Auction Rate Settlements May Leave Many Investors Out In The Cold
When several major Wall Street investment firms - including Citigroup, UBS, Wachovia and JP Morgan Chase - agreed to settle claims of auction rate securities fraud by state and federal regulators, many investors thought their financial problems finally were solved.
As it turns out, that may not be the case. According to an Aug. 18 story on Bloomberg.com, the recent deals that New York Attorney General Andrew Cuomo struck with some Wall Street institutions to buy back billions of dollars of action rate securities they sold directly to individuals do not include investors who hold auction rate debt purchased through mutual fund firms or brokers that didn’t actually underwrite the securities.
And that leaves a lot of unanswered questions. These investors hold some $160 billion of auction rate securities.
“This is a glaring oversight,†said Jonathan Kahn in the Bloomberg article. Kahn is an investor who holds auction rate debt underwritten by Goldman Sachs Group Inc. and purchased through a different brokerage.Investors like Kahn have been in a holding pattern over their auction rate investments since February, when the market for auction rate securities seized up as Wall Street investment banks abruptly stopped offering financial support to buy the securities.
Investors, who previously had been told by their brokers that auction rate securities were cash equivalents, suddenly found themselves with illiquid investments.
Following the auction market’s collapse, several states, including New York, began looking into how Wall Street firms marketed and sold auction rate securities to investors. In August, settlements were reached with some of the biggest underwriters of the securities, with Citigroup, UBS, Morgan Stanley, JPMorgan Chase and Wachovia Corp. agreeing to buy back a combined $42 billion of auction rate securities they sold directly to individuals.
So far, about 30 companies have been subpoenaed by Cuomo’s office for their alleged mishandling of auction rate securities sales. Other states, as well as the Securities and Exchange Commission (SEC), also are involved in ongoing investigations.
Eventually, Cuomo says action against smaller brokerages will come to fruition.
But, as everyone knows, “eventually†on Wall Street could be a long time in coming. Until then, the light that so many investors thought they saw at the end of the auction rate tunnel has fallen dark once again.
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