Archive for August, 2009

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.

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.

They were supposed to be cash-like investments, something that would mimic money-market funds. Getting into auction rate securities was the easy part; it’s the getting out that has proven to be a financial nightmare for individual and institutional investors. When the ARS market collapsed in February 2008, investments in auction rate securities suddenly became illiquid, making it next to impossible for investors to sell their instruments.

Now, business for secondary market firms is booming, as more investors still stuck with untradeable investments in auction-rate securities seek out their services as a last-ditch alternative. One of those companies is SecondMarket. As reported Aug. 22 by the Wall Street Journal, companies like SecondMarket are thriving because other firms that initially arranged sales of auction-rate securities and other illiquid assets have not come up with a liquidity solution for investors. SecondMarket arranged $750 million in sales of illiquid assets in the first half of 2009, equaling its sales volume for all of last year.

Secondary market firms match investors with a roster of buyers who are eager to purchase illiquid assets at bargain-basement prices. Holders of the investments receive anywhere from a few cents on the dollar to 90 cents for the best securities.

The deals arranged by secondary market firms like SecondMarket do not come cheap. SecondMarket charges from 2% to 4% of the sales price.

SecondMarket primarily caters to individual investors, and about half of its business is in auction rate securities. Competitor firms like Hedgebay Trading Corp. market their services to large institutional clients.

One investor who turned to SecondMarket was Seymour Lowell, who’d been stuck in auction rate securities from Nuveen Investments since 2008. Nuveen wouldn’t buy back Lowell’s securities, so SecondMarket found him a buyer - at 13% less than the $1.7 million he had paid.

To date, Nuveen has redeemed 38% of its auction rate securities’ face value, with no redemption plans announced for the remaining amount. With no solution in sight, investors like Lowell are more than willing to take significant financial haircuts via firms like SecondMarket.

“My redemptions from Nuveen were really slow, and I’d be dead before I saw it all,” Lowell said in the Wall Street Journal article.

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.

The auction rate securities mess is heating up for Charles Schwab. New York Attorney General Andrew Cuomo is expected to soon file a lawsuit against San Francisco-based Schwab over issues related to the company’s marketing and sales of auction rate securities (ARS) to retail and institutional investors. Cuomo announced last month that he intended to take legal action against the brokerage unless it agreed to an ARS settlement and a buy-program to repurchase the auction rate securities from clients.

Since no deal has materialized, Cuomo will likely proceed with a civil fraud lawsuit against Schwab, according to an Aug. 17 story in the Wall Street Journal. As part of the lawsuit, Cuomo will present transcripts of recorded conversations between Schwab brokers and its clients, revealing how the auction rate securities were misrepresented by Schwab.

In one exchange between a Schwab broker and a client, the customer says: “You know, I’m not trying to make a ton of money. I just want to play it safe.” The broker responds: “The hardest part of this auction is getting into it. That is the tough part. Getting out is easy as just selling.”

Auction rate securities are considered long-term debt instruments that act as a short-term investment because of the manner in which they are resold. Interest rates on the products are reset at weekly or monthly auctions. When the market for auction rate securities collapsed in February 2008, thousands of retail and institutional investors became stuck with an illiquid investment.

Faced with potential lawsuits from state and federal securities regulators, a number of Wall Street firms that underwrote auction rate securities, including Citigroup, Merrill Lynch, UBS and J.P. Morgan Chase, agreed to buy back more than $60 billion of the instruments from customers.

Several retail brokerages, however, opted not to participate in the buy-back programs. Specifically, some “distributors” of auction rate securities continue to leave their clients with no solution to the financial losses they’ve suffered because of ARS investments.

When the market for auction-rate securities collapsed last year, Schwab’s clients were stuck with $789 million of the securities.

Schwab’s hold-out to avoid any type of settlement with regulators comes on the heels of recent agreements by two retail brokers to buy back millions of dollars in auction rate securities from clients. In July, Fidelity Investments and TD Ameritrade both agreed to repurchase $756 million of the securities from customers.

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.

