Archive for the “Morgan Stanley” Category

It’s become a predictable news headline: “Wall Street Firm Charged With Fraud In Auction Rate Securities Sales.” Following the collapse of the auction bond market in February, investment banks and securities firms have made a cottage industry out of reportedly deceiving investors by keeping the risk factors of auction-rate notes quiet.

Now, nearly major Wall Street player - from UBS, to Merrill Lynch, to Citigroup - is facing the wrath of state and federal securities regulators, as they answer tough questions of why they falsely promoted auction-rate notes as safe, liquid investments.

Investors are asking questions of their own - as well as taking action, with many lining up to file arbitration claims and class-action lawsuits against the Wall Street firms that they say caused them financial disaster because they were misled about the liquidity risks of the auction bonds.

For a number of these investors, the auction rate scandal ultimately will lead them to an arbitration hearing - a procedure in which two parties involved in a dispute (in this case, the investor and the broker or brokerage firm) - present various evidence to a three-member panel of “judges.”

And therein lies the problem. For claims of more than $50,000, the rules of arbitration can be an albatross for investors because the three-member panel must include an industry representative, as well as two individuals who also could have industry ties.

Columnist Jane Bryant Quinn addresses this issue in a July 30 story on Bloomberg.com, in which she writes: “The industry rep is there to explain the industry’s point of view to the other panelists - effectively, a Wall Street mouthpiece, sympathetic to the very products and practices you’re complaining about. As an “expert,” his or her opinion carries extra weight.”

In other words, investors could very well find themselves at a major disadvantage. Birds of a feather flock together. If one of the individuals on the three-member arbitration panel represents the very industry that investors contends wronged them, the likelihood they will receive a completely unbiased and fair hearing - let alone a favorable outcome - is certainly in question.

As reported in Quinn’s Bloomberg commentary, the Public Investors Arbitration Bar Association (PIABA), a national association of lawyers who represent investors in arbitrations against the brokerage industry, took up this matter with the Financial Industry Regulatory Authority (FINRA) last May when it asked for changes to be made in arbitration proceedings so as to avoid potential conflicts of interest. Specifically, PIABA wanted panelists who had worked for firms that originated or sold auction rate securities to be barred from arbitration hearings altogether.

That didn’t happen. Instead, FINRA, which runs the securities arbitration system, decided that an arbitrator would only be required to make additional disclosures if, after Jan. 1, 2005, “he or she worked for firms that sold auction rate securities, sold them themselves or supervised anyone who did.”As an added catch, FINRA also ruled that it would be the responsibility of the lawyers for the investors (or the investors themselves if they are going it alone) to decide whether to elect those arbitrators as part of the three-member panel.

And that can cause a host of problems during the actual selection process for the three individuals to comprise the arbitration panel. Each party in the arbitration dispute is given three lists of names, which have been created from an arbitrator pool and randomly selected via computer, according to Quinn’s article. One list contains names of industry panelists and two other lists have names of public members. Both sides can disallow, for any reason, up to four names on all three lists.

However, in that individuals involved with auction-rate securities could be in the panelist pool, investors’ lawyers are forced to use up their four challenges to strike them. After that, they are simply out of luck and must live with the names they get.

In December 2007, PIABA testified before Congress, asking that it abolish FINRA’s rule of requiring one of the three securities arbitrators to be associated with the securities industry. PIABA also requested that FINRA adopt new rules to ensure arbitrators on a panel have no ties or connections to brokerages or industry associations.

To no one’s surprise, FINRA - which is a private regulator for more than 5,000 U.S. brokerage firms - is against PIABA’s suggested reforms.

However, in an attempt to address criticism over the arbitration process, FINRA announced a two-year pilot program on July 24 that would give investors the option of having their cases heard solely by an all-public panel. Over the two-year period, 400 cases could be heard by panels consisting of investor peers. At the conclusion of the pilot, FINRA says it plans to conduct a study to determine the differences between all-public and nonpublic arbitrators, how cases settle in the two different forums and which option customers more readily choose.

So far, several major brokerage houses, including UBS, Merrill Lynch and Morgan Stanley, have agreed to participate in FINRA’s program. The first 40 clients of those firms who file arbitration cases after Oct. 6 will have the option of choosing either an arbitration panel of only public representatives or a panel with a member of the financial services industry.

Meanwhile, critics of mandatory industry panelists are calling the pilot program a long time in coming and finally a move in the right direction. Removing the industry representative component out of the three-member panel structure not only sheds the David-and-Goliath persona associated with arbitration proceedings involving auction rate securities but also is a critical and essential step to restoring faith in the process and allowing investors to believe that their voice may actually be heard this time around.

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.

Wall Street investment banks have come under fire lately, prompting U.S. Securities and Exchange Commission Chairman Christopher Cox to ask lawmakers to ramp up the agency’s authority to officially oversee them.

