Fund sues banks for $1.2 billion loss tied to subprime mortgages

A hedge fund is taking aim at the world''s biggest banks in an effort to recoup $1.2 billion it lost on subprime mortgages, entering a legal fight where so far Wall Street has largely been unscathed. The lawsuit against Morgan Stanley, Goldman Sachs Group Inc and about 10 other banks is one of the biggest cases of its kind to be filed so far in US courts.
The case cites a sizable number of so-called "confidential witnesses" quoted in the lawsuit, who said underwriting standards were abandoned in order to meet demands for mortgages from Wall Street. The case could encourage other investors, such as large pension funds, to bring similar lawsuits against Wall Street.
Law firms representing investors have an inventory of related cases that they are considering filing, and they will be following the Cambridge case closely, said James Cox, a professor at Duke University Law School. Several aspects of the lawsuit might help it overcome some of the problems of earlier attempts to pin the subprime meltdown on Wall Street banks, Cox said. For example, the case was filed under investor-friendlier Massachusetts state law, rather than federal law.
Gerald Silk, a partner at Bernstein Litowitz Berger & Grossmann LLP, which represents the plaintiff, said he believes the Massachusetts investor protection laws "provide us with a powerful weapon to uncover the unscrupulous conduct by the Wall Street banks and recover our client''s significant losses."
The lawsuit, brought by hedge fund Cambridge Place Investment Management, centers around residential mortgage-backed securities (RMBS), which are bonds backed by home loans. Cambridge invested $2.4 billion in the securities. When the US housing market began to collapse in 2006 and 2007, many of the RMBS, which were assembled by the banks, plummeted in value as record number of homeowners fell behind on their housing payments. The collapse of the RMBS spread around the globe and helped spark the financial panic of 2008.
Cambridge in 2007 closed its Caliber Global Investment Ltd, a fund that invested more than $900 million in mortgage securities. Goldman Sachs and Morgan Stanley declined to comment on the lawsuit. Two other defendants, J.P. Morgan Chase & Co and Citigroup Inc, also declined to comment.