The Role of the Trustee in Mitigating Fraud in Structured Financings

Abstract

The author illuminates the behind-the-scenes administrative role of trustees in securitized transactions and describes their limited resources for ferreting out fraud. The article defines the elements of fraud, distinguishes fraud from negligence, describes the types of deals that are “hot spots” for fraud, questions whether fraud in structured finance transactions can ever be eliminated completely, and describes areas where a pattern of malfeasance emerges such as fraudulent custody of cash and cash flows, phantom collateral, and misleading servicer reports on available cash and collateral. The article proposes some inexpensive techniques and a joint effort by underwriters, issuers, servicers, trustees, and rating agencies to reduce opportunities for fraud in complex transactions.