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"Auction
rate preferred securities is the largest fraud
ever perpetuated by Wall Street on investors.
It dwarfs all frauds in history, including Madoff."
- Harry Newton
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July
1, 2009
Oppenheimer
Strains to Reassure ARS Clients
But June Statement Fuels Pointed Skepticism
By Phil Trupp (MVA News Service)
Washington,
July l -- Oppenheimer & Co., Inc., continues
to spell out its auction rate securities (ARS)
woes as it pitches conflicting statements aimed
at soothing its increasingly livid and totally
frustrated client base.
In
its late "June 2009 ARS Update," the
company admitted it "has been subject to
ongoing investigations" into its sale of
nearly $1 billion in auction rate securities.
But not to worry. Clients should keep fingers
crossed for a happy ending.
Oppenheimer's
"interrogators" include FINRA and "various
state regulators," whose names were not included
in the update.
Though
the company failed to name the state regulators,
it is known that two of them are Massachusetts
Secretary William Galvin and New York Attorney
General Andrew Cuomo, who may be seeking a global
settlement in the ARS scandal.
Secretary
Galvin has set a November trail date to air a
scathing list of allegations against the company,
including insider trading and fraudulent sales
of ARS as "cash equivalents."
In
a puzzling use of logic, Oppenheimer has consistently
claimed it was not an ARS market participate,
leaving its clients to wonder how the company
managed to sell nearly $1 billion in ARS paper
while not being part the market-wide $336 billion
boondoggle. This riddle was compounded by a seemingly
contradictory statement in its June 2009 statement:
"Oppenheimer,
in conjunction with other industry participants,
is actively seeking a solution" to ARS illiquidity.
In
addition to Oppenheimer's approximately $925 million
in frozen ARS paper -- the company appears not
to redeemed one nickel of ARS -- the company estimated
that various buy-backs, mostly through settlements
offraud charges by various state attorneys general,
have halved the outstanding global debt to $165
billion--$5 billion less than previous estimates
obtained by Auction Rate Preferreds.org. What
that has to do with its miserable record no one
has yet figured out. Except that Oppenheimer management
enjoys giving new meaning to obfuscation.
The
June update appears to have fueled the frustration
of Oppenheimer's ARS clients. It is a semi-ambiguous
recitation of previous remarks in which the firm
claims to be seeking pools of liquidity which
never seem to materialize.
"Since
last fall, we have been looking for a means to
begin a buy-back of ARS held by our clients,"
the company explained. "In the current environment,
there has been no lending available through commercial
sources and we therefore have looked at various
federal programs as a solution to this pressing
problem."
Oppenheimer
Trust Company recently received approval for a
change to its charter in the state of New Jersey
to become a commercial bank, a move requiring
FDIC approval.
"Unfortunately,
we now believe this option holds only limited
value in terms of providing a liquidity solution
to a large group of our clients," according
to the June update. Oppenheimer has repeatedly
fed this piece of bad news to its long-suffering
ARS holders.
"You
have to swallow the idea that the company is operating
on fumes," said one client who asked not
to be named because he believes the company is
making a list of ARS holders "who are the
squeaky wheels" -- a sort of Oppenheimer
Enemies List. The source further believes
these "squeaky wheels" will never get
the grease.
This
grim skepticism appears to be shared by other
Oppenheimer clients. Some have noted with irritation
that the firm recently repurchased 600,000 shares
of its own stock, diluting the equity float. The
company also announced expansion of operations
into the southeastern United States.
"If
they're so tight on money, they can't redeem their
ARS, what's all the expansion talk?" one
client fumed. He noted that Oppenheimer has also
crowed about hiring new high-priced talent in
order to expand its brokerage, IPO and investment
banking business.
Still
another client referred to the upcoming Galvin
trail in Massachusetts as "meaningless."
Even if the company is ordered to redeem its ARS,
"they'll turn to the federal government and
say, 'Okay, find the money for us!'."
Oppenheimer
in earlier statements said it would seek TARP
relief but later reneged on the option. The company
now claims to be working with congress and "other
industry participants" to for an amendment
to TALF legislation to include ARS as an eligible
asset class for FDIC guarantees, "which we
believe may provide a means to resolve this issue."
In
addition, the company asserted it is in contact
with the U.S. Treasury Department in an effort
to have ARS made an eligible security.
Still,
Oppenheimer clients appear reluctant to sip the
Kool-Aid.
"This
is going to fall on the taxpayer," said one
ARS victim. "Why don't they just come out
and admit they want a federal bailout?"
Oppenheimer
is clearly aware of client discontent. Its June
statement ends with an impassioned bromide: "There
is no higher priority for Oppenheimer than to
provide an ARS solution to our clients."
When
the statement was read to yet another Oppenheimer
client, she replied, "Right! Quit the talk
and show me the money!"
Oppenheimer's
publicly-traded stock has been on a tear recently.
Since its March 9 low of $6.70, it has risen to
$22.18 -- the closing price on July 1. Oppenheimer's
CEO and chairman, Albert G. Lowenthal earned $937,988,
according to figures released by the company.
June
5, 2009
Cuomo
Takes Aim at Oppenheimer;
Mid- and Downstream ARS Sellers
Also in New York AG's Crosshairs.
By
Phil Trupp (MVA News Service)
Washington,
June 5: New York Attorney General Andrew Cuomo
is investigating allegations of fraud by Oppenheimer
& Company in its sale of nearly $1 billion
in auction rate securities, Auction Rate Preferreds.
