UBS to Pay $81M in Auction-Rate Securities Case
Kajeet Inc., a kids’ cell phone marketer, is the latest winner in the legal battle over auction-rate securities. In August 2010, an arbitration panel of the Financial Industry Regulatory Authority (FINRA) ordered UBS AG to pay Kajeet $80.8 million for damages the company suffered when its cash became frozen in auction-rate securities three years ago. The award was 10 times the amount that Kajeet had originally invested through UBS in auction-rate securities.
As reported August 5 by the Wall Street Journal, Kajeet’s award is an example of how Wall Street’s bills for the market meltdown are still growing. As of the end of June 2010, investors have filed more than 650 arbitration claims with FINRA to recover the financial losses suffered in the ARS market.
Problems for auction-rate securities began in February 2008, after the Wall Street banks that underwrote the securities abruptly pulled back their support. Retail and institutional investors suddenly found themselves unable to liquidate their ARS investments.
Regulators later charged UBS and other Wall Street firms of misleading investors about the liquidity of auction-rate securities, saying the investments had been falsely represented as the “equivalent to cash or money market funds.”
In February 2008, UBS had more than $35 billion in auction-rate investments held by 40,000 customers, according to the Securities and Exchange Commission (SEC).
Kajeet’s victory comes on the heels of several other legal wins by institutional investors involving auction-rate securities. In June 2010, a FINRA arbitration panel awarded $9.8 million to Catalyst Health Solutions in its case against Credit Suisse Securities. In February 2009, another FINRA panel ordered Credit Suisse Group to pay $400 million to STMicroelectronics NV to settle claims that the broker misled STMicroelectronics into buying auction-rate securities.
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