Archive for the “UBS” Category

Earlier this summer, news of auction-rate securities (ARS) settlements gave hope to millions of investors who were stuck with illiquid auction bonds following the collapse of the ARS market in February. As institutional and retail investors have discovered, however, the settlements between Wall Street firms and securities regulators contain specific clauses that make them ineligible to recover any financial losses from auction-rate securities.

A Nov. 28 article by Gretchen Morgenson in the New York Times highlights the ongoing problems for a growing number of investors who bought auction-rate bonds and who still are unable to find a solution for their problems. As Morgenson’s article points out, the terms of many of the settlements dictate that firms redeem auction-rate securities for clients who bought them between certain dates only.

For example, in the deal struck by Massachusetts securities regulators with UBS on Aug. 8, the firm agreed to the redeem auction-rate securities of clients who bought them from UBS between Oct. 1, 2007, and Feb. 13, 2008, and who moved to other firms, as well as clients who were holding any auction-rate securities at UBS on Feb. 13.

That means investors who, say, bought auction-rate securities sometime in 2006 from UBS and then moved to another brokerage firm that year would be disqualified from participating in UBS’ settlement offer.

Irene Scharf is an investor who did just that. Back in 2005, the college professor invested $75,000 in several auction-rate securities backed by municipalities. The money she invested was intended to pay for her two sons’ college education. According the NYT’s article, Scharf purchased the auction-rate securities at the suggestion of her broker at UBS. In 2007, that broker joined Smith Barney, and Scharf moved her account with him.

In the deal struck with Smith Barney, the brokerage only is required to redeem customers’ auction-rate securities that were directly bought from the firm before Feb. 11, 2008. In other words, that leaves Scharf out.

“We lived very frugally for years so I would not have to take out loans when my kids went to college,” Scharf said in the New York Times article. “I was not informed of any risk; my broker kept assuring me nothing was safer. When I asked about redeeming them, he said I’d only need to give him two or three days’ notice to redeem.”

Scharf’s dilemma is far from unique. More and more retail and institutional investors are learning that the settlements involving auction-rate securities contain specific clauses that disqualify them from redeeming their illiquid auction bonds.

As for the securities regulators that devised the settlement offers, they say they are aware of the problem and continue to work on finding a solution for all auction-rate holders.

With 2008 quickly coming to a close, that solution is long overdue.

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.

Recent lawsuits filed by two Louisiana pension funds against Citigroup and JPMorgan Chase highlight the growing concerns facing more corporate, state and municipal pension funds in the wake of the subprime fallout and ongoing credit crunch. In the case of Louisiana, the Louisiana Sheriffs’ Pension and Relief Fund and the Louisiana Municipal Employees’ Retirement System allege that Citigroup and JPMorgan misled investors in more than $29 billion of Citigroup’s securities offerings dating back to May 2006.

The proposed class-action lawsuits also name former Citigroup chairman Charles Prince and more than a dozen underwriters of the securities offerings, including units of Bank of America Corp., Goldman Sachs Group Inc., UBS AG, Barclays PLC, Deutsche Bank AG and Fortis.

The complaint, which was filed Oct. 1 in New York State Supreme Court in Manhattan, contends that Citigroup “harmed investors by causing a significant decline in the value of the securities purchased in or traceable to a series of securities offerings.” 

The suit also claims that Citigroup failed to disclose its “massive exposure to losses from its mortgage-related assets” and failed to write down the assets to properly reflect their true value.

The success of public pension funds depends on the entities that serve as the steward of the fund’s assets.  In a number of instances that are just now coming to light, that work has been severely flawed. Meanwhile, pension fund managers continue to reassure retirees and current employees that their funds are safe and the assets sufficient to pay benefits for several years.

In truth, it depends on the quality and quantity of the securities contained in the fund’s portfolio, as well as the valuation model used to determine the value of the assets. The bottom line: Many portfolios of large pension funds include a high concentration of hard-to-value and difficult-to-sell assets, including mortgage-related securities and other collateralized pools of debt. These investments do not readily trade on the secondary market. Therefore, the value assigned to them simply does not reflect their actual value.

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. 

Just when investors thought financial relief was on the way over their auction-rate securities (ARS) nightmares, yet another headache may be right around the corner. Case in point: A recent filing by UBS with the Securities and Exchange Commission (SEC), which sheds light on the convoluted and highly technical process attached to the settlement offers made by brokerage and financial firms with ARS investors.

