Misrepresenting the Risk of Collateralized Debt Obligations

Misrepresenting the Risk of Collateralized Debt Obligations

A collateralized debt obligation (CDO) is a form of structured asset-backed security that may include mortgage-backed securities. CDOs are funded by investors who are then repaid in a prescribed order of priority according to the seniority of the investment, which is also known as a “tranche.”

The CDO collects money when payments are made on the loans that are held within the CDO, and then the CDO investors are paid based on the priority of the CDO tranche that they own. When some loans within the CDO default and the money collected by the CDO is insufficient to make payments to all CDO investors, those investors with the least seniority are paid back last, and sometimes not at all.

When Should You Invest in a CDO?

Generally speaking, investing in a CDO is safest if your seniority places you at the top of the payment priority, and becomes more risky depending on your prescribed tranche. You should be aware of the risks of such an investment, especially if your broker is selling you a junior tranche that generally is more risky than the more senior tranches.

Call a Los Angeles Securities Lawyer Today

Investors often rely on their broker or brokerage firm to provide sound advice when it comes to investing in CDOs. If your broker misrepresented or misled you regarding a collateralized debt obligation, and failed to properly advise you of the inherent risks of a CDO, you should contact an experienced Los Angeles securities lawyer for a free consultation to discuss your legal rights.

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