Archive for the “Auction Rate Securities” Category

Like many states, Hawaii has been hit hard from investments in auction-rate securities. Two years after the market for the instruments collapsed, Hawaii has lost about $250 million in market value on $1 billion in student-loan securities initially sold by a single Citigroup broker as a “cash substitute.” The story was first reported March 4 by Bloomberg.

Hawaii can’t find a buyer for the securities, half of which were purchased eight months before the ARS market crashed from Honolulu broker Pete Thompson.

According to the Bloomberg story, the deal transpired while Citigroup was increasing brokerage commissions and traders were being told to “make sure all hands are on deck” and to “do whatever is necessary” to dispose of auction-rate bonds as signs of the market’s demise began to appear.

Auction-rate securities have been the root of financial problems for hundreds of thousands of individual and institutional investors for more than two years. The nightmare began in February 2008 when the $330 billion ARS market came to a standstill after the Wall Street banks that underwrote the securities abruptly pulled back their support.

Meanwhile, purchasers like Hawaii - which were under the impression that auction-rate securities equaled a cash substitute - have been left with few options. They could sell the instruments but only at a considerable loss.

According to Bloomberg, an end-of-the year valuation from Citigroup showed that securities with a face value of $1 billion were worth about $752 million.

“It was represented to us that these were liquid investments that we could get out every seven to 10 days,” said Scott Kami, an administrator at Hawaii’s Finance Department, in the Bloomberg story.

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.

Legal expenses have skyrocketed for Morgan Keegan & Company, the Memphis-based broker that has been the subject of countless lawsuits and arbitration claims over losses suffered by investors in several Morgan Keegan bond funds. The funds plummeted in value due to investments in toxic mortgage-related securities.

As reported Feb. 25 by Investment News, Morgan Keegan’s legal bills equaled 12% of the firm’s total revenue last year. That’s double from 2008. In total, the company spent more than $160 million in “professional and legal fees” last year on revenue of $1.28 billion, according to the Investment News article.

Recent big wins for investors have added to Morgan Keegan’s growing legal fees. Earlier this month, an arbitration panel of the Financial Industry Regulatory Industry Authority (FINRA) ruled against Morgan Keegan, awarding separate claims of $2.5 million and $1.1 million to investors.

Adding to Morgan Keegan’s legal woes has been ongoing scrutiny from securities regulators. The Securities and Exchange Commission (SEC) and FINRA both recently issued Wells Notices to Morgan Keegan, a move indicating that disciplinary action could be in the company’s future. In the SEC filing, the action stemmed to the group of Morgan Keegan bond funds. Another Wells notice was filed in connection to auction rate securities sales.

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Former UBS executive David Shulman has agreed to pay a $2.75 million fine over insider trading charges connected to auction-rate securities sales and be suspended from employment by a broker or dealer until next January. He was suspended by UBS in July 2008.

“While thousands of UBS customers received no warning about the auction-rate securities market’s serious distress, David Shulman - one of the company’s top executives - used insider information to take the money and run,” said New York Attorney General Cuomo in a press statement. “From the start, our prime goal has been to get investors their money back.  But let there be no mistake - when corporate executives unlawfully take advantage of their positions, we will hold them accountable.”

Cuomo announced the settlement with Shulman on Feb. 18. Shulman is the second UBS executive to settle with Cuomo’s office thus far. To date, Cuomo’s investigation into auction-rate securities has reached agreements with 13 broker/dealers and produced more than $60 billion in repurchases of investors’ ARS holdings.

Shulman was accused of selling off $1.45 million of his personal investments in auction-rate securities in December 2007 after he learned that UBS’ own auctions were hitting a snag. On Dec. 11, one of Shulman’s employees e-mailed him that the group was “very concerned” about certain issues related to UBS’ student loan auction-rate program and its continuing support for that program.  In that e-mail, the employee stated that “the auction product is flawed.”

On Dec. 12, records show that one of Shulman’s employees forwarded an e-mail to Shulman with a subject line of “stud loans,” and warned Shulman that “the auction product does not work … our options are to resign as remarketing agent or fail or ?” In another e-mail that same day, the employee advised Shulman in no uncertain terms that with respect to UBS’ student loan auction-rate securities, “the entire book needs to be restructured out of auctions.”

Finally, on Dec. 13, Shulman instructed his broker to immediately sell his holdings in student loan auction-rate securities, before the upcoming auctions could occur.  Later that day, Shulman’s ARS holdings were sold via inter-auction directly to the UBS Short Term Trading desk.

