Securities Fraud in Contingent Outsourcing:
Transaction Processing for Asset Backed Securities.
Specialized outsourcing service providers manage the collection process for consumer receivables such as credit card debt, consumer installment purchases of goods from retail stores, home mortgages and other payment obligations. Securities underwriters package such receivables into collateralized mortgage obligations (“CMO’s”), collateralized credit card securities, “securitized” receivables and similarly labeled special-purpose asset-backed securities. The underwriters then sell the pooled payment streams to investors, typically “qualified institutional investors.” In the sales process, the underwriter makes certain representations concerning the effectiveness and predictability of the collection process. Under certain conditions, investors relying on such representations may have a securities fraud claim if the transactions processing company fails to perform, such as in bankruptcy.
In a federal court decision in April 2003, the court gave guidance to the underwriters, as well as any other “statutory” underwriter who packages securities for sale to investors based on some ongoing performance obligation of a processing company hired to collect revenue or perform other critical business processes for the investors’ benefit. The court was required to interpret Section 10b of the Securities Exchange Act of 1934 (and SEC Rule 10b-5), Section 12(a)(2) of the Securities Act of 1933 and the tort principles of fraud, deceit and negligent misrepresentation under common law.
The decision is instructive to any securities underwriter, plaintiff’s class action attorney, retail seller, credit card issuer, investors in such securities (particularly institutional investors), collection services provider or transactions processor, and the CFO’s and CEO’s of consumer retail companies. The decision addresses what rules govern the servicing procedures for such asset-backed securities and whether disclosures about such servicing procedures constitute securities fraud under U.S. federal securities laws. It is instructive on what might happen in case of the bankruptcy of the company providing the transactions processing for asset-backed securities. For more see: (free registration required to view article in its entirety.)