Archive for the “Merrill Lynch” Category

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.

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.

Thousands of institutional investors that bought auction-rate securities on the premise they were cash equivalents are still waiting for their liquidity to materialize. By and large, corporate investors were not included in the settlement agreements that took place last summer when Wall Street banks and investment firms agreed to buy back billions of dollars worth of auction-rate securities from retail investors and small businesses as a way to settle state and federal charges alleging misrepresentation of the instruments. Instead, institutional investors continue to be left waiting in the wings, with no ARS solution in sight.

Auction-rate securities are long-term bonds or preferred stocks that pay interest or dividends at rates determined through auctions held every seven, 14 or 28 days. In February 2008, the market for auction-rate securities essentially collapsed, leaving both retail and institutional investors holding a supposedly liquid investment now considered worthless. 

Approximately $330 billion of auction-rate securities were outstanding when the auctions began collapsing in February. About $160 billion of auction rates remain outstanding following the settlements, according to a May 24, 2009, article in Investment News, with most paying very low “penalty” rates under the terms of the failed auctions.

The ARS buyback programs that were announced by brokerage firms in August 2008 failed to provide liquidity relief to institutional investors, offering instead only vague commitments to work with corporate investors on finding a solution for their ARS holdings. Even then, it could be years before institutional investors see any of their auction-rate securities redeemed for cash. 

Meanwhile, companies such as Citigroup, Wachovia, Merrill Lynch, and UBS Financial Services all face a growing list of individual lawsuits from institutional investors that have massive amounts of money still tied up in illiquid auction-rate bonds. To date, several investors have scored major legal victories in their ARS cases, including a February 2009 decision by a Financial Industry Regulatory Authority (FINRA) arbitration panel that awarded European chipmaker STMicroelectronics $406 million over a dispute with Swiss bank Credit Suisse Group and the unauthorized purchase of auction-rate securities.

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 maker of Valvoline motor oil has filed a lawsuit against Oppenheimer & Co., a subsidiary of Oppenheimer Holdings, over the sale of $194 million of auction-rate securities. According to the complaint by Ashland Inc., Oppenheimer misrepresented the liquidity and risks of the instruments at the time it sold them to the chemical company in 2007 and early 2008. 

When the market for auction-rate securities collapsed in February 2008, Ashland, like thousands of institutional and retail investors, found itself stranded with an illiquid investment that no one wanted to buy. Several months later, in an effort to settle investigations by state and federal regulators, many Wall Street firms, including Citigroup, UBS and Merrill Lynch, agreed to buy back billions of dollars of auction-rate securities from investors. Oppenheimer, however, opted not to participate in the ARS buy-back programs, contending it didn’t issue or underwrite the securities but only sold them.

In November 2008, Massachusetts’ Secretary of State William Galvin sued Oppenheimer, charging the firm with fraud and dishonest and unethical conduct in connection to its auction-rate securities business. Galvin not only wanted Oppenheimer to rescind all sales of auction-rate securities at par and make full restitution to investors who already had sold their securities but also sought to revoke Oppenheimer Chairman and CEO Albert Lowenthal’s Massachusetts registration as a broker-dealer agent of Oppenheimer, as well as fine the company and several senior-level executives.

Ashland filed its lawsuit against Oppenheimer on April 17 in the U.S. District Court for the Eastern District of Kentucky.

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’ve been called everything from weapons of mass destruction to a company’s worst investment nightmare. Now hospitals and nonprofits from California to Indiana are getting an unwelcome lesson on the financial consequences of what can go wrong when interest rate rate swaps meet an economic downturn.

South County Hospital in Wakefield, Rhode Island is a prime example. As reported March 18 by Bloomberg, in just one year the interest rate on the hospital’s $52 million of debt has doubled to 12%. On top of that, the facility has turned over nearly $13 million in “collateral postings” to Merrill Lynch, money that could have been used to make up for a reduction in state aid for treating uninsured patients or buy four years’ worth of orthopedic supplies, according to the Bloomberg article.

Interest rate swaps have become an increasingly popular mechanism with hospitals, nonprofits and other tax exempt entities to hedge against changes in interest rates. There is a downside, however. The value of the swaps is tied to the contract’s underlying assets, as well as larger trends in the lending markets.