Org has learned.
The investigation has been ongoing for months,
according to various sources familiar with the
case.
In addition to Oppenheimer, these sources confirmed
that Mr. Cuomo's team of investigators is also
targeting other mid-size and downstream ARS
sellers.
Confirmation of the investigation comes as the
statute of limitations for filing arbitration
against Oppenheimer draws near. The deadline
ends February 2010.
However, the date does not apply to New York
residents.
Apparently Oppenheimer is marking time, hoping
to cut its losses when the deadline passes for
non-New York State residents, these sources
indicated.
The Attorney General's office has been besieged
by angry and frustrated Oppenheimer clients.
"We're aware of the situation," one
insider explained. He suggested that Oppenheimer
clients request an extension of the statute
of limitations. If the company declines and
digs in its heels, the AG's office will likely
speed up the investigation.
Others familiar with the investigation told
AuctionRatePreferreds.Org that Mr. Cuomo's
team will be "most interested" in
Oppenheimer's response to client requests for
deadline extensions. Clients should seek extra
time, he said.
Sources said there is "uncertainty"
surrounding the company's financial condition.
"They've been telling clients they're strapped
for cash and can't redeem their ARS," according
to one knowledgeable source. But in a baffling
high-end public relations move, the company
recently said it was buying back 600,000 shares
of its own stock and recruiting high-priced
talent.
"It doesn't jibe," the source said.
The Cuomo investigation, which has been ongoing,
apparently mirrors many of the allegations against
Oppenheimer by Massachusetts Secretary William
Galvin. The Massachusetts case is set for trial
November 4. The complaint accuses Oppenheimer
of deceptive ARS sales tactics and market manipulation
as well as insider trading of ARS by the company's
top executives.
According to Galvin, Oppenheimer CEO Albert
Lowenthal allegedly disposed of more than $1.7
million worth of ARS with full knowledge that
the auction market was about to implode.
Sources close to the Cuomo investigation were
blunt in their assessment of Oppenheimer's tactics.
"They knew what they were doing,"
according to one source. "And they knew
what they were selling-or certainly they ought
to have known."
It is understood the Cuomo team will make use
of the Martin Act. A rare legal weapon crafted
in 1921 in New York, the Martin Act grants extraordinary
powers and discretion to fight financial fraud.
Those called for questioning under the act do
not have a right to counsel or a right against
self-incrimination.
It is not known if Cuomo intends to file a global
case. Sources refused to be pinned down, but
it is understood allegations likely will be
filed before the statute of limitations winds
down.
Meanwhile, others with knowledge of the case
said Oppenheimer's legal team appears to be
in "disarray." The company's attorneys
also are facing a class-action suit filed in
the Southern District of New York against Oppenheimer
&Co., Oppenheimer Holdings, Inc., and Oppenheimer
Asset Management, Inc.
"They're overwhelmed," according to
one source. "And they're delaying arbitration."
Oppenheimer has recently reincorporated from
Canada to Delaware. Earlier, company officials
said the move would allow the possibility of
TARP relief in order to redeem frozen ARS. Then
the company inexplicably changed course, saying
TARP was an inappropriate venue. It indicated
it would seek TALF relief, but this program
also is seen as inappropriate.
Oppenheimer was not available to comment on
this story.
CEO
Albert G. Lowenthal received $5,876,510 from
Oppenheimer in 2007. See the next story, also.
June
2, 2009
Advice
& Encouragement to Opco Victims
By
Phil Trupp (MVA News Service)
We
recently asked Oppenheimer ARS victims to send
us their stories. The response was overwhelming.
While each story was unique, the similarities
were striking. Rather than publish each response
(it would amount to half of War and Peace) we've
culled the central points and respectfully offer
the following advice to long-suffering victims
of Opco's ARS scam:
+
Your fate is 100% in your hands. No matter
what they tell you, they will absolutely not help
you. In fact, they will never help you get your
ARS money back. Oppenheimer ranks at the top of
our worst-of-the-worst list.
+Get aggressive and stay aggressive. Inundate
your broker, the broker's manager, and Opco's
top corporate weasels, Albert and Robert Lowenthal
with e-mails, letters and phone calls outlining
your case, and don't spare the details or the
outrage. Squeaky wheels get the grease, but only
if they keep on squeaking.
+ Use facts in all correspondence. Lots
of them. Let Opco know FASB and NASD ruled that
ARS can not be defined as "cash equivalents,"
and that having done so, Opco committed fraud.
+ Tell Opco you're aware that fraud cases have
been filed against them. Brush up on the latest.
Go Online and read Massachusetts AG William Galvin's
complaint. There's enough ammunition there to
make you an authority on Opco's insider trading
and its deceptive sales tactics. You might also
inform Opco that New York AG Andrew Cuomo may
soon file a complaint seeking a global settlement.
Copy your e-mails to legislators, AGs, the House
Financial Services Committee, FINRA and SEC. Create
a huge paper trail.
+ It's your money! It was stolen from you.
Insist, demand, confront. Tell them you want your
money back! Tell them more than once and don't
be genteel about it. You don't use political correctness
when dealing with thugs.
+ Write a letter to the editor of your local
newspaper. Follow up with a phone call. Ask
why your financial reporter isn't covering the
ARS scandal. After all, there's still nearly $200
billion in frozen cash unchallenged and tens of
thousands of weary victims. That's enough money
to clear California's debt! Again, use facts.