As background, UBS is one of the two largest participants in the auction-rate securities market. In late April 2008, the Swiss-based banking giant became the focus of an investigation by the Securities and Exchange Commission (SEC), as well as state securities regulators over its marketing and sales of auction-rate securities. During the course of the investigations, evidence was uncovered showing UBS intentionally made material misrepresentations and omissions to customers in connection to auction-rate securities.

The SEC’s investigation also revealed that until the auction-rate market seized up in February 2008, UBS marketed auction-rate securities to clients as safe and highly liquid investments, characterizing the instruments as similar to money-market funds. UBS further described auction-rate securities as “cash alternatives.” 

At the same time, UBS kept investors in the dark about the liquidity and investment risks of auction-rate securities, as well as neglected to warn them that those risks would increase significantly when UBS and other firms decided to no longer support the auction market in late 2007 and early 2008.

On Aug. 8, the SEC’s Enforcement Division, the New York Attorney General and Massachusetts and Texas securities authorities announced settlements-in-principle with UBS, in which the firm agreed to purchase $19.4 billion of the controversial bonds from retail customers, small businesses, and charitable organizations at 100 cents on the dollar. Under the terms of the settlement, UBS customers with less than $1 million in auction-rate securities would get their money back by Oct. 31, while others were to receive refunds by the end of the year. The firm also was fined $150 million.

For investors who had been misled by UBS about the financial risks of auction-rate securities - and who subsequently lost their life savings because of that product misrepresentation - the buy-back news appeared to be a win for them. Now, however, it seems their headaches may be just beginning.

On Oct. 7, 2008, UBS filed what’s known as a “Form F-3 Registration Statement” with the SEC as part of the legal process in connection with its auction-rate securities settlement with investors. According to the filing, each auction-rate securities investor will receive a prospectus from UBS outlining the mechanism in which the settlements are to be implemented.

According to the prospectus - which is overly complicated and written in legalese - auction-rate securities investors will have the opportunity to exchange their auction-rate securities for one or more of seven series of auction-rate securities rights, each of which has its own terms and conditions.

Some of the terms in UBS’ auction-rate securities settlement will come as a surprise to investors. For instance:

• Perhaps most important, the prospectus clearly states that any settlement with investors is contingent on UBS’ financial resources and that, “UBS AG may not have sufficient financial resources to satisfy its obligations under the ARS rights.”

• In many cases, investors will not receive immediate payment for their auction-rate securities. Instead, they will receive “auction-rate securities rights.” These auction-rate securities rights expire between early Jan. 2011 and early July 2012 (depending on the series). Based on information in the prospectus, investors will receive a payment at par when UBS sells or disposes of the auction-rate securities received from the investor. Apparently this will happen periodically over the next two-plus years.

• If a holder purchased auction-rate securities from UBS between Oct. 1, 2007, to Feb. 13, 2008 but transferred those auction-rate securities to another firm before Feb. 13, 2008, the investor must then transfer the auction-rate securities back to the investor’s original UBS account in order to accept the offer and become eligible to receive auction-rate securities rights.

• Investors will have approximately 30 days to review the prospectus from UBS and decide whether to accept its offer.

• Accepting the offer will require investors to effectively forego any legal claims against UBS, except for claims regarding consequential damages that are subject to a special arbitration process.

• Investors may be offered auction-rate securities rights in different series, which means they will be required to complete a whole new set of forms in order to receive any settlement from UBS.

The bottom line: Investors who have been sold auction-rate securities by UBS in the past and who now agree to the company’s terms for a settlement may be in for a long and tedious process in trying to collect their money. For them and other ARS investors, this summer’s news of ARS settlements by Wall Street banks over their mishandling of auction-rate securities is by no means an end to investors’ financial turmoil.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in valuating their legal options when confronted with subprime and other mortgage-related investment losses. 

Bank of America apparently is getting ready to join Citigroup, UBS, JPMorgan and other banks that agreed to cut deals with state and federal regulators and resolve investigations into the alleged mishandling of auction rate securities sales.

On Sept. 3, Massachusetts Secretary of State William Galvin said Bank of America, the nation’s second-largest bank, must either reach an agreement with state regulators or be prepared to face legal action. On Sept. 4, New York Attorney General Andrew Cuomo followed up on Galvin’s edict, serving subpoenas to eight Bank of America executives as part of his six-month investigation on how Wall Street’s biggest banks sold auction rate securities to investors.

So far, eight Wall Street heavyweights - UBS, Morgan Stanley, Citigroup, JPMorgan Chase, Wachovia, Merrill Lynch, Goldman Sachs and Deutsche Bank - have agreed to settle claims that they marketed auction rate securities as cash-like alternatives to investors. In addition to buying back nearly $50 billion of the securities from retail investors, the banks also must pay fines totaling more than $500 million to state and federal regulators.