Coincidentally, the Short Term Trading desk was under Shulman’s supervision.  Shulman’s broker mentioned Shulman by name when he called the desk to place the trades. This was the first and only time Shulman sold auction rate securities inter-auction.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with significant investment losses.

It’s bonus time on Wall Street, and individual and institutional investors of auction rate securities (ARS) should be up in arms. While the financial press reports that some of the nation’s biggest banks - including Goldman Sachs, Bank of America, JP Morgan Chase and Citigroup - have set aside billions of dollars in bonuses for 2009, untold numbers of ARS investors are still in dire financial straits. And they have been since February 2008, when the market for auction rate securities came to an abrupt standstill.

Today, investors  of auction rate securities are left with little recourse to recover their now-illiquid investments. They can attempt to unload the instruments, albeit at a loss, on the secondary market or file a complaint with the Financial Industry Regulatory Authority (FINRA.)

Either way, the same investment firms and banks that were taken to task by state and federal regulators for allegedly failing to disclose the risks associated with auction-rate securities are now patting themselves on the back with outrageous bonus packages.

When the auction rate market collapsed in February 2008, investors were hit hard. They couldn’t access their supposedly liquid investment, leaving many forced to postpone plans for retirement or pay other expenses.

Eventually, the ARS meltdown led many financial firms to reach settlements with state regulators to buy back auction rate securities from retail clients and some smaller businesses.

Larger institutional ARS investors, however, were not so lucky. They still hold billions of dollars worth of auction rate securities that can’t be sold or are sharply reduced in value.

Meanwhile, in letters sent Jan. 11 to eight major banks - Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo - New York Attorney General Andrew Cuomo is requesting a slew of information about Wall Street’s 2009 bonuses. The banks have until Feb. 8 to respond.

Investors should pay close attention to their responses.

Our affiliation of lawyers is actively advising individual and institutional investors and evaluating their legal options concerning auction rate securities. Tell us about your investment losses; leaving a message in the Comment Box below or via the Contact Us form.

Auction rate securities continue to create financial havoc for many institutional investors, with businesses across the country fighting an uphill battle to recover billions of dollars that are still frozen in the instruments. As reported Jan. 2 by the Wall Street Journal, some 400 companies hold more than $20 billion of auction rate securities that can’t be sold or are sharply reduced in value.

As a result, those companies are pulling back their spending which, in turn, creates yet another drain in an already-depressed economy.

It was in February 2008 that the $330 billion market for auction rate securities met its demise. Investors were left without the liquidity they had been promised and, instead, faced a new reality altogether: To access their money, they could only sell their investments on the secondary market at a steep discount or hold onto the securities until they matured - a process that could take 20 years or more.

Since then, individual and institutional ARS investors accuse the investment firms and banks that sold them auction rate securities of misrepresenting the safety and liquidity of the products. The complaints eventually prompted a series of investigations by both state regulators and the Securities and Exchange Commission (SEC), which resulted in a number of settlements last year. Under the settlements, many of Wall Street’s major brokerage houses agreed to buy back auction rate securities from individual investors and small businesses. For the most part, however, larger institutional investors were left out of the buy-back deals.

One of those institutional investors is Abercrombie & Fitch. According to the WSJ article, the company has $230 million, or 33%, of its cash on hand tied up in the auction-rate securities it purchased from several banks, including UBS AG and Bank of America.

“If we had more cash, we’d be running different [business] models, with more stores and more inventory,” said Abercrombie & Fitch treasurer Everett Gallagher, in the WSJ story.

For other companies, lack of access to short-term cash means employee cutbacks. Nanophase, an Illinois business that provides molecular technology for floor coatings and sunscreens, has let go 12 of its 54 employees. The company says that auction-rate securities have tied up about half of its $8 million, money it needs for corporate expenses.

According to the Wall Street Journal, Nanophase survived 2009 in part by selling some of its auction-rate securities for 87 cents on the dollar.

Another ARS investor who is hurting is Bob Bridgeman. When Bridgeman sold a small New Jersey oil-change and car-wash business, he put his money into LandAmerica 1031 Exchange Services. The company enables small business owners to invest their cash tax-free. It turns out that LandAmerica invested its entire pool of about $200 million in auction rate securities. In November 2008, LandAmerica was forced to close its doors. On Sept. 9, 2009, it filed for bankruptcy reorganization, leaving investors like Bridgeman - who had more than $1 million in LandAmerica - with no access to their cash.