Make them red hot. Tell your newspaper that while
Bernard Madoff was a cheap swindler who made off
with $65 billion, you are the victim of "institutional
fraud," fraud on a scale which at it's apex
($336 billion) amounted to 2 percent of annual
GDP. If you can't get the press' attention, start
picketing Oppenheimer's offices. Call your local
TV stations and tell them there's a demonstration
outside Oppenheimer's offices. A hunger strike
would get you a lot of attention on the 6 P.M.
local news
+
The telephone hasn't gone out of style. Use
it to call your broker and other co-conspirators.
Call often. Keep repeating: "I want my money
back!" Make the lives of the Opco weasels
as miserable as they've made you. Squeak, squeak,
SHOUT!
" Threaten to sue your broker, Opco, the
local Opco manager.
+ Don't let them intimidate you. There's
been a lot of that going on. Do not be bullied.
Old boxing axiom: "It ain't what you dish
out that always wins, it's how much you can take!"
Dish it out and show them know you can take the
best they've got.
" When demanding the return of your stolen
cash, remind Opco that the company recently announced
it was sufficiently capitalized to buy back shares
of its own stock and was hiring high-priced personnel.
Let them know you won't fall for the lie that
Opco can't afford to repay its ARS victims. Why
did they turn away from TARP? They implied they
were going to use TARP money to redeem the ARS
monies. But then they changed their mind - without
any explanation.
+
The regulators are your friend -- but only
if you take them a well-documented story, with
facts, dates, etc. .
May
30, 2009
Attention
Oppenheimer ARS holders
Where
are your guts?
You
believe that Oppenheimer will redeem your auction
rate securities if you shut up and don’t
go public with your story?
You’re
living in fantasy land.
Here are the facts:
+
Oppenheimer has announced absolutely no plans
to redeem your auction rate securities.
+ The company is spending millions of your dollars
buying back 600,000 of its own shares, opening
new offices, including in New York, and hiring
hugely expensive new employees.
+ Oppenheimer's brokers told their clients lies
after lies about where their money was invested
and what their money was invested in. The brokers
never mentioned auction rate securities. They
talked about "cash management."
+
Oppenheimer invested their clients monies in auction
rate securities in contravention of their clients'
own wish for safety and liquidity.
+
Oppenheimer invested its clients money into auction
rate securities for one reason – it gets
paid fees on selling these securities. It didn’t
get fees if it invested its clients money into
safe money market funds which is what its clients
assumed their monies were invested in. The company
is still collecting fees from the issuers
of auction rate securities on your nearly $1 billion
in frozen auction rate securities.
+ Oppenheimer knew there were problems with auction
rate securities as far back as 2005. Even after
FASB and the NASD ruled that auction rate securities
didn't meet the requirements for "cash equivalents,"
Oppenheimer continued to misrepresent them, using
terms such as "floaters" to mislead
clients. It didn’t tell its clients of the
problems nor the risks. It assured all of them
they were being invested in cash-like securities--"safe
as it can be." A complaint against Oppenheimer
by the State of Massachusetts says "substantial
disruptions" occurred in the ARS market during
the summer of 2007, but "Oppenheimer largely
ignored them, intentionally choosing not to inform
all of its Financial Advisers (FAs) or their clients
of the failures." The state added, "They
(Oppenheimer) blissfully pocketed millions of
dollars in revenue while failing to adequately
research and substantiate their sales representations--representations
that proved to be inaccurate and which led to
investors losing access to hundreds of millions
of dollars in assets."
+ Oppenheimer's top brass have been accused by
Massachusetts AG William Galvin of insider trading,
dumping their ARS holdings with full knowledge
of the impending market meltdown. Galvin has alleged
that among those inside-trading executives was
CEO Albert "Bud" Lowenthal, who unloaded
$1.75 million in ARS between January 29, 2008
and February 12, 2008. Others named by Galvin
are COO Larry Spaulding ($700,000), Greg White,
managing director of the ARS department ($300,000),
Louis Gelormino, ARS Desk Supervisor ($75,000).
Now
Oppenheimer is threatening its clients that if
they go public with their story – like telling
this column or the Wall Street Journal how they
were cheated – they’ll never get their
money back. This tactic might have been reasonable
if Oppenheimer was organizing to your ARS redeeemed.
But they have no plan and have done nothing. It's
been over 15 months since the auction rate securities
markets seized up. Honest companies like Deutsche
Bank have redeemed the ARS they sold their clients.
Oppenheimer has done nothing.
Please
recognize Oppenheimer & Co. , for what they
are – the worst of the worst. A brokerage
firm with little conscience and littlle honesty.Their
ethics is money out of your pocket into their
pocket.
The
only way you are going to get your Oppenheimer
auction rate securities is if you go public. Tell
the world you story. Put pressure on the regulators
to go after Oppenheimer. Stop clients dealing
with Oppenheimer. Email us 
or Phil Trupp, who is closely tracking the Oppenheimer
fiasco. His email address is PZBAR@Comcast.Net.
May
26, 2009
Opinion
Oppenheimer
Makes For Great Fiction.
Only the Truth is Stranger;
The Characters Are Real.
By Phil Trupp (MVA News Service)
What
makes the Oppenheimer story read like a crime
thriller? Or more to the point, why do so many
former clients describe the company as the corporate
incarnation of Tricky Dick Nixon?
