Baupost: We’re Walnut Place, and we’re not shorting BofA stock

December 12, 2011

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 stated 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.

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One comment

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There should be some stricter regulation regarding Hedge Funds seeking litigation.

The hedge fund should be barred from any speculation in instruments directly related to the sector for like 12 months prior to its complaint and like 2 months after the closure of its complaint. Furthermore, frequent disclosure of positions should be enforced.

This way, the hedge fund had no living chance of making unusual returns off its litigation.

You allow a hedge fund to object to a Bank of America settlement and then at the same time protect its debt with JP Morgan and short PNC we are NOT having a fair market for all parcipants…

Bank of America is not any bank, it is like the largest US bank together with JPMorgan in assets.

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