Cox told the House Financial Services Committee today that the nation’s biggest names in the investing world should have mandatory SEC oversight of their capital, liquidity and risk management practices. Currently, the SEC has a supervisory role over four of the largest investment firms - Goldman Sachs, Merrill Lynch, Morgan Stanley and Lehman Brothers - but it is on a voluntary basis only.

The SEC’s move to garner more oversight of Wall Street has been underway since the Federal Reserve’s bail-out of Bear Stearns in March. At that time, fears of similar scenarios playing out at other investment banks caused the Federal Reserve to open its discount lending window. Since then, the Federal Reserve has maintained that more oversight of investment banks is needed in the event it becomes obligated to lend them money again in the future.

The collapse of Bear Stearns and the U.S. subprime-mortgage market has contributed to almost $470 billion in write-downs and credit losses since the start of 2007.

Earlier this month, the Federal Reserve and the SEC formally agreed to an information-sharing pact in which the two agencies would exchange information and resources on common issues.

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.Â

The net continues to widen in the auction-rate securities probe. Now, federal prosecutors are investigating whether two former brokers from Switzerland’s second-largest bank lied to investors about how they placed their money into the short-term securities.

The investigation focuses on two New York-based brokers, Eric Butler and Julian Tzolov, who resigned from Credit Suisse Group on Sept. 7, 2007, following accusations from clients that they had been misled about the risks of auction-rate securities, which turned out to be backed by risky collateralized debt obligations (CDOs).

Both men later took jobs with Morgan Stanley, and were reportedly fired on July 7. They also had been employed with Lehman Brothers Holdings and CIBC World Markets Corp.

First reported July 9 in the Wall Street Journal, the investigation, which doesn’t target the Swiss bank, is the first criminal probe stemming from the collapse of the auction-rate market in February.

The probe into the former Credit Suisse brokers comes only weeks after Massachusetts Secretary of State William Galvin filed a civil suit against UBS for fraud and misconduct over auction-rate securities. Among the charges, Galvin alleges UBS knowingly informed investors that auction securities were “safe, liquid cash alternatives” when it knew, in fact, they were not.

In addition, Galvin charged UBS with ramping up its marketing efforts to sell auction-rate securities to various individual investors at a time when the firm’s brokers had prior knowledge that the auction market was headed for failure.

Investor problems involving the two former Credit Suisse brokers were first reported by the Wall Street Journal last fall. At the time, the two men helped run a $15 billion cash-management service for corporate clients. The service offered slightly higher yields than money funds, reaching 5% in some cases, according to the paper.

The commissions that brokers receive on auction-rate securities are typically three to four times as large as for other short-term fixed-income securities. According to the July 9 Wall Street Journal article, Credit Suisse brokers typically received a portion of 0.1% to 0.25% for auction-rate purchases, but received no commission for putting clients into money market funds. When the men left Credit Suisse last October, “their total fees and commissions for a 12-month time period reportedly were $6.4 million and prior assets under management were about $2.3 billion.”

To date, client complaints against Eric Butler and Julian Tzolov have resulted in at least two civil settlements. Records from the Financial Industry Regulatory Authority (FINRA), the non-governmental watchdog group of U.S. securities firms, show civil settlements of $7 million and $3.6 million were reached last fall. When the auction-rate market seized up in February of this year, additional complaints were filed.

Until now, the fallout from the frozen state of the auction-rate market has been civil lawsuits and individual arbitration claims. The appearance of criminal charges against two former Credit Suisse Group brokers, however, may mean the auction-rate securities debacle is headed down a new path, one in which Wall Street is forced to pay up or come up with a plan to appease investors who’ve been financially burned in the auction-rate ordeal.

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.Â

What a difference a year makes - and no one knows this better than Wall Street.

As the turmoil that began with the subprime mortgage debacle intensified and began to eat away at the credit markets over the past 12 months, major investment banks and securities firms such as UBS, Citigroup, Morgan Stanley and Merrill Lynch found themselves in precarious financial straits, taking billions of dollars in write-offs on bad investments.

Meanwhile, financial advisors and brokers had the unpopular job of placating nervous clients, assuaging fears that their investments were safe and sound. A particularly challenge feat considering the parent companies’ poor investments had left their own financial houses far from being in order.

Reporter Helen Kearney writes an in-depth article titled The Strongest Link in the June 1 issue of OnWallStreet.com regarding the health of the brokerage divisions inside the largest and most prestigious Wall Street firms. Among other things, she discusses the mounting frustration felt by financial advisors as they attempt to conduct business in today’s climate of corporate losses, deception and market failures.

The article underscores the fact that while it’s never easy to serve as the bearer of bad news, image is indeed everything. This holds true for any industry - and maybe even more so for the brokerage world, where stories of corporate meltdowns, breach of investor trust and mounting lawsuits are daily news headlines.

