Comprehensive disclaimers in collateralized debt obligation offerings do not necessarily shield sellers from liability, a unanimous state appeals panel has ruled, handing victories to investment firm Loreley Financing in two fraud lawsuits against Citigroup and Merrill Lynch.
Loreley’s suits allege that Citigroup and Merrill Lynch worked with Illinois-based hedge fund Magnetar Capital to put together collateralized debt obligations that were designed to fail, so that Magnetar could profit by taking a short position, while marketing them as legitimate long investment opportunities to others. In the years leading up to the financial crisis, Magnentar was allegedly behind a large number of such CDOs, sometimes called the “Constellation CDOs” because many were named after constellations.
