Marked by a massive lawsuit against the securitization facilitators of National Century Financial Enterprises, this next wave of NCFE litigation - call it the securities fraud wave - has begun, involving, for perhaps the first time, ABS bank research.

The lawsuit, led by Arizona government entities, claims that Credit Suisse First Boston, JP Morgan Chase and Bank One, among others, knew that NCFE was including "ineligible receivables" in its securitizations. Officials from all three banks declined to comment.

Nevertheless, a significant line was crossed in the Arizona complaint, as it directly cites CSFB research on NCFE securitizations. It should be noted that the referenced research piece, which responds to a Fitch Ratings downgrade of NCFE bonds last July, came just a few days before an affirmation of NCFE by rival rating agency Moody's Investors Service. Both Moody's and CSFB referred to similar performance indicators, such as the age of the receivables, performance and seller concentrations.

This similarity implies that CSFB researchers were basing their opinions on the same information that Moody's had, which came from servicing reports provided by the NCFE entities to the trustees.

In November, CSFB issued a press release declaring that NCFE "deliberately misled CSFB and its other investors," and that the firm would write down its $258 million exposure to NCFE to $44 million.

What the lawsuit alleges, however, is that CSFB was knowingly misleading investors with its research to maintain the value of its exposure to NCFE. Moody's, as a rating agency - which based its opinions on the same dataset - would have no such "trading value" motivation. According to the rating agency, its affirmation was in response to investor queries that followed Fitch's action.

Still, the question is potent: Have the research controversies seen in the equity market trickled into ABS?

The Arizona plaintiffs allege that CSFB, as an advisor to Fresenius in a 1998 sale of subsidiary NMC to NCFE, had knowledge of ineligible receivables, by virtue of age, being placed in the NPF trusts, and that there were dissenting opinions about the value and this $100 million portfolio. NMC and its receivables were acquired by NCFE affiliate Healthcare Corp. of America.

A slew of suits

During NCFE's startling collapse last fall, a legal frenzy erupted, characterized by complaints, temporary rulings and restraining orders associated with the funds tied up in the lockboxes and the healthcare providers that were suddenly devoid of cash. As of an April deadline, claims exceeding $5 billion from nongovernmental healthcare providers were filed against NCFE, according to published reports.

Meanwhile, parties to the ABS - such as investors, rating agencies, underwriters, lawyers and trustees - all of whom were more intimately familiar with NCFE's purported business model and concepts like reserve accounts, due-diligence, and "ineligible receivables," began assessing the damage and, not uncharacteristically, pointing fingers at each other.

The Arizona plaintiffs point the finger at just about all of the above, excluding - perhaps notably - the rating agencies, which were an initial target of criticism. NCFE was also left out, being insolvent. However, several principals of NCFE, including co-founder Lance Poulsen and his wife, are named in the lawsuit.

"We're obviously mindful of the research that (the rating agencies) did and the ratings that they gave, and obviously those are things we will continue to look at, but we've sued who we've sued," said Kathy Patrick, partner with Gibbs & Bruns, which is representing the plaintiffs.

It is apparently quite difficult to sue a rating agency, as they have several exemptions, not unlike those afforded to journalists.

Other parties

"Never disclosed to the investors was the fact that their investment, meant to be over-secured by actual receivables and sizable cash reserve accounts, was secured by nothing of the kind," the Arizona lawsuit states. "In October 2002, Plaintiffs discovered that, contrary to the representations made to them when they bought their [n]otes, NCFE, NPF VI and NPF XII were essentially in the business of making unsecured loans for a variety of purposes, including loans made largely for the benefit of the principals who had assisted in selling the [n]otes in the first place."

The Arizona filing, on behalf of roughly 180 plaintiffs, accounts for about $1.3 billion of the near $3.0 billion outstanding, which accounts for more than 50% of the NPF XII trust. The plaintiffs include governmental agencies, pension fund managers, insurance companies, mutual funds and bond funds, among others. MetLife has filed a lawsuit against Bank One in association with NCFE, sources at the company confirmed. At $121 million, MetLife is the largest insurance company holder of NCFE bonds, according to Thomson Financial BondWatch. ING Barings is said to have a significant exposure to NCFE, in the $300 million range. Including ING there are still several hundred million worth of NCFE bonds out there whose holders have yet to visibly file suit. It is understood that no cash has been released to bondholders since November.

Meanwhile, Bank One, which was trustee to the NPF XII deals and named as a defendant in the Arizona complaint, has filed its own lawsuit against several of the NCFE parties, including JPMorgan Chase, which was trustee on the NPF VI deals.

The suit alleges that Bank One and JP Morgan Chase, which managed the reserve accounts, knew or should have known that the numerous wires transfers from NPF VI to NPF XII, and back again, were in violation of the indenture documents. Whether or not it is the trustee's function to flag such things is a debate on its own in the securitization industry.

Unfortunately for JP Morgan in this case, directors at the firm were also directors or investors in NCFE. These directors, and their venture fund The Beacon Group, are also named in the suit.

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