In the case of South County Hospital, fallout from the credit crunch and the collapse of the auction rate securities market caused its interest rate swaps to backfire, which in turn contributed to a $1.5 million operating loss for the hospital and a need to lay off employees and reduce pay for others.

South County is far from alone. Countless other hospitals and nonprofits face a similar plight after having entered into these complex derivative deals with Wall Street. Instead of the savings they were promised by bankers, the instruments have become a big liability.

And the news couldn’t come at a more inappropriate time. According to the Bloomberg article, the investment income that nonprofits use to support their operations fell more than $830 million in the third quarter of 2008, while unemployment rose and more patients without insurance sought medical care.

When South County initially entered into its interest rate swap arrangement with Merrill Lynch, it agreed to pay an annual fixed rate of 3.5% for 30 years after selling $52 million in auction-rate securities. At the time, the average rate for a comparable fixed rate hospital bond was 4.5%, according to Bloomberg data.

In February 2008, however, everything changed for the $330 billion auction-rate securities market. Wall Street banks suddenly stopped serving as buyers of last resort, which led to the market’s collapse. As a result, investors had no buyers for their investments, while issuers like South County faced penalties of double digit interest rates on their auction bonds.

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. 

New York Attorney General Andrew Cuomo and U.S. Rep. Barney Frank are demanding Bank of America CEO Ken Lewis immediately reveal details regarding individual bonuses that Merrill Lynch paid to employees in December. Bank of America, which acquired Merrill Lynch on Jan. 1, has repeatedly tried to keep executive pay data confidential.

Bank of America may be fighting a losing battle. In a March 9 letter to Lewis, Cuomo and Congressman Frank said any information pertaining to bonuses must be made public because Bank of America received $45 billion as part of the government’s banking rescue program. As a recipient of those funds, Bank of America is obligated to keep taxpayers informed about how their money has been spent.

An investigation into the timing of nearly $4 billion in bonuses paid by Merrill Lynch to certain employees was first launched by in December 2008 by the New York Attorney General’s office. Bank of America distributed about $3.3 billion in bonuses. Among other things, Cuomo wants to know whether Merrill and BofA failed to give adequate disclosures to shareholders about the bonuses, as well as the $15 billion loss incurred by Merrill Lynch in the fourth quarter.

Our affiliation of securities 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. 

Summoned to Capitol Hill by furious lawmakers, Bank of America’s Ken Lewis, Citigroup’s Vikram Pandit and Jamie Dimon of JPMorgan Chase faced the wrath of Congress on Feb. 11 over how their firms have spent the first $350 billion of taxpayers’ money under the Troubled Asset Recovery Program (TARP).

CEOs from eight of the nation’s biggest banks arrived early Wednesday morning to answer questions from the U.S. House Financial Services Committee. This time, unlike what occurred in November 2008 when CEOs of the Big Three auto companies came to Washington to request taxpayer bailout money in private jets, the bank CEOs arrived via public transportation.

The CEOs presented their testimony in alphabetical order. All of the statements are posted on the House Financial Services Committee Web site. As expected, the executives defended their companies’ use of the TARP funds.

The TARP Accountability: Use of Federal Assistance by the First TARP Recipients meeting is the first of what some say will be regular examinations held by Congress as it moves to increase federal oversight of Wall Street.

And that oversight couldn’t come at a more appropriate time. Taxpayers and investors are justifiably up in arms over how financial institutions are reaping the benefits of the government’s massive multibillion bailout plan, but producing little in return. Instead of improving the state of the credit market, banks apparently spent the money on corporate bonuses, press junkets and, in the case of Merrill Lynch’s John Thain, on a $1.4 million office redecorating project.

Our affiliation of securities 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.

“I’m sorry.” That’s what recently fired former Merrill Lynch CEO John Thain had to say about his spending $1.2 million on an office decorating project while his company was drowning in debt and slashing thousands of jobs.

In a Jan. 27 interview on CNBC, Thain said he “regretted” using corporate funds on such items as a $37,000 commode and two area rugs totaling $131,000 and, if he had it to do over again, he would pay for the expenses out of his own pocket.

Unfortunately for Thain, there won’t be any do-overs in his future. On Jan. 27, New York Attorney General Andrew Cuomo issued subpoenas to both Thain and Bank of America’s chief administrative officer, J. Steele Alphin, as part of an investigation into the $4.1 million worth of bonus checks that Merrill Lynch paid executives just days before its sale to Bank of America.