To comb through the messy details of the formal
complaint filed against Oppenheimer & Co.,
and its top executives by Massachusetts Secretary
William Galvin is a little like wading through
a surreal scam dreamed up by Elmore Leonard with
Watergate tossed in for a back story.
The plot is at once fascinating and repulsive,
animated by characters who turn out to be amusing
in a creepy way. One can imagine the company's
top brass, Albert Lowenthal, Robert Lowenthal
and Greg White, alleged inside traders of auction
rate securities, giving us the Nixon laser stare
and growling, "We are not crooks!"
We'll see about that. As for rumors of a widow
who was scammed in 2007, I'll get to her.
But first let's admit it: No matter how soft hearted
we may be, there's nothing lovable about the apparent
disdain with which Oppenheimer and its miniature
Masters of the Universe have dismissed the pain
auction rate securities investors have been feeling.
The company is holding on with what amounts to
a death grip to nearly $1 billion in frozen
ARS paper, ginning up the fury of its clients.
And these frustrated investors are angry with
good reason. They say they were lied to and told
by Oppenheimer that ARS was as good as actual
cash -- this despite contrary rulings by leading
authorities such as FASB and NASD. But never mind.
Accounting rules didn't stop Oppenheimer's dodges
and feints which in reality appear incredibly
hollow.
Following the collapse of the auction rate market
in February 2008, Oppenheimer & Co. did a
dramatic geographical bob-and-weave reminiscent
of Nixon's trip to China. With a flourish Oppenheimer
raised a brand new flag. Shareholders approved
reincorporation from Canada to Delaware. This
was supposed to place the company in line for
TARP relief designed to make its ARS clients whole.
Sounds good, right? A rare glimmer of corporate
conscience? But wait. There's a twist.
Reincorporation was approved. It seemed the clouds
would part for ARS investors. But Oppenheimer
shrugged off TARP with the obtuse reasoning that
characterizes much of what passes for smarts in
the world of broker-dealers.
After dissing TARP, the company then suggested
it might opt for other government relief, once
again signaling hope. It teased its auction rate
victims by spinning the possibility of getting
help from the Term Asset-Backed Loan Facility
(TALF). This was another questionable if not entirely
false move. TALF issues asset-backed securities
collateralized by student loans, auto loans, credit
card debt and loans guaranteed by the Small Business
Administration. Too bad ARS is invisible in the
mix.
I have received hundreds of emails from disgruntled-even
desperate- Oppenheimer clients. It's about time
they had their say.
About the widow I mentioned earlier: Some correspondents
claim the company victimizes elderly people. In
researching this particular accusation, I found
more than a few references to a July 2007 action
in which Oppenheimer was fined $1 million by Massachusetts
regulators. At the center of the claim was the
company's apparent failure to supervise an FA
who duped a widow and her dying husband out of
their savings.
The firm minimized the incident, which included
$350,000 in forged checks, and allowed the offending
broker to stay on at the firm until he resigned
a year later. One can only assume top-notch talent
is hard to find.
Oppenheimer also was accused in this case of making
"false and misleading" statements and
withholding evidence from state regulators. The
victimized now-widow hired an attorney and filed
claims in arbitration. Oppenheimer's response:
The woman "only has herself to blame for
any losses or other injury she may have suffered."
The Massachusetts regulator was stunned by the
callous blaming of the victim. "I guess the
message is that anybody stupid enough to invest
with Oppenheimer & Co., gets what they deserve,"
he said. "That's the only way to read a statement
like that."
This might seem an isolated incident if it weren't
for the reams of complaints which come my way
almost daily. For starters, you don't need to
be "stupid" to be victimized. After
all, the global $336 billion ARS scandal (that's
2 percent of annual GDP) trapped 146,000 victims.
Most of them are smart, successful people. Their
only fault was to trust. And Oppenheimer in particular
seems to have a nasty habit of stomping on trust.
I have never been an Oppenheimer client. And from
the tone of the emails and other messages I get,
I think I'll keep my distance.
Here's an example of one of those e-mails from
Oppenheimer victim Brad Dickson, an author and
comedy writer:
"Oppenheimer grotesquely misrepresented the
product (ARS) at point of sale. But it goes beyond
that. I think a company has a certain fiduciary
responsibility to the client post-market collapse.
In the 16 months since the ARS market froze, Oppenheimer
has barely responded to my emails and calls asking
what they're doing to rectify the problem.
"As far as I can ascertain they have not
put even the tiniest bit of pressure on the issuers
to make this good. They've done nothing but stonewall
clients and treat us like dirt, and potential
Oppenheimer clients need to know that this firm
is not to be trusted…If I had it to do over
again, I wouldn't give Oppenheimer a nickel of
my money. I've never seen a company with such
a dismissive attitude toward its customers."
Another correspondent who wished to remain anonymous
wrote:
"I believe this week marks the six-month
anniversary of that scathing complaint filed by
(Massachusetts) against Oppenheimer…The complaint
contained many harsh allegations of insider trading
and (company) execs misrepresenting and unloading
their personal ARS holdings in advance of the
meltdown, and laid out tons of evidence and internal
e-mails apparently proving pretty much all the
allegations and-six months later, we're still
waiting to hear something-anything-more."
Another correspondent wrote of selling her home
in California with plans to move with her husband
to Hawaii and start a business there. She placed
the proceeds of the sale with her Oppenheimer
FA, who in turn placed her money in ARS.
"He (the Oppenheimer broker) told us the
account would act like a money market but with
a better return," she wrote. "He called
them (ARS) 'floaters' because the interest rate
reset weekly. The term 'auction' was never used…"
Then the market froze. Plans to relocate to Hawaii
were dashed.