As Kearney’s article states, a handful of wealth management companies are taking proactive approaches with their advisors and brokers, issuing communications on what they are doing to shore up balance sheets and setting up weekly conference calls between executives and sales.

Still, brokers may be growing weary of making excuses for their companies’ missteps, with many expected to jump ship in the not-so-distant future from the most prestigious brokerage houses to an independent channel.

“The illusion of the safety that comes with working at a big firm has been shattered by the collapse of Bear Stearns,” says Philip Palaveev, a principal at Seattle-based consulting firm Moss Adams, in Kearney’s article.

The bottom line: In a financial climate that has witnessed the failure of the auction-rate securities market, the collapse of countless once-popular hedge funds and the fall of the mighty Bear Stearns, the health of the nation’s brokerage house is in need of a dire image overhaul - and fast.

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.

Investors who have been financially burned by the frozen state of the auction-rate securities market aren’t the only ones up in arms these days. Apparently, financial advisors are angry, as well, saying they believed auction-rate securities to be safe as cash because that’s exactly how the products were explained to them in company training sessions.

Now, many of these brokers and advisors are scrambling to cover themselves in the event of future lawsuits over the misguided investments, collecting company sales materials and presentations that describe auction-rate securities as safe, 100-percent liquid investment vehicles.

Auction-rate securities are municipal bonds, corporate bonds, or preferred stocks that have interest rates reset through auctions held every seven, 14, 28, or 35 days. In theory, investors typically should be able to liquidate their ARS holdings at face value during the auctions - that is until the market seized up in February 2008 and auction-rate securities became illiquid. Investors who thought they were holding safe investments that they could cash out of at any time learned the opposite to be true.

Understandably fed up, many clients have headed to court, filing individual arbitrations and lawsuits against the brokerage companies and securities firms that they say never fully explained the true risks of auction-rate securities and instead pitched them as “cash equivalents.”

Investor complaints over auction-rate securities have led state regulators from New York to Illinois to Kansas City to even Alaska to step up their inquiries into the auction-rate market and, specifically, into the ways in which Wall Street banks sold auction-rate securities investors.

In March, a nine-state national task force, headed by Bryan Lantagne, director of the Massachusetts Securities Division, was formed to look into the auction-rate problems. The Securities and Exchange Commission (SEC) also has launched an inquiry of its own.

An unraveling of the auction-rate market seemed like an impossible concept. For more than two decades, the $330 billion auction market rode a wave of financial success. Then in February, the bottom fell out as bidders failed to show up for auctions. The investment banks that once gave financial support pulled back, and news of auction failures became the fodder of daily headlines.

As a result of the auction failures, issuers of the auction bonds, including municipalities and nonprofits, faced stiff penalties in higher interest rates - sometimes as high as 20 percent. They are now either buying back their bonds or in some cases refinancing.

For retail and brokerage clients, they’ve been presented “alternatives” that include 50 percent margin loan offers against the value of their auction-rate securities holdings.

As the furor over auction-rate securities continues to grow, so too, do the lawsuits. To date, the majority of Wall Street’s major investment banks and brokerage firms, including Citigroup, E-Trade Financial Corp., Merrill Lynch, Morgan Stanley, Raymond James Financial, UBS, AG, Wachovia Corp. and Wells Fargo Investments, are the target of investor litigation over failed auction-rate securities.

The outcome of these lawsuits is anyone’s guess. Regardless, an even bigger problem now awaits Wall Street: an unprecedented crisis in confidence with investors. The unspoken bond of trust between broker and client is supposed to be sacred; once broken, it’s difficult, if not impossible, to reconstruct. It becomes a situation reminiscent of the age-old children’s nursery rhyme in which, “all the king’s horses and all the king’s men couldn’t put Humpty together again.”

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 financial woes haunting the nation’s financial markets are far from over, predict Morgan Stanley analysts. On Monday, the company advised clients to “sell the rally” in financial stocks, as it slashed forecasts for big bank earnings and warned that the credit crunch is just beginning.

In aggregate, Morgan Stanley reduced its estimates for 2008 large bank earnings by $17 billion, or 26 percent, and reduced 2009 forecasts by $13 billion.

The investment bank forecast higher loan losses and expenses, saying profits could fall even further if the Federal Reserve stops lowering interest rates. Analysts led by Betsy Graseck wrote in a report that “more capital hikes and dividend cuts (are) coming as our credit deteriorates and forward earnings decline.

“We think we are only in the third inning of the credit cycle and expect this credit cycle will be worse than (the slump in) 1990-91.”

Many on Wall Street have believed that the markets are closer to the end of the current mortgage and corporate credit crisis than to the beginning. The latest forecast by New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value, means the light at the end of the credit-crisis tunnel may not be as bright as we first thought. The turmoil of the markets is here to stay for now.

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.Â