The attorney general’s investigation into the Merrill bonuses reportedly will focus on the timing of the payouts. The payouts were made as Merrill Lynch prepared to announce a $15 billion fourth-quarter loss and Bank of America was seeking a second financial bailout from the federal government.  

When asked about Merrill Lynch’s huge losses during the CNBC interview, Thain blamed his former predecessor, Stanley O’Neal.

Our affiliation of securities 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. 

At the very moment Merrill Lynch’s CEO John Thain was pleading for an emergency bailout from the U.S. federal government to the tune of billions of dollars in taxpayer money, the brokerage giant already had begun to dole out $4 million in bonus checks to executives. A few days later, with the help of government funds, Merrill Lynch was acquired by Bank of America (BofA).

On Jan. 22, Thain abruptly resigned from his post at BofA. Now, both Thain and Bank of America, which has received $45 billion in bailout funds, face harsh criticism for what many are calling an outlandish misuse of taxpayer money.

Adding to Thain’s PR troubles is news of a lavish spending spree totaling $1.2 million to decorate his corporate office during a time when Merrill Lynch was drowning in financial losses and slashing jobs. Among his purchases:

• $800,0000 for the services of interior designer Michael Smith
• $35,115 for a commode
• $1,400 for a trash can
• $37,000 for six dining room chairs
• $131,000 on two area rugs
• $68,000 on a credenza

In addition to Thain’s over-the-top decorating, he reportedly paid his driver a salary, including bonuses and overtime, of $230,000 for one year’s worth of work. Drivers for executives of Thain’s stature are usually paid about half that amount.

Thain also at one time had tried to secure a big bonus for himself before the sale of Merrill Lynch to Bank of America. In October, the 53-year-old suggested a sum of between $30 million and $40 million. Later, it was reduced to $10 million. In the end, he received no bonus at all.

Thain’s departure from Bank of America comes less than a month after being named head of the firm’s global banking, securities and wealth management division. Apparently, BofA CEO Ken Lewis flew to New York on the morning of Jan. 22 to meet with Thain and call for his resignation.

Lewis’ disappointment with Thain no doubt has something to do with Merrill’s unexpected $15.4 billion fourth-quarter loss, which forced BofA to seek an additional $20 billion of funding from the government last week.

As for Thain’s ill-timed gamble of paying $4 million in bonuses to Merrill Lynch executives, that matter is now under investigation by New York State Attorney General Andrew Cuomo. 

Our affiliation of securities 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 February 2007, M&T Bank came across a complex Wall Street innovation called “Gemstone VII.” Deutsche Bank did the pitching to M&T, and reportedly promised big returns and little risk. Like many Wall Street-engineered products, however, the investment turned out too good to be true. M&T Bank ended up losing $80 million.

M&T Bank is now suing Deutsche Bank for what it claims was a misrepresentation of Gemstone’s securities. Far from the conservative, low-risk instrument that M&T thought it was getting into, Gemstone consisted of bonds backed by toxic subprime mortgages and risky credit-default swaps.

M&T also contends that Deutsche Bank withheld key information from credit rating agencies Moody’s Investors Service and Standard & Poor’s regarding the securities held by Gemstone. By not having that information, the agencies inappropriately assigned higher ratings than they should have to the CDOs.

According to the complaint filed Jan. 19 with the New York State Supreme Court in Erie County, M&T is seeking more than $100 million of punitive damages.

The M&T/Deutsche Bank case is indicative of a new trend in which corporate and institutional investors are taking Wall Street to task for falsely marketing certain financial instruments. Another case that involves the mishandling of CDOs is the Ohio State Teachers Retirement System, which recently sued and won a $550 million settlement from Merrill Lynch.

Institutional investors are often regarded as “sophisticated” and “financially savvy;” therefore, critics argue that they should know what they’re investing in. However, whether an individual or institutional investor, brokerage firms and investment banks are bound by law to provide complete and truthful disclosure about the securities they represent. If misrepresentation occurs, institutional investors deserve to hold the responsible parties accountable.

It would appear that the law is leaning in their favor, as evidenced by the Ohio State Teachers Retirement System’s $550 million win from Merrill Lynch and cases like the one just filed by M&T.

Our affiliation of securities 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.