"Luckily we had some friends visiting us
from San Francisco who had corporate backgrounds.
They immediately rallied us to get info on what
we actually owned…They loaned us money, and
if it hadn't been for them, we would have become
destitute…The FA now refutes our comments
and states we were completely aware and informed
on the…market…The amount of stress we've
gone through is indescribable."
Other correspondents have equally unpleasant experiences
to recount:
"Canada gets rid of Oppenheimer and collects
$2 million as they exit. The U.S. gets another
corrupt financial firm. Just what we needed. Hopefully
by the end of the year, Oppenheimer & Co.,
CEO and other top executives will be in jail and
their auction rate victims will have their money
back."
By now, I suppose, Elmore Leonard would have developed
the character of the super-cop. The following
note would have mysteriously crossed his desk,
as it did mine:
"The United States should under NO circumstances
allow this company to do business here until they
have paid back the money they defrauded from auction
rate securities victims. They are operating with
money that doesn't belong to them-raking fees
off fraudulent investments-and denying the claims,
the same that UBS and Citibank and others settled
long ago. U.S., don't let this criminal corporation
in!"
Too late, I'm afraid. Oppenheimer & Co., is
now part of the murky broker-dealer mix.
The company is optimistic, even cheery, holding
its presence out to be a shining beacon for top
talent and profit-starved investors.
In a May 2 memo, Oppenheimer crowed, "…We
are seeing unprecedented interest in our firm
by highly qualified professionals who are looking
for an understandable culture that provides a
significant competitive infrastructure coupled
with highly understandable and attractive compensation
practices."
Yes, it's garbled prose, typical of some MBA's
twisted romance with three syllable words. But
let's not overlook the beacon, Oppenheimer's chest-thumping
optimism, as the memo continues:
"It has never been more important for us
to be in touch with our existing clients, counseling
them on their investments, and, equally important,
seeking new clients who are adrift in this uncertain
period…We move forward together as U.S. company,
with a strong franchise and untarnished brand."
Oppenheimer & Co., will face Massachusetts
Secretary William Galvin's fraud charges November
4. The official allegations repeat what so many
correspondents have said: "(Oppenheimer &
Co.,) significantly misrepresented not only the
nature of ARS, but also the overall stability
and health of the ARS market…" while
the company's top executives secretly dumped their
soon-to-be frozen ARS holdings.
Until a conclusion is reached in the case we can
neither confirm nor deny Oppenheimer's guilt.
But, hey, no matter how it all turns out, let's
not lose sight of the love. Like Elmore's "LA
Confidential," every twisted mystery needs
a love angle.
Oppenheimer did not return calls seeking comment.
May
21, 2009
Muni
Specalists Endorse "Enhanced Liquidity"
Proposal;
ARS-ARPS Cited as Credit Market Distortions
By
Phil Trupp (MVA News Service)
Washington, May 21: More than a dozen finance
specialists today told the House Financial Services
Committee the 2007-2008 implosion of the auction-rate
securities market played a role in setting off
a chain reaction that distorted municipal credit
and created havoc over wide range of credit instruments.
At a hearing to review proposals to improve the
efficiency and oversight of municipal finance,
witnesses described a weakened municipal market
and called for increased oversight of financial
advisors and municipal market practices.
The house committee has proposed the Municipal
Market Liquidity Enhancement Act of 2009, (MMLEA)
a mechanism authorizing the Federal Reserve to
purchase variable rate demand notes (VRDN) and
to refinance ARS and other short-term municipal
paper. The Fed would become a virtual Liquidity
Central for troubled short-term municipal debt.
Outlining the fallout around last year's ARS market
meltdown, Dallas Mayor Thomas C. Leppert, speaking
on behalf of the U.S. Conference of Mayors, cited
a Bank of New York Mellon study estimating that
municipal issues will decrease by $48 billion,
"a decrease comparable to eliminating all
highway and transit spending for one year,"
Mayor Leppert said.
He endorsed proposed legislation, saying it will
allow local governments with strong credit ratings
to leverage significant infrastructure assistance.
He also called for municipal bond insurance enhancement.
David W. Wilcock, deputy director of research
statistics for the Federal Reserve's Board of
Governors, said the ARS-ARPS market's lack of
an "explicit contractual liquidity backstop"
amounted to a fatal flaw. It was this problem,
he explained, that infected a variety of floating
debt instruments and caused broad credit disruption.
Market stresses have caused municipal bond insurance
to decline from 50 percent in fall 2007 to approximately
10 percent today. Mr. Wilcox noted that liquidity
support for variable rate demand obligations (VRDO)
has become expensive, "while support for
ARS has virtually disappeared." VRDO short-term
rates are currently below one percent, he said.
"Although the market for fixed rate municipal
debt is functioning fairly well, the markets for
floating rate municipal debt are in serious condition,"
he said.
The Fed official said many municipalities have
reportedly refinanced ARS into VRDOs or more traditional
fixed rate debt, "bringing down substantially
the volume of outstanding in the ARS market."
In an apparent slip-up in his calculations, Mr.
Wilcox said outstanding ARS amounts to approximately
$80 billion, a figure far below the estimated
$170 billion-$200 billion in frozen debt-this
18 months after the February 2008 collapse of
the market.
Despite the low rates for VRDOs, "market
participants report that the cost of liquidity
support from banks has risen sharply," Mr.
