We are investigating a possible securities fraud claim on behalf of an investor with Edward Jones’ Wilmette, Illinois office (Wilmette is a suburb of Chicago). This investor advised his financial advisor that he wanted conservative investments only. Edward Jones solicited his investment in CIT Group bonds. The investor was told that the CIT Group bonds were low risk but that they provided a high yield. Unbeknownst to the investor, the CIT Group bonds were fraught with risk and the investor has lost over 50% of his original investment. Based on our preliminary research, it appears that Edward Jones and other broker dealers were soliciting investments in CIT Group bonds without fully disclosing the risks.
As the world’s biggest institutional bond investors cut off funding to CIT Group, Inc., the commercial lender turned to retirees for debt financing.
CIT sold $827 million of debentures designed specifically for individuals between December 2007 and March 2008. At the time, “disruptions” in credit markets led to “the loss of access” to unsecured debt markets, “historically significant sources of liquidity for the company,” and CIT was forced to turn to individual investors.
It turns out the professionals were right to stay away. The 101-year-old lender said recently it may go into bankruptcy after $5 billion of losses in the past nine quarters.
CIT joined GMAC Inc., Prudential Financial Inc. and more than a dozen other companies that tapped individuals as credit markets closed to them through underwriters led by Chicago-based Incapital LLC. The Financial Industry Regulatory Authority now says it’s investigating whether the risks associated with these bond issues were adequately disclosed.
The retail bond market typically lets companies sell debt at lower yields than institutional investors would demand. Yet when a company’s fortunes deteriorate, the notes may trade at higher relative yields because it’s difficult to sell them. In the case of CIT Group, brokerage firms, such as Edward Jones, offered the bonds at yields of over 7% to entice investors to purchase the bonds. Companies can issue the bonds to individuals in times of strife because the higher yields make them “attractive.” Higher yields, though, mean greater risk, and as such, the CIT Group bonds, although bonds and seemingly less risky than stocks, were not appropriate for conservative or elderly investors.
InterNotes, managed by a joint venture with Banc of America Securities, are sold through 600 broker-dealers, including Fidelity Investments and Edward Jones & Co.
Incapital also underwrote debt offerings for New York-based investment bank Lehman Brothers Holdings Inc. until June 2008, three months before it went bankrupt. Units of insurer American International Group Inc. of New York and mortgage lender Freddie Mac in McLean , Virginia — both of which became wards of the U.S. government last year — also sold bonds through Incapital. Apparently, Incapital is where companies turn when they know institutional investors will not purchase their debt and they need to sell their bonds to the public.
Finra is examining sales practices at brokers that sell InterNotes, trying to determine whether they’re reporting trades to Trace within the required 15-minute time frame, and following up on “concerns about prospectus matters” (i.e. were the problems of these companies and the risks of purchasing these bonds disclosed to the individual investors?)
A 2006 prospectus for CIT InterNotes disclosed that there can be “no assurance” an investor could resell the notes as there is no secondary market for the securities. However, a prospectus is an overwhelming document, and it is unclear whether financial advisors were properly disclosing to their customers the risks associated with purchasing the bonds of CIT Group, a clearly distressed company.
By March 2008, CIT had borrowed the full $7.3 billion available on its credit lines. The company said in the July 21 regulatory filing that it drew down the facilities because “disruptions in the credit markets that began in 2007” prevented it from issuing unsecured debt. The problems in the credit market should have been apparent to any investment professional, and since CIT Group focused primarily in offering credit, it should have been equally apparent that the company was going to be faced with some serious challenges.
For example, credit-default swaps on CIT were trading at distressed levels on March 10, 2008, when the company sold a retail note with a 7.25 percent coupon, according to Bloomberg data. Sellers of the contracts demanded $1.75 million upfront and $500,000 a year to protect $10 million of the company bonds from default for five years, according to Phoenix Partners Group in New York . In other words, the industry already knew that CIT bonds were highly risky – as evidenced by the 42.5% insurance cost in insure the bonds when these bonds were being sold to the public.
CIT Group has since been cut to Ca by Moody’s, two levels above default, and “selective default” by S&P, after failing to win a second government bailout last month and saying it may go bankrupt if its restructuring efforts are unsuccessful.
If you have information regarding the disclosures made by Edward Jones in selling CIT Group bonds, please give us a call. Alternatively, if you have questions about investments you made with Edward Jones in this bond issue or another investment, or if you believe that you have been the victim of a securities fraud, The White Law Group may be able to help. To speak to a securities attorney, please call our Chicago office ate 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.