Archive for the “Non-Profits Affected” Category

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.

Last year’s death of the auction rate securities market creating a ticking time bomb for individual and institutional investors. Finally, in August 2008, after months of holding illiquid investments that had been touted “as good as cash,” some retail investors found relief when major Wall Street firms made a pact with state and federal regulators to buy back more than $50 billion of the securities. 

But for many auction rate securities investors, the deals failed to make them whole again. In particular, institutional investors, including charitable foundations and educational endowments, are still waiting on Wall Street to come up with a resolution for the carnage created by auction rate securities and other exotic investments.

For many foundations and endowments, the erosion of their investment portfolios has done far more than hinder their ability to grow and compete. It has forced some to close their doors, while others must reduce faculty and services or raise tuition during a time when students and families are hard pressed to come up with additional financial resources for college.

A study released March 2009 from the Commonfund Institute showed that endowments at colleges, universities and independent schools saw their worst six months of performance ever recorded at the end of 2008, losing an average of 24.1%.

The problem lies with portfolios of hard-to-value and difficult-to-sell assets. Among these investments are mortgage-related securities and collateralized debt obligations (CDOs), high risk products that are not trading on viable secondary markets.  

As a result, a growing number of universities, nonprofit organizations and other entities are facing a grim reality: The value of their endowments is being pulled so far down that they’re now worth less than the original donations. In other words, they’re under water. And state laws in 24 states prohibit nonprofits from tapping into their principal.

As reported March 20 in the News and Observer, neither the National Council of Nonprofits nor the Council on Foundations keeps track of how many of its members are struggling with endowments that currently are under water. According to Harvey Dale, director of the National Center on Philanthropy and the Law at New York University, however, “it is a serious problem,” one that will only get worse if the current financial downturn continues.

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 collapse of the auction-rate securities market - and the resulting higher interest rate penalties - has caused municipal borrowers from New York to California to take flight from the once-stable $331 billion market.

Since February, more than 70 percent of the auctions sold by cities, colleges, student lenders and closed-end funds have failed due to lack of interest from investors. As a result, the auction-rate market is shrinking by at least 15 percent, or $51 billion, with states, cities, hospitals and colleges from across the country converting or planning to replace at least $43.1 billion of that debt.

Meanwhile, Chicago-based Nuveen Investments Inc., along with seven other fund managers plan to redeem $7.8 billion in taxable preferred shares, which have rates set through periodic dealer-run auctions. Specifics of the redemption have yet to be revealed.

Auction-rate securities - which are long-term bonds sold by issuers such as municipalities, student loan companies, hospitals and closed-end funds - have interest rates that reset every seven, 14, 28 or 35 days. Much of the debt is guaranteed by bond insurance companies that also backed subprime mortgage-related securities. If an auction fails to draw enough bidders, the interest rate resets to a level previously determined in documents issued at the time of the bond sale. In recent months, the interest rate resets have been as high as 20 percent, leaving thousands of would-be sellers in limbo.

For many municipal borrowers and not-for-profit organizations, the higher interest rate penalties are forcing them to exit the auction-rate market entirely, and convert auction debt to fixed-rate 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.

Soaring debt costs due to the massive failure of the auction-rate securities in the last month have driven hospitals and nonprofits to seek permission from the SEC to bid on their own bonds.

The idea is to allow hospitals, universities, nonprofits, and government agencies a way to avoid interest rates driven up by the global credit crunch by participating in auctions that set rates on their own securities. Â When auctions fail, many reset at interest rates as high as 20 percent and create millions of dollars in extra borrowing costs.

Anne Phillips Ogilby, a Ropes & Gray attorney representing 14 hospitals such as Beth Israel, Dana-Farber Cancer Institute, and UMass Memorial Medical Center, estimates that one of the hospitals she represents would have to eliminate more than 250 full-time equivalent nurses to compensate for rising costs.

Hospitals and their allies in Congress are asking the SEC to allow institutions to bid on their own securities in such situations without raising concerns they are manipulating markets. Â Such bids would allow the institutions to avoid the highest rates that kick in when auctions fail, without the expense of retiring or refinancing the entire borrowing.

Most of the hospitals are among more than a dozen Massachusetts institutions that in recent years borrowed money at variable rates to lower costs, and purchased bond insurance to make the debt more attractive to investors. Â But many of these insurers have come under scrutiny recently for the subprime mortgages they held in their portfolios, scaring off many wealthy investors who previously bid at the auctions.

So far, SEC actions are unclear.  Hypothetically, allowing borrowers to bid on their own bonds could give them the chance to drive down interest rates artificially, which is why the SEC has frowned on the practice in the past.  Unlike share repurchases by companies, bond issuers’options usually are more limited by original offering documents.

The SEC is also weighing a separate suggestion from a trade group, the Securities Industry and Financial Markets Association, that the commission not object if issuers bid on their own securities such as those that had failed to sell at auction, effectively reducing their interest rates or canceling the securities altogether.

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