Less than two years ago, a highly complex and risky investing strategy known as municipal bond arbitrage created a financial tsunami for thousands of investors in two Citigroup hedge funds known as ASTA and MAT. Now, the same strategy has imploded once again - this time the victims include seven Norwegian municipalities and a Norwegian securities brokerage, Terra Securities. The group, which recently filed a lawsuit against Citigroup, lost tens of millions of dollars in complex securities investments they say were marketed and sold as low-risk, conservative products by Citigroup. 

According to the complaint, the municipalities say they were duped by Citigroup because the bank failed to warn them that the structured notes in question were highly risky and subject to being cashed out, at a significant loss, if the market price dropped below a certain point. 

As in the case of Citigroup’s ASTA/MAT hedge funds, the returns on the investments bought by the Norwegian towns were linked to a municipal bond arbitrage fund created by Citigroup. The fund involved leveraged investments in United States municipal bonds. The investments themselves were highly speculative and included collateralized debt obligations and mortgage-backed securities. In addition, the leverage associated with the fund created added risks - something the Norwegian towns, just like ASTA/MAT investors, were unaware of until it was too late. 

By May 2008, nearly all the Norwegian towns’ original investment in the Citigroup notes was wiped out. Meanwhile, Terra Securities found itself forced into bankruptcy. 

Court documents in the case accuse Citigroup of selling the notes “in order to unload what was becoming significant risk from either its own or its preferred customers’ balance sheets.”

The lawsuit against Citigroup was filed in the United States District Court for the Southern District of New York and also names as defendants Citigroup Global Markets and Citigroup Alternative Investments LLC.

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.

In David and Goliath fashion, seven small Norwegian villages brought to the brink of bankruptcy are taking on banking giant Citigroup, suing the New York-based company for fraud and misrepresentation of sales tied to high-risk mortgage backed securities. The municipalities, together with the bankruptcy estate of the Norwegian brokerage firm that set up the investments, Terra Securities, are seeking more than $200 million in compensation, after suffering losses on $115 million worth of complex structured financial products known as fund-linked notes, or FLNs.

According to the complaint, Citigroup represented the FLNs as safe, conservative investments. In reality, however, the products were neither. Returns on the notes were linked to the U.S. housing market. When the bottom fell out of that market beginning in the summer of 2007, the value of the FLNs plummeted, causing the municipalities to lose tens of millions of dollars. By May 2008, substantially all of their original investment had evaporated and Terra Securities was in bankruptcy. 

The lawsuit also contends Citigroup’s marketing materials contained misleading statistics that concealed from both Terra Securities and the municipalities the inherent risk factors associated with the fund-linked notes. Moreover, the group says Citigroup directed Terra Securities to present the deceptive materials to the municipalities. 

“Clearly, as credit markets began to deteriorate, Citigroup sold the FLNs to Terra and the municipalities in order to unload what was becoming significant risk from either its own or its preferred customers’ balance sheet,” the lawsuit says.

The seven towns involved in the lawsuit lost some $90 million as a result of their investment with Citigroup, while Terra’s shareholders lost their entire stake. 

Today, several of the Norwegian towns that invested in the FLNs are facing severe cutbacks of public services, including schooling and care for the elderly.

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.

Recent news coverage has not been rosy for Regions Financial Corp., the parent company of Memphis-based Morgan Keegan. In its second quarter, Regions posted $244 million in net losses versus $206 million in profits during the same period in 2008. Adding to the bank’s woes is news from the Securities and Exchanges Commission (SEC) that the regulator issued a Well notice to Regions subsidiary Morgan Keegan in July, as well as to Morgan Asset Management Company and three employees, informing them to get ready for future enforcement action over violations of federal securities laws. 

Morgan Keegan also received a Wells notice from Financial Industry Regulatory Authority (FINRA), which stated discipline actions against the brokerage were forthcoming in connection to sales of a group of proprietary mutual funds.

The now-controversial funds at the focus of the SEC and FINRA regulatory notices are the same funds facing hundreds of arbitration claims by investors who allege that Morgan Keegan misrepresented the products as low-risk and high-yield investments. In truth, the funds held huge concentrations of subprime mortgages and corporate junk bonds.

