Many ARS Investors Not Covered In Recent Settlements
Earlier this summer, news of auction-rate securities (ARS) settlements gave hope to millions of investors who were stuck with illiquid auction bonds following the collapse of the ARS market in February. As institutional and retail investors have discovered, however, the settlements between Wall Street firms and securities regulators contain specific clauses that make them ineligible to recover any financial losses from auction-rate securities.
A Nov. 28 article by Gretchen Morgenson in the New York Times highlights the ongoing problems for a growing number of investors who bought auction-rate bonds and who still are unable to find a solution for their problems. As Morgenson’s article points out, the terms of many of the settlements dictate that firms redeem auction-rate securities for clients who bought them between certain dates only.
For example, in the deal struck by Massachusetts securities regulators with UBS on Aug. 8, the firm agreed to the redeem auction-rate securities of clients who bought them from UBS between Oct. 1, 2007, and Feb. 13, 2008, and who moved to other firms, as well as clients who were holding any auction-rate securities at UBS on Feb. 13.
That means investors who, say, bought auction-rate securities sometime in 2006 from UBS and then moved to another brokerage firm that year would be disqualified from participating in UBS’ settlement offer.
Irene Scharf is an investor who did just that. Back in 2005, the college professor invested $75,000 in several auction-rate securities backed by municipalities. The money she invested was intended to pay for her two sons’ college education. According the NYT’s article, Scharf purchased the auction-rate securities at the suggestion of her broker at UBS. In 2007, that broker joined Smith Barney, and Scharf moved her account with him.
In the deal struck with Smith Barney, the brokerage only is required to redeem customers’ auction-rate securities that were directly bought from the firm before Feb. 11, 2008. In other words, that leaves Scharf out.
“We lived very frugally for years so I would not have to take out loans when my kids went to college,” Scharf said in the New York Times article. “I was not informed of any risk; my broker kept assuring me nothing was safer. When I asked about redeeming them, he said I’d only need to give him two or three days’ notice to redeem.”
Scharf’s dilemma is far from unique. More and more retail and institutional investors are learning that the settlements involving auction-rate securities contain specific clauses that disqualify them from redeeming their illiquid auction bonds.
As for the securities regulators that devised the settlement offers, they say they are aware of the problem and continue to work on finding a solution for all auction-rate holders.
With 2008 quickly coming to a close, that solution is long overdue.
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