CDO, CDS Fraud Probes to Be 2011 Priority, Prosecutor Says

U.S. criminal investigators will step up probes into possible fraud involving collateralized debt obligations and credit default swaps, a top federal prosecutor in New York said.

Christopher Garcia, chief of the Securities and Commodities Fraud Task Force in the U.S. Attorney’s Office in Manhattan, told white-collar criminal-defense lawyers at a conference today that his office will spend this year investigating possible fraud involving CDOs and CDSs.

“If there’s crime there, we’re going to find it and we’re going to pursue it,” Garcia said at an American Bar Association meeting in San Diego. Investigators won’t be deterred by the complexity of the financial instruments, he said.

CDOs are pools of assets such as mortgage bonds packaged into new securities. Interest payments on the underlying bonds or loans are used to pay investors.

Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Garcia said in an interview after his presentation that his office is “bringing in people with expertise in these areas.”

“It’s an enforcement priority,” he said.

Garcia declined to say whether he expected his office to file cases this year.

Joseph Cassano

U.S. prosecutors in Washington last year decided not to bring charges against former American International Group Inc. executive Joseph Cassano after a probe into whether executives in the firm’s Financial Products Division misrepresented the value of a portfolio of “super senior” credit-default swaps, which insured bond losses tied to the U.S. housing market.

“The cases are complex because the products at issue are not inherently fraudulent -- they have economic value,” Jim Walden, a lawyer for Cassano, said in an interview. “They involve fraud only when the company lies to the public about the risks or the valuation.”

Walden, co-chairman of the white-collar group at Los Angeles-based Gibson Dunn & Crutcher LLP, said a company’s risk and valuation disclosures are usually considered by dozens of internal and external accountants, lawyers and auditors.

“If everyone said the disclosures were accurate at the time, it is hard to blame someone later when, after the fact, the government wants to show they should have said something more or different,” he said.

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