Institutional, Retail Auction Rate Securities Investors Still At Odds With Wall Street
The collapse of the auction rate securities market in February 2008 left millions of retail and institutional investors stuck with an investment that no one wanted to buy. Nearly a year later, little has changed for many ARS investors.
Many investors were under the impression auction-rate securities were safe, low-risk investments - financial products similar to a money market fund yet with a slightly higher return. At the same time, auction rate securities were supposed to be easy to sell - for their face value - at weekly or monthly auctions.
That didn’t happen, of course. Instead, the ARS market came to a standstill in 2008, and investors got stuck with securities that today pay extremely low yields. In some cases, the auction-rate securities will never mature, leaving ARS holders with the prospect of never getting their money back unless they part with their investments for rock-bottom prices.
As reported Oct. 11 by the New York Times, the biggest losers in the auction-rate securities debacle are institutional investors - corporations that bought the securities and were never covered by the settlements that many Wall Street firms made earlier this year to reimburse individual investors.
To a lesser extent, some retail investors are still stuck with their securities, either because their brokerage firm refused to settle or because they’ve moved from one firm to another and neither is willing to buy back the securities.
According to the New York Times article, some corporate ARS purchasers are in a Catch 22 position. They can’t sue the brokerages that misrepresented the auction-rate investments as safe and secure investments because of the Private Securities Litigation Reform Act law - a law that was strongly backed by corporate America as a way to curb frivolous lawsuits.
Specifically the Private Securities Litigation Reform Act dictates that when a case is filed it must be very detailed about the alleged fraud or it will be immediately dismissed. In many cases, though, a plaintiff needs access to inside information to make a claim with such information, which could be found in company files. Oftentimes, however, a plaintiff has no way to access such details before the case is thrown out, says the New York Times.
The latest reversal for investors came late last month when a federal judge dismissed a case filed against Raymond James, a brokerage firm that underwrote and sold auction-rate securities. In that case, a customer claimed that a broker at Raymond James misled her about the safety of auction-rate securities. As an underwriter and conductor of the auctions for the securities, the customer alleged that Raymond James was involved in a fraud to unload the securities before the market for them collapsed in February 2008.
The judge in the case says that’s not enough. The broker, he states, worked for one Raymond James company; the underwriting was done by a different Raymond James firm. “There is no evidence in the complaint,” the judge wrote, “from which the court can infer that the Raymond James entities had even the most basic understanding of the others’ business.”
To many, such reasoning sounds a little like a pitch to disguise the obvious. If the plaintiff could prove that one Raymond James subsidiary lied about the securities while another one profited from selling them the end result would likely prove the investor’s allegations of fraud. Yet, if there is no discovery of evidence allowed, we will never know whether such a claim could be proved.
The plaintiff in the case has until Oct. 16 to file an amended complaint that can pass muster under the 1995 law. The lawyer representing the investor says a new complaint will indeed be filed.
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