“It was a big portion of what I worked for my whole life,” Bridgeman, 60, said in the Wall Street Journal.

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.

Dow Corning Corp. has filed another ARS lawsuit - this one against Merrill Lynch over a $166 million loss in auction rate securities. The lawsuit, filed Nov. 20, alleges that Merrill Lynch misled the silicone supplier about the safety and liquidity of the instruments and the ARS market, which collapsed in February 2008.

This is the second lawsuit that Dow Corning has filed over losses in auction rate securities. The first complaint was filed Nov. 7 against BB&T Corp. and alleged that the North Carolina bank falsely represented the safety and liquidity of $667 million in auction rate securities that Dow previously purchased. According to the complaint, Dow bought the ARS bonds from 2005 to February 2008 after BB&T touted the investments as a “highly liquid, highly rated and secure investments that were equivalent to cash.”

The latest lawsuit involving Merrill Lynch is Dow Corning Corporation et al v Merrill Lynch & Co, U.S. District Court for the Southern District of New York, No. 09-9697.

Tell us about your situation with auction rate securities by leaving a message in the Comment Box below or via the Contact Us form. You may have a viable claim for recovery of your investment losses.

Wells Fargo & Co. will refund $1.4 billion in non-liquid auction rate securities to investors, charities and small businesses nationwide, including about $700 million to California investors. The agreement, which was reached Nov. 18 with the California Attorney General’s Office, puts to rest a California fraud lawsuit that alleged Wells Fargo misrepresented auction rate securities to thousands of investors as safe-as-cash investments.

As part of the settlement agreement, the bank also will pay a $1.9 million fine, plus legal costs and future monitoring expenses incurred by the attorney general’s office.

In April, California Attorney General Edmund G. Brown, Jr. sued three Wells Fargo investment subsidiaries, accusing them of securities fraud by convincing investors to purchase auction-rate securities with false promises of healthy returns and liquidity. The company also was charged with failing to supervise and train its sales agents and selling unsuitable investments.

When the market for auction rate securities collapsed in February 2008, those same investors suddenly found themselves holding essentially worthless investments.

The North American Securities Administrators Association also had launched an inquiry of the Wells Fargo subsidiaries over sales of auction rate securities.

“Wells Fargo convinced thousands of investors to purchase auction rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold,” the California attorney general said in announcing the agreement with Wells Fargo. “Based on misleading advice, investors bought these risky securities. Now, retail investors and small businesses are finally getting their money back.”

Wells Fargo joins more than a dozen brokerages and investment firms that entered into settlement agreements with regulators to buy back auction rate securities from investors. To date, companies have agreed to repurchase approximately $61 billion of the risky investments.

Tell us about your situation regarding auction rate securities by leaving a message in the Comment Box below or via the Contact Us form. We want to counsel you on your legal options.

Dow Corning, the world’s biggest silicone supplier, is suing BB&T Corp. over allegations the North Carolina bank falsely represented the safety and liquidity of $667 million in auction rate securities that Dow has been unable to sell. According to Dow’s complaint, it bought the auction rate bonds from 2005 to February 2008 after BB&T touted the instruments as a “highly liquid, highly rated and secure investments that were equivalent to cash.”

Problems for investors holding auction rate securities reached a fever pitch in February 2008 when the $330 billion ARS market came to a standstill after brokerages abandoned their support for the instruments. Meanwhile, individual investors and institutional investors were left stranded, unable to sell their so-called cash-like investments.

As reported Nov. 6 by Bloomberg, Dow’s complaint accuses BB&T and its Scott & Stringfellow broker/dealer unit of fraud, breach of fiduciary duty, negligent misrepresentation and omissions, and violations of the Michigan Uniform Securities Act.

Tell us about your situation with auction rate securities by leaving a message in the Comment Box below or via the Contact Us form. We want to counsel you on your legal options.

Institutional and individual investors failed to emerge victorious in two recent auction rate securities arbitration claims against Citi Smith Barney and Raymond James Financial. As reported Nov. 9 by Investment News, a Miami FINRA (Financial Industry Regulatory Authority) panel denied claims brought by the Banco Industrial De Venezuela against Smith Barney in October. That same month, a Texas FINRA panel denied an investor’s claim involving more than $10 million worth of auction rate securities purchased from a Raymond James broker in 2006 and 2007.

For more than a year, thousands of retail and institutional investors have struggled to find a solution to their auction rate securities (ARS) woes. 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.

Following the collapse of the auction rate securities market, a number of state and federal investigations ensued. The result of those investigations led to allegations 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 fact that the auctions for the securities could fail.