The risky composition of the RMK funds eventually spelled financial disaster for investors beginning in the summer of 2007 and the subsequent collapse of the housing market. Since then, investors have filed scores of arbitration claims with FINRA, winning a total of about $4 million in awards so far.

According to recent analyses of the Morgan Keegan funds, losses in the funds entailed more than $2 billion between March 31, 2007, and March 31, 2008.

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.

In the future, investors may be the benefactors of a welcome shot in the arm thanks to recently introduced legislation that would make it easier for them to sue accountants, marginal financial players, investment banks and other entities that act as accomplices of securities and investment fraud. The measure, which was unveiled July 30 on the Senate floor by Sen. Arlen Specter, could significantly change recent Supreme Court limits on such cases.

“It would be an appropriate change,” said Donald Langevoort, a securities law professor at Georgetown University, in an Aug 4 article by Bloomberg. “Secondary actors who play a big enough role in perpetrating a fraud should bear responsibility just like anyone else and shouldn’t be able to hide.” 

“There’s a lot of investor anger, especially against major players on Wall Street, and aiding and abetting liability taps right into that,” Langevoort said in the story.

If passed, the bill would reverse the Supreme Court’s 2007 decision in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. In that case, the Supreme Court ruled in a 5-3 vote that shareholders could not sue third parties that “assisted” in a fraud committed by the company whose stock they own.

That ruling ultimately left many investors with no legal recourse, while at the same time essentially giving selected individuals a free pass to commit fraud.

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.

For more than a year, hundreds of investors have filed claims with the Financial Industry Regulatory Authority (FINRA) over massive losses they sustained in a group of Morgan Keegan mutual funds that invested in high-risk mortgage securities. In a growing number of those cases, FINRA panels have ruled in favor of investors. Apparently unwilling to live with that outcome, however, Morgan Keegan is now asking a state court to overturn the rulings. 

Morgan Keegan filed its most recent motion to vacate - which means it is asking a judge to throw out the arbitration panel’s award decision - on July 22. In that case, Morgan Keegan wants the $220,000 award dismissed because it says the panel’s chairman, who previously sat on another arbitration panel that ruled against Morgan Keegan, should have been released from the panel.

Two other appeals were filed in May. On the first motion, which involves an award of more than $628,000 to two investors, Morgan Keegan accuses arbitrators of misconduct for not postponing a hearing during which the investors presented suitability claims. Morgan Keegan filed the second motion to vacate on grounds that the arbitration panel exceeded its authority in awarding more than $187,000 in damages, attorneys’ fees and costs, said Steven B. Caruso, the attorney for the investor, in an Aug. 4 article in the Wall Street Journal. 

Morgan Keegan’s strategy to file the appeals is unusual. Arbitration awards typically are binding, and appeals are difficult to win. Ultimately, the plan could backfire altogether for the brokerage.

“The strategy - and its delays - come with a price tag, said Caruso in the Wall Street Journal. “Who pays for it? The shareholders of Regions Financial.”

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.

It was in the 1990s that the Shelby County, Tennessee, government first entered into a contractual agreement with Memphis-based Consulting Services Group (CSG) for advice on how to allocate its pension fund assets and on which money managers to hire. One of those money managers eventually included Morgan Asset Management, a subsidiary of Morgan Keegan & Co. Today, both companies - CSG and Morgan Keegan - are the subject of ongoing investigations and possible enforcement actions by the Securities and Exchange Commission (SEC) for misleading investors.

CSG has been identified as channeling clients’ money into Ponzi schemes, including the notorious one run by Bernie Madoff. It’s also being questioned by the SEC and New York Attorney General Andrew Cuomo for its role in the so-called “pay-to-play” pension fund consulting scandal in New York.

Meanwhile, Morgan Keegan, Morgan Asset Management and three unidentified employees were put on notice by the SEC earlier this month to expect legal action in the relating to various types of securities and financial products that Morgan Asset Management managed and which the SEC believes Morgan Keegan misrepresented to investors.

The products in question include several Morgan Keegan mutual funds whose values plummeted in 2007 and 2008 because of the underlying investments they contained. Those investments, which Morgan Keegan allegedly marketed to investors as stable investments, included high concentrations of risky and untested securities. 