Wilcox told the committee. "Demand for VRDOs
has reportedly been so weak," he explained,
that the instruments have been turned into so-called
"bank bonds." These bonds present their
own difficulties. They must confront the possibility
of having to amortize debt over very short periods
of time.
A new twist is outlined in the administration's
second Stimulus Package which includes authorization
of "Build America Bonds." These will
give issuers of taxable municipals a 35 percent
federal rebate on interest costs.
Michael J. Marz, vice chairman of First Southwest
Co., indicated that distortions traceable to the
liquidity and credit crunch were exacerbated by
the ARS debacle.
"Some sectors of the municipal market are
still quite distressed," he explained, adding
that "friction" among the sectors is
"causing significant fiscal pain for states
and localities and investors."
Mr. Martz noted that a large volume of ARS remains
outstanding where states and other borrowers have
been unable to refinance to alternative forms
of credit.
He said the committee's proposed legislation will
offer targeted, temporary federal assistance to
help states and localities until the credit picture
returns to normal.
"In January 2008, $330 billion in ARS were
outstanding," Mr. Martz continued. "A
significant volume of these securities have been
refunded and restructured-but nearly $200 billion
remain outstanding."
Some state and local governments have restructured
ARS debt, "curing the problem of high penalty
rates," Mr. Martz said. However, many municipal
and closed-end funds remain illiquid. Mr. Martz
said student loan-backed ARS remain locked down
with little hope of immediate resolution.
It's a kind of toxic closed circuit, he said.
Buy-backs of illiquid paper simply transfer illiquidity
problems from investors to dealers, many of whom
may be facing their own liquidity crunch.
It has been suggested that the Fed expand the
MMLEA to address non-municipal sectors of ARS
and ARPS as well as student loans.
Ben Watkins, director of bond finance for the
state of Florida, endorsed MMLEA and bemoaned
the double-digit rates still being paid by ARS
resets. The proposed legislation also was backed
by Bernard Beal, president of MR Beal & Co.,
and vice chairman of the Securities Industry and
Financial Markets Association (SIFMA).
Sean Egan, managing director of Egan-Jones Rating
Co., had harsh words for MBIA, Inc., the credit
rating agency.
"They (MBIA) face risks over the next couple
of years," Mr. Egan said. He claimed MBIA
is not an AAA-rated business.
The ease of AAA ratings, he added, "misled
investors" into making "dangerous mistakes."
AAA ratings embellished the ARS market and played
a large role in the overall deception of investors.
Mr. Egan said the so-called "compensation
model" of rating securities amounted to a
sure means of inflating their value. The compensation
model is one in which issuers of securities pay
for the golden seal of AAA approval.
"The only real reform for the ratings industry
is to return to the…business of representing
those who invest in securities, not those who
issue them," Mr. Egan concluded.
Friday,
May 15, 2009
About
Time: Virginia sues Stifel, Nicolaus & Co.
over auction rate securities
St. Louis Business Journal - by Greg Edwards
The
state of Virginia is suing Stifel, Nicolaus
& Co. over its sale of auction rate securities
to investors there. It is similar to a suit
filed in March against Stifel by Missouri Secretary
of State Robin Carnahan.
The
suit contends Stifel, an investment firm based
in St. Louis, sold $8.4 million worth of auction
rate securities (ARS) to Virginia investors
while representing that they were as liquid
as cash. “Retail clients were systematically
and routinely informed that ARS were safe, conservative,
liquid investments equivalent to cash or money
market funds, a misleading and improper classification,”
the suit said.
Stifel
denies any wrongdoing and has offered to repurchase
the securities over three years, the same offer
that it made to Missouri investors, which Carnahan
deemed inadequate.
“Investors
across the country have been harmed by Stifel’s
refusal to provide immediate relief to their
clients holding auction rate securities,”
Carnahan said. “Virginia’s action,
along with ongoing investigations in several
other states, reinforces that Stifel customers
should not have to wait over three years for
the immediate relief that so many other firms
have already provided to their clients.”
May
11, 2009
This
company is total garbage. Oppenheimer has so
far stiffed its retail customers $930 million
in auction rate securities. It told everyone
lately it was moving to the U.S. so it could
get TARP money in order to redeem the auction
rate securities its brokers sold its retail
customers. Now it doesn't want the TARP money....
but about its poor retail customers who got
sold a large bill of goods? No mention. This
gives disgusting behavior a whole new meaning.
-- Harry Newton
Oppenheimer
Shareholders Approve Reincorporation in Delaware
By Miles Weiss
May
11 (Bloomberg) -- Oppenheimer Holdings Inc.’s
shareholders approved its reincorporation from
Canada to Delaware to gain greater access to
U.S. capital markets and bailout funds.
Oppenheimer
Holdings, the Toronto-based parent to Oppenheimer
& Co. of New York, said the reincorporation
proposal was approved by investors holding 85.8
percent of its shares outstanding, with 5.8
percent opposed. Owners of the company’s
Class A and Class B shares voted together as
a single class.
The
domicile change originally was intended in part
to give Oppenheimer Holdings access to U.S.
government bailout funds, a possible source
of cash to pay claims by clients holding frozen
auction-rate securities. The company filed a
preliminary application for the bailout program
in November. It may no longer seek that money,
Chief Executive Officer Albert Lowenthal said
in an interview.