A number of Wall Street brokerage firms have since announced ARS buy back programs, agreeing to repurchase their clients’ auction-rate investments. In total, more than 20 firms - including Citigroup, Wachovia, Morgan Stanley, UBS, Goldman Sachs, Bank of America, TD Ameritrade, Fidelity Investments and Merrill Lynch, have agreed to repurchase $61 billion of the instruments from some customers.

In the recent case involving Raymond James Financial, it’s worth noting FINRA’s explanation of its decision (FINRA No. 08-03386) in the case. The panel’s findings state that Raymond James broker Rick Woolfolk “was poorly trained with respect to the ARS product. At various times, he described the investment as a unit trust, short-term paper or short-term stuff.”

The panel also noted that it was unclear whether the investor who purchased the auction-rate securities from Raymond James Financial was aware of the risks of failed auctions when he directed the initial purchase of the instruments. It was only after the purchase that Raymond James disclosed the risks of the products, according to the panel’s findings.

Despite denying all relief to the claimant, the FINRA panel said it remained “troubled by the inadequate training and other firm-related deficiencies” on the part of Raymond James Financial. Forum costs totaling $7,000 were assessed to Raymond James.

Meanwhile, investors continue to fight their ARS battles by filing individual arbitration claims against the brokerages that sold them investments in auction rate securities. As reported in a Nov. 8 article in the New York Times, almost 500 auction-rate securities claims have been filed by investors with FINRA following the collapse of the ARS market. A total of 253 are pending; 242 have been closed.

Seventeen claims have gone to a final hearing. Of those, investors won in four cases; a $400 million award was handed down by a panel in one matter. But 146 of the 242 closed cases were settled by the parties involved in the dispute, the New York Times reports. Settlement terms aren’t made public, but such deals typically involve refunding much, if not all, of investors’ money, the New York Times article states, citing lawyers who handle the cases.

Moreover, some settlements involve “consequential damages” - additional money awarded to cover investors’ costs of the arbitration proceedings or investment opportunities they missed because they were unable to access to their money.

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 many institutional and individual auction rate securities investors, life remains in limbo. Their investments, once touted by Wall Street as liquid as cash, have proven otherwise, leaving investors with no where to turn.

Before the ARS market seized up, municipalities, closed-end funds, student loan companies, hospitals and other non-profit entities issued auction rate securities in the form of preferred shares or as debt instruments to companies and individual investors. Problems in the $330 billion auction rate securities market came to a head in February 2008, when auctions for the instruments stopped trading. Since then, several of Wall Street’s major brokerage firms have taken steps to redeem their clients’ ARS holdings, or face the wrath of state securities regulators.

Some brokerage firms, including Oppenheimer and Raymond James, have not gone this route, however. This means their clients are essentially in the same position as they were a year ago. In other cases, investors’ efforts to retrieve their money through class action lawsuits are coming up short, according to a Nov. 8 article by Gretchen Morgenson in the New York Times. Judges overseeing at least 23 auction rate class actions have dismissed them in recent months, the article says.

A coalition comprised of 25 companies holding approximately $8 billion in frozen auction-rate securities backed by student loans is trying to draw attention to ARS illiquidity and the broader consequences of what will happen if there’s no solution to make good on the investments. The group contends if companies and individual investors were able to cash in their securities, the result would be an immediate $58 billion to $63 billion of economic stimulus. Currently, the coalition is taking its message to members of Congress and the Treasury Department, as well as other leaders in political and financial circles.

Individual investors, however, typically don’t have this kind of clout or resources. For them, filing an arbitration claim against the brokerage firm that initially sold them their auction rate securities may hold the most promise for resolution. As reported in the New York Times article, almost 500 auction-rate securities claims have been filed by investors with the Financial Industry Regulatory Authority (FINRA) since the collapse of the ARS market. A total of 253 are pending; 242 have been closed.

Seventeen claims have gone to a final hearing. Of those, investors won in four cases; a $400 million award was handed down by a panel in one matter. But 146 of the 242 closed cases were settled by the parties involved in the dispute, the New York Times reports. Settlement terms aren’t public, but such deals typically involve refunding much, if not all, of investors’ money, the article says, citing lawyers who handle the cases.

Moreover, as the New York Times points out, some settlements involve “consequential damages” - additional money awarded to cover investors’ costs or investment opportunities they missed because they didn’t have access to their funds.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options regarding auction rate securities. Tell us about your situation by leaving a message in the comment box or the Contact Us form.