However, the New York attorney general says any settlements agreed to thus far do not cover any possible misconduct by individual brokers.

Meanwhile, two former Credit Suisse Group AG brokers were formally charged with violating securities laws and fraudulently selling subprime mortgages connected to auction rate securities to corporate clients.

As reported Sept. 5 on Bloomberg.com, Julian Tzolov and Eric Butler were charged on Sept. 3 for falsely representing various securities to investors as backed by federally guaranteed student loans and safe alternatives to cash or money market funds.

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.

“Nobody gets a pass.” That’s apparently the verdict from Christopher Cox, chairman of the Securities and Exchange Commission (SEC), who says investigations into the collapse of the auction rate securities market will indeed extend beyond major Wall Street investment banks to include secondary dealers who sold the securities.

Cox’s clarification follows recent criticism by smaller brokerages like Fidelity Investments and Oppenheimer & Co., which contend they should not be obligated to buy back billions of dollars of auction rate securities from investors based on the fact they didn’t underwrite the securities nor run the auctions for the securities. The big investment banks did.

Moreover, the brokerages say that when it came to knowing about potential problems brewing in the auction rate market, they were kept in the dark right along with investors.

The finger pointing over who’s at fault over auction rate securities has gained momentum in the past week after several of Wall Street’s biggest players - including UBS, Citigroup, JP Morgan Chase and Wachovia - agreed to settle claims of auction rate fraud with New York Attorney General Andrew Cuomo and buy back more than $42 billion of auction rate securities from their customers. Now, smaller brokerages say even though some of Wall Street’s larger investment banks are agreeing to Cuomo’s terms, it doesn’t mean they need to follow suit.

As reported Aug. 19 in the Wall Street Journal, secondary dealers of auction rate securities like Fidelity and Oppenheimer believe regulators should put the onus of blame for the auction market’s demise - as well as any agreements to buy back auction rate securities from investors - solely on the underwriters of the securities and the controllers of the auctions: Wall Street investment banks.

“None of the rest of the market knew about how auction dealers allegedly controlled the whole auction process for 25 years,” said Michael Decker, chief executive of the association that represents regional brokerages, in the Wall Street Journal article.

Whether regional brokers had prior knowledge about the inner workings of the auction rate process may be irrelevant. At the heart of the state and federal investigations regarding auction rate securities is the issue of whether the securities were presented and sold to investors as “safe” and “liquid” when, in fact, they were not. In many cases, investors contend brokers sold them the instruments as cash alternatives - investments they could cash out of at will.

It was only when the auction market collapsed in February - and their auction securities became illiquid - that investors learned their “cash alternative” investments strayed far from the promises of brokers.

Moving forward, the issue of culpability for smaller brokerage houses will be contingent on what regulators uncover in their investigations. Period. Interestingly, several of the brokerages mentioned in the Aug. 19 Wall Street Journal story, including Oppenheimer, E-Trade Financial Corp. and Fidelity Investments, have refused to specify the dollar amount in auction rate securities their clients hold.

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.

Just when you thought the auction rate securities ordeal might be nearing an end - and investors who’d been pitched the instruments by Wall Street as cash alternatives finally would receive their money back - think again.

In the past two weeks, New York Attorney General Andrew Cuomo has succeeded in getting several major Wall Street players - Citigroup, UBS, JP Morgan Chase, Morgan Stanley and Wachovia, among them - to pony up billions of dollars to buy back the auction rate securities they sold to investors. The catch is in the fine print of the agreements orchestrated by Cuomo: The Wall Street firms only have to pay back the auction rate bonds they sold, not the billions more they actually underwrote.

That small detail could have big repercussions for millions of investors holding illiquid auction rate securities bought through mutual fund firms or individual brokers. As reported Aug. 18 on CNBC.com, a number of regional firms and discount brokerage houses say the blame for the auction rate securities scandal rests firmly with the major underwriters of the securities - Wall Street powerhouse firms that decided to no longer support the auction rate market and dropped out entirely in February.

According to the CNBC article, the Regional Bond Dealers Association, a brokerage trade association, has written a letter to Cuomo and the Securities and Exchange Commission (SEC) in which it claims the real auction rate fraud was conducted by the underwriters of auction rate securities. The Wall Street firms dominated the auction rate market, the letter says, and sold the auction bonds to regional firms and discount brokerages with the promise to hold auctions. The brokers who sold the securities to customers contend they acted in good faith and relied on information about liquidity risks from those underwriters.

