My colleague Karen Freifeld was in Manhattan State Supreme
Court Thursday when Bank of America counsel Theodore Mirvis of
Wachtell, Lipton, Rosen & Katz stood up to argue for the
dismissal of Walnut Place's suit demanding millions of dollars
in put-backs in two Countrywide mortgage-backed securities
trusts. Everyone who follows MBS litigation knows that Walnut,
represented by Grais & Ellsworth, is the leading objector to
BofA's embattled $8.5 billion settlement with Countrywide MBS
investors. But Freifeld was the first journalist to pick up
Mirvis's big disclosure: Walnut Place, he told Justice Barbara
Kapnick, is actually the distressed debt hedge fund Baupost.
Late Friday, Baupost informed its partners (as the fund
calls clients) that it is indeed Walnut Place. But according to
a source who disclosed the memo's content to Reuters, the hedge
fund said it is litigating to protect its clients' investment
-- and not, as a blog suggested Thursday night, because it has
shorted Bank of America stock.
"From time to time and for a variety of reasons [Baupost]
forms legal entities to consolidate investments. Walnut Place
is such an example," the Baupost memo said. "It holds certain
of our residential mortgage-backed securities investments.
Walnut Place has initiated legal actions against the originator
of the loans underlying those securities because we believe
there have been egregious deficiencies in the underwriting of
mortgages. That litigation is intended to protect the interests
of our investors and is ongoing."
The hedge-fund blog Zero Hedge speculated Thursday night
that Baupost, as Walnut Place, may be fighting the proposed
BofA MBS settlement because it has shorted Bank of America stock and taken a long position on MBIA, which is also engaged
in do-or-die MBS litigation with BofA. The Baupost client memo
-- without naming the Zero Hedge blog -- firmly rejected that
assertion as "unfounded and completely false."
"We have on occasion owned a small amount of default
protection on Bank of America debt as part of our overall
portfolio hedging strategy through which we hold credit default
swaps on a diverse group of financial institutions and other
corporate issuers," the memo said. "We currently have no long
or short position in equity, corporate debt, or credit default
swaps of Bank of America or MBIA."
The back story on Baupost and Walnut place certainly
supports Baupost's position that it wasn't using Walnut as a
vehicle to hide its investment in Countrywide mortgage-backed
notes. BofA counsel Mirvis called Baupost a vulture fund in
court Thursday, but the fund and its president, Seth Klarman,
are renowned investors. In a profile of Klarman last June,
Absolute Return + Alpha reported that Baupost has profited
mightily in the economic downturn, expanding from about $7
billion under management in 2007 to more than $21 billion in
2010. (It's now $23 billion.) Last month, Klarman got the
Charlie Rose treatment in a 40-minute interview about his
charitable foundation, Facing History and Ourselves, and
investing strategy. (The distressed-debt blogosphere
scrutinized the interview for pearls of investment wisdom, as
Business Insider noted.)
Baupost contacted Bank of New York Mellon (the Countrywide
MBS trustee) under its own name back in August 2010, as BofA
revealed in a May 2011 motion to dismiss the Walnut Place put-back suit. In a pair of letters from the hedge fund's
lawyers at Grais & Ellsworth and Hanify & King, Baupost
demanded that BNY Mellon assert put-back claims against
Countrywide for deficient mortgages in two MBS trusts in which
the fund was a noteholder.
Interestingly, the Baupost letters landed at BNY Mellon at
about the same time that major institutional investors
represented by Gibbs & Bruns distanced themselves from a plan by Countrywide MBS noteholders working through Talcott
Franklin's Investors Clearinghouse to send a demand letter to
the Countrywide MBS trustee. I haven't seen any evidence that
Baupost was active in the Clearinghouse, but the hedge fund's
counsel, David Grais, certainly was.
According to the BofA motion to dismiss the Walnut case,
BNY Mellon next heard from Baupost in December 2010 -- but in
the December letter, Grais & Ellsworth wrote on behalf of
Walnut Place, which said it had been assigned the hedge fund's
interests in one of the Countrywide MBS trusts. In January, BNY
Mellon received a second Walnut Place letter asserting
Baupost's interest in another trust. BofA later confirmed that
various Walnut Place entities were incorporated in Delaware in
December, just before Grais & Ellsworth sent the first Walnut
letter to BNY Mellon. The bank's lawyers subsequently called
Walnut a "made-for-litigation" fiction; Baupost's memo to
client Friday, however, made it seem as though the hedge fund
frequently aggregates investments for administrative reasons,
which was its state reason for creating Walnut.
As BofA and BNY Mellon engaged in negotiations with the
Gibbs & Bruns investor group last fall and winter, Walnut Place
counsel Grais rejected BNY Mellon's overtures to talk. (The two
sides vehemently disagree on the terms of the trustee's
invitation.) Walnut filed its put-back suit in February and has
since fought to preserve its rights to litigate its own case,
rather than see its claims subsumed in the $8.5 billion
settlement BofA proposed in June.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
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