Basis PAC-Rim Opportunity Fund Index (Master), et al., vs. TCW Asset Management Company
A five-judge Appellate Division panel in New York unanimously reversed a Supreme Court ruling that had allowed a complaint against collateral manager TCW Asset Management Company (TCW), an Analysis Group client, to go forward. Two investment funds, Basis Pac Rim Opportunity Fund and Basis Yield Alpha Fund (jointly, “Basis”), claimed that TCW had made various alleged misrepresentations concerning the mortgage-backed bond market and its portfolio selection of residential mortgage-backed securities (RMBS) and collateralized debt obligation (CDO) securities, just prior to the industry-wide collapse of the market in 2007. TCW's subsequent request for a summary judgment in their favor had been dismissed by a New York Supreme Court judge in October 2015.
In reversing the ruling, the appellate panel referred several times to the analyses provided by Analysis Group academic affiliate R. Glenn Hubbard, a well-known expert in economics and financial theory. With the support of an Analysis Group team led by Managing Principal Mark Egland, Principal Marnie Moore, and Vice President Andrew Stichman, Dr. Hubbard analyzed the performance and macroeconomic environment surrounding MBS and RMBS-CDOs during 2007, and also provided an analysis of the structure and underlying collateral of the specific Dutch Hill II transaction, the $400 million CDO investment. Dr. Hubbard and the Analysis Group team performed analyses assessing the effect of macroeconomic factors on the CDO investment's performance relative to performance benchmarks for the loan pools in question.
The appellate panel accepted Dr. Hubbard's conclusion that, ultimately, Basis's “economic losses were caused by unforeseeable macroeconomic events,” writing that “Basis failed to produce any evidence that” it was TCW's alleged “misrepresentations, rather than market forces, that caused the investment losses.