A retired securities attorney is suing Nuveen Investments, Merrill Lynch, Citigroup, Deutsche Bank, and Mesirow Financial for the $2 million in losses that he and his wife suffered as a result of investing in auction-rate securities. According to the lawsuit, Joan and Howard Kastel allege that they are victims of a “fraudulent scheme” in which markets for the instruments were intentionally manipulated.
The lawsuit says that in August and September 2007 Mesirow Financial purchased 88 shares of auction-rate preferred securities for the Kastels’ account. The shares, which cost $25,000 per share, were issued by three Nuveen North Carolina funds through Nuveen Investments LLC, the Chicago-based broker-dealer, at auctions conducted by Deutsche Bank. As reported in an Aug. 26 article by Investment News, Merrill Lynch and Citigroup participated in the auction, as well.
When the $330 billion auction-rate securities market suddenly froze up in February 2008, the Kastels’ were unable to access their cash. According to their lawsuit, they are now stuck with 85 shares of Nuveen North Carolina ARPS, which pay “unconscionably inadequate” interest that “does not fairly compensate” the couple.
The Kastels are suing Mesirow, Nuveen and Merrill Lynch for approximately $6 million. In addition, they are seeking compensation for emotional distress.
Prior to the collapse of the ARS market, thousands of retail and institutional investors purchased auction-rate securities on the premise they were cash equivalents. When the market crashed last year, however, they discovered that their liquid investments had become essentially worthless. On the heels of lawsuits by state and federal regulators, some Wall Street banks and investment firms eventually agreed to buy back billions of dollars worth of the securities from retail investors, while other firms have continued to resist such measures.
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