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.
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