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A unit of New York Life Insurance Co. issued a $1.5 billion collateralized debt obligation (CDO) named after a Northern sky constellation in April 2007, but the deal burst when it defaulted less than a year later, Bloomberg News reported yesterday. The Corona Borealis CDO, underwritten by Lehman Brothers Holdings Inc., is one of dozens of deals named in the Justice Department’s Feb. 4 lawsuit accusing the world’s largest credit-rating company of deliberately misstating the risks of mortgage bonds as it sought to keep its share of the booming business of repackaging home loans for sale as securities. Eastern Financial Florida Credit Union lost its investment after purchasing a portion of the Corona Borealis CDO, relying in part on Standard & Poor’s assessment of the securities, according to the Justice Department’s complaint filed in federal court in Los Angeles. The U.S. is seeking penalties against S&P and its New York-based parent, McGraw-Hill Cos., that may amount to more than $5 billion, based on losses suffered by federally insured financial institutions.

Citigroup Inc. asked a U.S. appeals court to overrule a trial judge and let its $285 million mortgage-securities settlement with the Securities and Exchange Commission go forward, Bloomberg News reported on Friday. The bank is challenging U.S. District Judge Jed S. Rakoff’s 2011 refusal to approve the agreement, which would resolve claims that New York-based Citigroup misled investors in a $1 billion financial product linked to risky mortgages. The SEC claimed Citigroup cost investors more than $600 million. Judge Rakoff criticized the SEC practice of agreeing to settlements that do not require defendants to admit wrongdoing. He said that the parties did not give him "any proven or admitted facts" he could use to determine whether the settlement was fair.

The U.S. Treasury, under pressure to quickly wind down its crisis-era bailouts, believes that it cannot rush the sale of auto lender Ally Financial because the company's mortgage lending unit is in a messy bankruptcy, Reuters reported on Friday. Ally is one of Treasury's largest remaining holdings, but the lender will be hard to exit as long as it is working through the bankruptcy of its Residential Capital unit and is also selling its international operations. In a report last month, an internal Treasury watchdog said that the agency needed a more concrete plan for repayment of the $17.2 billion it poured into Ally during the crisis. The government's difficulties in exiting Ally show how hard it will be for Treasury to completely close down TARP. Treasury has recovered 93 percent of the $418 billion it put into the program, but remaining companies could take a long time to shed.

A proposed liquidation plan for MF Global Holdings Ltd. fails to take into account that its finance unit is being hit twice for the same debt, undercutting what some creditors might recover, JPMorgan Chase & Co said in a court filing, Reuters reported on Friday. Creditors of the finance unit could get up to 47.7 percent of their money if the double liability were voided, according to the filing by JPMorgan, which is an agent and lender under the unit's $1.2 billion liquidity facility. That is more than the maximum 33.6 percent that those creditors would receive under the plan proposed earlier this month by Silver Point Capital, Knighthead Capital and Cyrus Capital Partners in conjunction with trustee Louis Freeh.

The Securities and Exchange Commission is going to examine the rules governing when shareholders must disclose the acquisition of a significant position in a public company, but an unintended and harmful effect of such a change may be that it will help companies adopt so-called low-threshold poison pills—arrangements that cap the ownership of outside shareholders at levels like 10 or 15 percent, according to a commentary yesterday in the New York TimesDealBook. The SEC should be careful to avoid such an outcome in any rules it may adopt. Under current SEC rules established under the Williams Act of 1968, outside shareholders who obtain stakes of 5 percent or more of a company’s stock must publicly disclose their holdings within 10 days. The SEC, however, is planning to consider a rule-making petition, filed by a prominent corporate law firm, that proposes to reduce the 10-day period, as well as to count derivatives toward the 5 percent threshold. Read the full commentary.

The creditors' trustee in Alabama's municipal bankruptcy asked the U.S. bankruptcy court to allow an accelerated payment on Jefferson County's debt, Reuters reported yesterday. The Bank of New York Mellon Corp., which collects the money from the county, last week said that some payments due on Feb. 1 to owners of $3.14 billion of sewer debt were suspended. In its court filing yesterday, the bank said that some bondholders did not agree to the trustee's application of funds to the regularly scheduled payments, so that the trustee did not have enough money to pay the principal. Lawyers for creditors and Jefferson County, which filed for chapter 9 bankruptcy in 2011 mainly because of overwhelming debt on its sewer system, are battling in court over sewer fee hikes that would be used in part to service the sewer warrants.

For more on municipal financial distress and chapter 9 trends, be sure to pick up a copy of Municipalities in Peril: The ABI Guide to Chapter 9, Second Edition.

Moody's Investors Service, Standard & Poor’s and Fitch Ratings are being investigated by the New York Attorney General over whether they breached a 2008 settlement with the state, Bloomberg News reported yesterday. The companies reached an agreement with then Attorney General Andrew Cuomo that required them to adopt changes to their operations. Eric Schneiderman, the current attorney general, is probing whether they complied with the agreement. The U.S. Justice Department and state attorneys general this week sued S&P, accusing the company of inflating ratings on mortgage-backed securities during the housing bubble. New York was not one of the states that sued.

Delaware Chancery Court Judge Leo Strine delivered a scathing attack on lawyers who tried to pursue a derivative suit against Bank of America over its Countrywide purchase, saying that they failed to come up with a rational explanation for why BofA directors allegedly broke the law, Forbes.com reported yesterday. Delaware requires the lawyers to first ask the company to sue itself or prove that such a demand would be futile because the directors have conflicts that prevent them from acting in the company's best interests. Strine, in a ruling from the bench on Monday, said that lawyers at Cooch & Taylor and Pomerantz Grossman had not only failed to prove futility, but had tactically chosen not to cite records that might explain why directors had chosen to violate the law. He dismissed the suit without prejudice, saying that another plaintiff might find a valid reason to sue BofA directors over the Countrywide acquisition.

A report on Residential Capital LLC’s pre-bankruptcy deals with parent company Ally Financial Inc. will be finished in early May, about one month later than planned, a lawyer for the retired judge conducting the probe said, Bloomberg News reported yesterday. Lawyers for former Bankruptcy Judge Arthur J. Gonzalez, ResCap’s bankruptcy examiner, received about 2 million documents to review at the end of January and early this month, later than expected, Howard Seife, an attorney for Gonzalez, said in court yesterday. The examiner's report will affect ResCap's ability to develop a consensual reorganization plan, Bankruptcy Judge Martin Glenn said in federal court in Manhattan yesterday.

Standard & Poor's Ratings Services could face a much higher legal bill than the $5 billion sought by the federal government as more and more states join the battle against the credit-ratings firm, the Wall Street Journal reported today. A raft of lawsuits this week from attorneys general from several states, including California and Iowa, is compounding S&P's legal woes over its role during the financial crisis of 2008-2009. The Justice Department on Tuesday sued S&P for allegedly causing some banks and credit unions to lose $5 billion after relying on the company's ratings of mortgage-linked securities. Thirteen states and the District of Columbia have followed in the Justice Department's footsteps, filing separate lawsuits against S&P on Tuesday. The California attorney general alone is suing S&P for about $4 billion to recover funds for two of the country's largest public pension funds, according to its lawsuit.