In addition, the SEC filed a federal complaint against Morgan Keegan in early July over its sales of auction-rate securities. Again, the agency claims Morgan Keegan misrepresented the nature of risks associated with the instruments to investors.

As for Shelby County, the account that Morgan Asset Management oversees is comprised of intermediate bond funds; securities in that account are currently valued at $3.6 million. The account was opened nine years ago with $20 million, according to a July 24 article in the Memphis Daily News. At the pension board’s request, Morgan Asset Management recently began disposing of securities in the fund; the $3.6 million in securities is what remains. The fund should be completely liquidated within the next three to six months, according to the article. Once that happens, Shelby County will no longer have a relationship with Morgan Asset Management.

CSG’s future role in managing Shelby County’s finances is still unclear, though given the fact it has a long history of regulatory black eyes against it - the most recent being the New York state pension fund scandal - county officials may finally start to scrutinize the company’s practices in earnest. Some food for thought might include a recent article in the June 8 issue of Forbes magazine. The story provided a cautionary tale on the pension fund consulting industry, citing CSG as one of the biggest players. Among the highlights: 

• In the 1990s, CSG began steering clients into hedge funds, including its own and others that paid finder’s fees. One CSG client was municipally owned Memphis Light, Gas & Water. In 1997, Memphis Light discovered CSG was collecting $800,000 annually in commissions from a Florida money manager. The utility’s pension replaced CSG later that year as its consultant.

• In 1998, CSG signed up Shelby County and its $670 million pension fund as a new client. CSG put Shelby County into five funds of funds, which invested in 120 hedge funds. That “strategy” subjected Shelby County to three layers of fees that together cost between 2.5% and 3.25% annually, plus 20% of any profits. Last year, the pension lost 25% of the assets it had invested in CSG’s hedge fund program, net of fees.

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.

For more than a year now, retail and institutional investors of Raymond James Financial have patiently been waiting for an end to the nightmare known as auction-rate securities (ARS). The problems began in February 2008 when the once $330 billion ARS market abruptly came to a standstill, leaving investors who thought their money was as liquid as cash in dire financial straits. 

As reported Aug. 1 in the New York Times, the auction-rate securities mess hit individual investors especially hard, prompting investigations by state and federal regulators. The outcome of those investigations resulted in charges that many Wall Street firms aggressively marketed and sold auction-rate securities as liquid, cash investments, while failing to tell investors about the considerable risks associated with the instruments and the ARS market.

Since then, a number of major investment firms and brokerages agreed to settle charges by regulators and buy back ARS holdings from retail clients. Some firms, however, remained on the sidelines, refusing to make their clients whole by either redeeming their ARS investments or paying to recoup investors’ losses. One of those firms is Raymond James Financial.

Raymond James Financial is one of the nation’s last independent investment banks and brokerage firms. Last week, the company reported that its clients currently held about $800 million of illiquid auction-rate securities, down from $1 billion earlier this year, according to the New York Times.

The decline is tied to a series of redemptions by issuers of the securities, including closed-end funds and municipalities. So far, Raymond James has shown no interest in redeeming customers’ holdings, according to the New York Times story.

Redeeming the $800 million of auction-rate securities would be difficult, says Raymond James. The figure is equal to 4.4% of the company’s total assets and 42% of its shareholder equity.

That means Raymond James’ clients are no better off today than in February 2008, when the market for auction-rate securities collapsed.

The picture is much rosier for Raymond James’s CEO Thomas James. Last year, his company raised its dividend 10%. For James, who owns 12.2% of Raymond James Financial shares outstanding, the dividend increase translated into a payout of about $6 million. And the money will keep coming to James in 2009 if the company continues to pay the current rate of 44 cents a share.

On top of that financial bonanza, James saw a pay package valued at $3.55 million in 2008.

Besides executive compensation, Raymond James Financial spent $6.3 million during 2008 and 2009 for the naming rights to the stadium where the Tampa Bay Buccaneers play. That move alone begs the question: Why aren’t the clients of Raymond James viewed as valuable to the company as a corporate branding campaign?

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.