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State inquiry targets Bank of America

Subpoenas seek records on securities

Massachusetts securities regulators are investigating whether Bank of America Corp. inflated the value of troubled business loans it sold to investors five years ago.

Secretary of State William F. Galvin said he issued subpoenas yesterday to a unit of the Charlotte, N.C., bank, Banc of America Securities LLC, for records on two sets of collateralized loan obligations - business loans the bank bought from other institutions and pooled together to sell to investors as securities.

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Galvin said both pools, sold to investors for a total of about $865 million in 2007, suffered steep losses. The portfolios were ultimately liquidated in the financial crisis in October 2008, costing investors $150 million.

Specifically, Galvin said his office is looking into whether Bank of America knowingly overvalued the loans in the portfolio to “get them off their books’’ and pass the losses to investors.

“The question is what did the issuers know at the time of the sales and were the assets being priced truthfully,’’ Galvin said.

A study last month by Securities Litigation and Consulting Group Inc., a Virginia consulting firm hired by some of the investors who lost money in the securities, suggested that the value of the loans had already declined by $35 million, about 4 percent, between the time Bank of America purchased the loans in late 2006 and 2007 and then sold them to investors in July 2007. The study also suggested that Bank of America failed to adequately warn investors of the losses in loan values.

Bank of America, one of the nation’s biggest banks and the largest in Massachusetts, said it plans to cooperate with Galvin’s office and disputed suggestions that it misled investors about the value of the securities.

“Bank of America sold the investments based on the valuations at the time,’’ said bank spokesman Bill Halldin. “There was extreme market volatility following the sale of this investment in the summer of 2007.’’

Some investors who lost money in the investments have already pursued action on their own. An arbitration panel last month ordered a unit of Bank of America to pay a Nevada investor $1.3 million in damages and attorney’s fees.

Collateralized loan obligations have received much less attention from regulators than home loans and other types of securities that lost money in the housing and financial crises.

But Galvin said the time is ripe to look into investor losses from the products now that Attorney General Martha Coakley and other attorneys general have reached a $25 billion settlement this week with major banks on foreclosure practices. That settlement did not preclude attorneys general from filing additional suits against the banks for fraud related to the repackaging of loans to investors.

“We’ve had this on our radar for some time,’’ Galvin said. “We think now is the time to move on to these other entities.’’

Galvin said his office will probably examine additional pools of loans in the future - including those marketed by other banks - that resulted in losses to Massachusetts investors.

But Galvin said it was too early to say when the office might issue additional subpoenas or to name any of the other possible targets.

Todd Wallack can be reached at twallack@globe.com. Follow him on Twitter @twallack.
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