO management team - which was brought on last spring - of lacking diligence which caused cash to be improperly paid out, and weakening the deal; buying a bond in DASH II rated below covenant requirements; managing DASH III with too much uninvested cash. The letter closes with the sentence fragment: "DASH deals falling apart after departure of previous team."
Although there is no proof, AAM and one DASH II debt investor said they strongly suspect Meritus Asset Management sent the documents to IFR Markets. Two of the former "key-men" of the DASH CDOs are currently partners at Meritus. AAM says the firm is in the process of suing the former DASH "key-men" Larry Zeno and Patrick Livney for a number of alleged torts surrounding the DASH ABS CDOs. AAM claims that they have widened the scope of the lawsuit to include more "conspirators" to include other major investors who tried to remove AAM from managing the DASH II and DASH III CDOs, such as Liberty Hampshire.
"We left AAM in March and April and the mistakes occurred well after our departure," said Meritus' Zeno. "We had nothing to do with the sending of any documents to IFR Markets and an action like that does neither party any good. We just want to put this whole issue behind us. Litigation in situations like this produces no winners."