And that’s where problems arise. Many regional firms and brokers do not have the financial prowess of major Wall Street banks. Forcing them to buy back auction rate securities from investors at par value could financially bury many of them. The Regional Bond Dealers Association, in its letter to the SEC, said that the only practical solution for making investors whole is to include ARS customers of distributing firms in the settlements with large lead managers.

For his part, Cuomo reportedly stated in an Aug. 16 interview with CNBC that he has no plans to become involved in what could be a he said/she said dispute between brokers and the big Wall Street firms over who is culpable for misleading investors.

“I represent the investor,” he said, “and that’s why I’m treating this as a sales practice issue.” That’s all well and good. But until the fine print in the settlement agreements involving auction rate securities is worked out, thousands of ARS investors are no better off today than they were six months ago.

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.

When several major Wall Street investment firms - including Citigroup, UBS, Wachovia and JP Morgan Chase - agreed to settle claims of auction rate securities fraud by state and federal regulators, many investors thought their financial problems finally were solved.

As it turns out, that may not be the case. According to an Aug. 18 story on Bloomberg.com, the recent deals that New York Attorney General Andrew Cuomo struck with some Wall Street institutions to buy back billions of dollars of action rate securities they sold directly to individuals do not include investors who hold auction rate debt purchased through mutual fund firms or brokers that didn’t actually underwrite the securities.

And that leaves a lot of unanswered questions. These investors hold some $160 billion of auction rate securities.

“This is a glaring oversight,” said Jonathan Kahn in the Bloomberg article. Kahn is an investor who holds auction rate debt underwritten by Goldman Sachs Group Inc. and purchased through a different brokerage.Investors like Kahn have been in a holding pattern over their auction rate investments since February, when the market for auction rate securities seized up as Wall Street investment banks abruptly stopped offering financial support to buy the securities.

Investors, who previously had been told by their brokers that auction rate securities were cash equivalents, suddenly found themselves with illiquid investments.

Following the auction market’s collapse, several states, including New York, began looking into how Wall Street firms marketed and sold auction rate securities to investors. In August, settlements were reached with some of the biggest underwriters of the securities, with Citigroup, UBS, Morgan Stanley, JPMorgan Chase and Wachovia Corp. agreeing to buy back a combined $42 billion of auction rate securities they sold directly to individuals.

So far, about 30 companies have been subpoenaed by Cuomo’s office for their alleged mishandling of auction rate securities sales. Other states, as well as the Securities and Exchange Commission (SEC), also are involved in ongoing investigations.

Eventually, Cuomo says action against smaller brokerages will come to fruition.

But, as everyone knows, “eventually” on Wall Street could be a long time in coming. Until then, the light that so many investors thought they saw at the end of the auction rate tunnel has fallen dark once again.

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.

UBS continues to find itself in hot water over auction rate securities. Less than a week after the Swiss-based bank agreed to settle charges by New York Attorney General Andrew Cuomo of auction rate fraud and buy back nearly $20 billion of the securities, UBS is now being sued by New Hampshire securities regulators.

In the first legal action of its kind, the state accuses UBS of hatching an elaborate plan to unload its own inventory of auction rate securities by urging the New Hampshire Higher Education Loan Corp (NHHELCO) to increase the monthly interest rates the loan corporation pays - in some cases to nearly 18% from about 3.4%.

NHHELCO says that following UBS’ advice and raising interest rates to entice more investors winded up costing an additional $25.5 million, forcing the state’s leading issuer of student loans to suspend two loan programs: the alternative student loan program and the federal consolidation loan program.

Reportedly, student loan officials in Vermont and Illinois also believe that UBS used similar tactics to persuade them to temporarily raise interest rates as a way to bring in more investors. To date, neither of those two states has filed related complaints on the issue.

Student loan entities like NHHELCO are major issuers of auction rate securities. In February, investment banks abruptly pulled out of the auction rate market, no longer willing to use their own capital to buy auction rate securities. As a result, many nonprofit student loan lenders have billions of dollars of illiquid auction rate securities outstanding that were underwritten and remarketed by investments banks like UBS and other firms.

As with other state and federal investigations into the role Wall Street firms may have played in the auction rate market’s collapse and their dealings with investors, emails are a central factor in the New Hampshire charges. Specifically, the emails contend that UBS steered NHHELCO into auction rate securities at a time when it knew the market was headed for collapse and the bank’s own auction rate inventory piling up.In one email to colleagues, Ross Jackman, an UBS official, said the following: “Clearly, student loans are the problem pushing us over inventory limits.”

