State of Virginia Sues Stifel Nicolaus Over Auction-Rate Securities Sales
Auction-rate securities (ARS) are once again making news. This time it’s in the state of Virginia, which has just filed a lawsuit against investment broker Stifel, Nicolaus & Co. over its sale of auction-rate securities to Virginia investors.
Among the charges, the suit contends St. Louis-based Stifel Nicolaus sold $8.4 million worth of auction-rate securities to investors while touting them as liquid, cash investments.
“Retail clients were systematically and routinely informed that ARS were safe, conservative, liquid investments equivalent to cash or money market funds, a misleading and improper classification,” the complaint said.
Stifel denies any wrongdoing in the Virginia case, which is the same argument it made back in March when Missouri Secretary of State Robin Carnahan filed a lawsuit against Stifel and its Stifel, Nicolaus & Co. subsidiary for allegedly misleading Missouri customers who bought auction-rate securities. In addition, the Missouri suit charged Stifel of failing to come up with an adequate buy-back program to reimburse investors for their ARS losses. Yielding to pressure, Stifel agreed in April to buy back $180 million in frozen auction-rate securities from 1,200 Missouri investors.
Thousands of investors throughout the country have been in financial distress following the collapse of the auction-rate securities market in February 2008. Since then, intense backlash has been building against the investment firms that represented auction-rate securities as safe, cash-like investments to retail and institutional clients.
In reality, auction-rate securities are debt instruments with a long-term maturity. Interest rates are reset via an auction process, with auctions for the securities held every seven, 14 or 35 days by various brokerage firms that run the auctions. In February 2008, however, the same brokerage firms that conducted the auctions and sold the securities to investors decided to pull out of the ARS market and no longer financially back the instruments. As a result, investors, who thought auction-rate securities were the equivalent of cash investments, were left holding an illiquid investment no one wanted to buy.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