“We
think domestication in the U.S. would be helpful,
but we are not sure TARP would be helpful,”
Lowenthal said, referring to the $700 billion
Troubled Asset Relief Program. “The TARP
funding has become better defined now than it
was in the October-November period, and it doesn’t
show a clear path to resolution of auction-rate
issues.”
Oppenheimer
Holdings said reincorporation in Delaware would
make it more clearly identified as a U.S. company.
In turn, that would make it easier for Oppenheimer
to raise capital in the U.S. through steps such
as selling stock or bonds.
Company’s
Roots
Oppenheimer
Holdings, formerly Fahnestock Viner Holdings
Inc., owns Oppenheimer & Co., the brokerage
already incorporated in Delaware, as well as
Oppenheimer Asset Management Inc. Oppenheimer
& Co.’s roots date to the late Leon
Levy and Jack Nash, founders of the hedge fund
Odyssey Partners LP.
The
parent company’s retail clients were stuck
with about $930 million of auction-rate securities,
typically long-term bonds or preferred shares
whose interest rates are set at auctions run
by broker-dealers. Wall Street companies marketed
the securities as a cash equivalent that offered
higher yields than conventional money-market
funds.
May
8, 2009
"Liquidity
Facility" Proposal to be Reviewed;
ARS, Other "Credit Issues" Targeted;
Congressional Hearings Slated May 21.
By Phil Trupp (MVA News Service)
A
proposal authorizing the Federal Reserve Bank
power to create a "liquidity facility"
dealing with auction rate and other variable
rate notes was announced today by House Financial
Services Committee Chairman Barney Frank (D.,
MA).
Review
of the proposed legislation is scheduled for
May 21.
The
liquidity facility has been discussed behind
closed doors for at least two months. Today's
announcement was good news to frustrated ARS
and ARPS investors left holding an estimated
$170 billion in frozen assets. When the auction
rate securities market collapsed in February
2008, some $336 billion was frozen overnight,
leaving 146,000 investors stuck with illiquid
paper.
The
Liquidity Facility proposal is part of the house
committee's ongoing review of the financial
industry. Rep. Frank said the committee also
will focus on investment advisers of municipalities.
Speaking
before a meeting of the Financial Industry Regulatory
Authority, Inc., in Boston, Rep. Frank said
the proposal will establish a "fiduciary
standard" for municipal financial advisers
and give the Securities and Exchange Commission
new powers to police them. He also called for
creation of a reinsurance mechanism for mono-lines
dealing exclusively in municipal finance.
Rep.
Frank told his audience that the house committee
proposal seeks a "globalization of the
ratings system" for both corporate and
municipal debt.
The
legislation comes in part out of ARS hearings
by the House Financial Services Committee held
last September. Those hearings were a disappointment
to many investors left holding illiquid auction
rate bonds. No proposals to aide ARS-ARPS investors
were announced following 3-1/2 hours of intense
testimony, and relief has only been hinted at
until now.
"We
were tied down with so many problems, we couldn't
act last year," a committee source told
Auction Rate Preferreds. Org. "Now we are
moving forward."
The
proposed legislation comes in direct response
to credit market problems, including auction
rate securities, the source explained. A number
of issuers of municipal debt were invested in
variable rate paper, demand notes and ARS-ARPS.
At
the same time, Rep. Frank said the White House
expects to sign sweeping and comprehensive regulatory
reform by the end of the year.
Votes
on the proposed Liquidity Facility legislation
will begin next month. The committee will also
undertake creation of what Rep. Frank called
a "systemic risk regulator" linked
to a resolution authority to dissolve non-bank
institutions.
The
newly proposed financial authorities will work
within existing federal regulatory framework.
The systemic risk regulator "will not displace"
or diminish the role of FINA, Rep. Frank said.
He
said the new authority will have power to be
emphatic and nimble, with the ability to "step
in and cover" financial flare-ups. The
authority, the details of which will be disclosed
next week, will have a regulatory handle on
leverage, reducing it when necessary.
Rep.
Frank said the federal government will stay
out of the business of executive compensation.
However, there will be a proposal to give shareholders
more power-a "say on pay" vote on
executive compensation packages.
May
7, 2009
Four
brokerages to repurchase auction rate securities,
pay $550K in fines
With the settlements,
Finra has now settled ARS charges with nine
firms
By Mark Bruno, InvestmentNews
The
Financial Industry Regulation Authority Inc.
has reached an agreement with four brokerage
firms to repurchase $554 million in auction
rate securities from clients, and also pay a
combined $850,000 in fines to settle charges
that they misled investors by marketing these
debt instruments as risk-free.
Cleveland-based
NatCity Investments Inc. was fined $300,000;
Buffalo-based M&T Securities Inc. was fined
$200,000; Philadelphia-based Janney Montgomery
Scott LLC was fined $200,000; and M&I Financial
Advisors Inc., which is based in Milwaukee,
was fined $150,000, New York and Washington-based
Finra revealed in an announcement today.
As
part of the settlement, these brokerages neither
admitted nor denied the charges brought by Finra,
according to the announcement.
With
this latest round of settlements, Finra has
now settled auction rate securities charges
with nine firms.
Combined,
these firms have paid more than $2.6 million
in fines to the authority, and have agreed to
return more than $1.2 billion to investors who
purchased the instruments.
May 6, 2009
The
farce called FINRA has no shame.
by
Dan Solin, author of the bestseller, The
Smartest Investment Book You'll Ever Read
Posted
on the Huffington Post: The Financial Industry
Regulatory Authority (FINRA), is the "non
governmental" regulator for U.S. securities
firms. FINRA runs the mandatory arbitration
system for the resolution of all disputes between
brokers and their clients. Many believe (and
I am one of them) this process is biased and
rigged against investors.