NHHELCO’s complaint is the first legal action to focus on the plight of issuers of auction rate securities.

UBS has 11-year relationship with NHHELCO, underwriting $1.5 billion in auction rate securities.

In the 42-page complaint filed August 14, NHHELCO says UBS’ actions ultimately prevented the New Hampshire lender from raising $70 million to fund 6,500 loans for students. This means many students heading back to college this month - particularly those needing last-minute financing - will find fewer loan options available to them. Meanwhile, NHHELCO is still paying UBS $2.5 million a year in broker fees.

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.

Image is king, and Goldman Sachs - an undisputed corporate powerhouse king that only caters to the wealthy - may have an image problem.

For the past five months, New York Attorney General Andrew Cuomo has been vigilant in his pursuit of Wall Street investment banks for their mishandling of auction rate securities sales. So far, Citigroup, UBS and Merrill Lynch all have agreed to repurchase billions of dollars of the now-illiquid securities at face value from individual investors. Other firms are said to be close to reaching similar settlements with state and federal regulators.

Goldman Sachs, however, has remained silent on the auction rate securities issue. As reported Aug. 14 in the Wall Street Journal, Goldman is a major player in the auction rate arena. Between 2003 and 2007, the firm was the No. 5 underwriter of the instruments.

When the auction rate market came to an abrupt halt in February, following an exit by Wall Street firms like Goldman Sachs which stopped serving as buyers of the last resort for the securities, investors were suddenly left holding illiquid securities. Some of those investors are Goldman Sachs clients, and they want to know what the company plans to do about their situation.

Goldman’s clients could be in for a long wait. Despite disclosing back in April that it had received requests from various governmental agencies and self-regulatory organizations for information relating to auction products and recent auction failures, Goldman has so far refused to settle the matter and, according to the Wall Street Journal article, has no intention to buy back clients’ auction rate paper.

The Wall Street Journal cites the case of Carl Everett, a Goldman Sachs client who rates the service at Goldman as top of the line - until now. Everett apparently has money tied up in auction rate securities, and faces the same situation as thousands of other investors: stuck with illiquid investments. Recent settlements by investment banks like Citigroup and UBS to resolve the matter focused on small investors, leaving wealthier investors like Everett, institutional clients and corporate buyers of auction rate securities out of the picture thus far.

Everett says that on Aug. 9 he was told by Goldman Sachs that the company would not be buying back his auction rate securities.

“That’s disappointing to me - my expectation is for the Goldman Sachs brand,” said Everett in the Wall Street Journal article. “My expectation for that is they would honor their position and statement of these securities as cash and cash equivalents.”

With Wall Street’s image already tattered and tarnished - some say beyond repair - Goldman Sachs might want to rethink its position in the days ahead.

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.

The Federal Reserve’s Primary Dealer Credit Facility (PDCF) is supposed to serve as a ‘lender of the last resort’ - intended to keep the country’s financial markets functioning properly by providing loans to securities firms at a discount.

Now the Fed’s facility could be tapped for an entirely different purpose: lending money to investment banks that are buying back illiquid auction rate securities (ARS) from investors.

According to an Aug. 11 article on Bloomberg.com, some analysts predict that Wall Street banks will turn to the Fed and its discount interest rates to finance the billions of dollars in auction securities they’ve agreed to repurchase, even using some of the ARS paper as collateral. Ultimately, banks might borrow upwards of $100 billion from the Federal Reserve, according to the article.

Last week, Citigroup and UBS became the first two firms to pony up approximately $30 billion to buy back auction rate securities from investors, as well as pay $250 million in fines. Merrill Lynch voluntarily announced its own auction rate plans shortly thereafter, agreeing to purchase $10 billion of the securities.

For the past five months, New York Attorney General Andrew Cuomo has led a nationwide investigation into the February collapse of the auction rate securities market, targeting Wall Street firms that allegedly deceived investors about ARS liquidity risks.

On Aug. 11, Cuomo turned up the heat on his investigation by strongly encouraging three major underwriters of auction rate securities - JPMorgan Chase, Morgan Stanley and Wachovia Corp - to take immediate actions to resolve investigations into their auction rate securities sales. Later that same day, Morgan Stanley agreed to repurchase some $4.5 billion of auction rate securities from investors. The offer, however, was disregarded by Cuomo, who called it “too little, too late.”

Reportedly, Cuomo, along with multiple state regulators and the Securities and Exchange Commission (SEC) are close to reaching a settlement with a number of other banks.

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.Â