Private Civil Litigation Involving Collateralized Debt Obligations

Abstract

The credit and liquidity crisis has badly affected the performance of collateralized debt obligations (CDOs) and structured investment vehicles (SIVs). Dislocations in these products have led to the filing of many lawsuits in the United States and in other countries. This article examines some basic themes of litigation in the U.S. brought by stakeholders in these transactions. In general, these cases either involve claims against other stakeholders in disputes over the application of collections and liquidation proceeds following an event of default, or allegations of fraud, misrepresentation, and other tortuous conduct against underwriters and other gatekeepers, including rating agencies, arising from the structuring and marketing of transactions. The welter of litigation involving CDOs and SIVs has exposed structural weaknesses as well as ambiguities and other traps in the complex contracts and disclosures governing these products. That litigation has challenged some of the basic legal framework on which transactions were based and highlighted the limits of liability arising from these types of products. The lasting legacy of these lawsuits may be a record of case law that fundamentally affects the way in which securitized investment vehicles will be structured and conceived in the future.

TOPICS: CLOs, CDOs, and other structured credit, legal and regulatory issues for structured finance, legal/regulatory/public policy