FINRA's
Board of Governors is a who's who of the securities
industry. Prudential, Merrill Lynch, Pershing
and other industry insiders are well represented.
They "govern" their fellow brokers
the same way the SEC "governed" Bernie
Madoff.
FINRA's
kangaroo court is currently processing cases
brought by investors who purchased auction rate
securities. These investors were told ARS were
"as good as cash." It turns out the
markets were rigged (much like FINRA's arbitrations)
by the market makers, who made huge underwriting
profits packaging and selling these "investment"
products. The ARS markets froze in February,
2008 leaving investors holding more than $100
billion.
We
now learn that FINRA itself bought more that
$860 million of ARS. Unlike investors who are
stuck with these bonds, FINRA dumped all its
holdings less than six months before the market
for them froze up.
What
remarkable foresight!
FINRA
is the ultimate insider. Is it really possible
it did not know the market for ARS was in deep
trouble when it got rid of its ARS?
In
October, 2007, Mary Schapiro, formerly the head
of FINRA, gave a speech in which she said that
"individuals bought auction-rate securities
even as institutional investors were dumping
their shares." Shapiro posed "the
question" as follows: "Was that information
freely shared with individual investors?"
At
the time, FINRA's own sale of its ARS was not
publicly disclosed.
Ultimately,
it will fall to the SEC to investigate the propriety
of FINRA's conduct. That could present a problem.
Mary Schapiro is now the head of the SEC. How
vigorously will she investigate her own behavior?
In
the meantime, gullible investors will proceed
with their FINRA arbitrations, clinging to the
false hope of a fair hearing.
And
pigs will fly!
May
4, 2009
Credit
Suisse Ex-Broker Likely to Plead Guilty in Auction
Rate Fraud Case
By AMIR EFRATI, The Wall Street Journal
Julian
Tzolov, a former Credit Suisse Group broker
accused last year of deceiving investors about
investments known as auction-rate securities,
is expected to plead guilty to fraud charges,
his lawyer said in a court hearing last month.
If
Mr. Tzolov pleads, it would mark the first criminal
conviction stemming from the auction-rate securities
mess, in which hundreds of thousands of investors
were left holding billions of dollars worth
of securities they couldn't easily sell.
Federal
prosecutors in Brooklyn, N.Y., last year brought
charges against Mr. Tzolov and a former colleague
at Credit Suisse, Eric Butler, alleging they
marketed to clients auction-rate securities
backed by student loans, but instead used client
funds to purchase riskier auction-rate securities
backed in part by subprime mortgages, which
brought in higher commissions for the brokers.
The
market for those riskier securities, whose interest
rates reset at periodical auctions, collapsed
starting in 2007 and they have lost much of
their value. Prosecutors said clients lost as
much as $500 million from the alleged fraud.
At
the hearing, Mr. Tzolov's lawyer, Benjamin Brafman,
said his client expected to resolve the case
before trial, which is set for June.
The
announcement came after prosecutors told the
court they had evidence Mr. Tzolov, a native
of Bulgaria, lied in his application to become
a U.S. resident. It's unclear whether Mr. Tzolov
will testify against Mr. Butler as part of an
eventual plea agreement with prosecutors. Greg
Andres, the prosecutor handling the case, declined
to comment, as did Paul Weinstein, a lawyer
for Mr. Butler.
Credit
Suisse has said it cooperated with authorities.
May
1, 2009
Opinion:
FINRA
Knew and sold its ARPs Before the Auctions Froze
-- Update 1
By
Phil Trupp (MVA News Service)
We
make a big fuss about bank robbers. But what
about banks robbing us?
We have come to expect taxpayer rip-offs, and
now we find disturbing evidence that the cops
helped the crooks pull off the auction-rate
securities heist.
FINRA,
the bank-owned regulator, sold more than $862
million iARS it owned right before the
market collapsed. What did FINRA know that we
didn't? And why did a high-ranking congressional
economist call the market collapse a "scripted
failure" following only one day of hearings
last September by the House Financial Services
Committee? Clearly there was method to the ARS
"script," and each day we find new
ghost-written clues.
Let's
begin with the most obvious. After examining
dozens of class action suits, and following
interviews of leading attorneys, I find a one
size fits all sales pitch scripted carefully
as a bad sit-com, with only slight variations,
and no laughs. For example, the details of ongoing
class action suits by San Francisco-based Girard
Gibbs against Wells Fargo, Raymond James, and
Deutsche Bank depict a course of conduct by
the banks that is consistent with the allegations
in virtually all other law suits which have
appeared since February 2008, when the auction
rate securities market tanked and ARPS owners
were stuck with "cash-equivalent"
securities that weren't.
By
now readers are painfully aware of the deceptive
methods by which these bonds were sold. There
was a clear plan, a lock-step sales pitch designed
to deceive 146,000 otherwise smart investors.
The scam worked because the broker-dealers spoke
with a single voice. Investors wondered: could
so many Wall Street gurus and how could so many
CFOs of public companies be wrong?
We
have since been made aware of massive insider
trading of ARS and ARPS when the market was
set to fail. The spectacle of dumping soon-to-be-illiquid
bonds into investor portfolios might make a
conspiracy theorist look sage, even prescient.
And guess what--more than a few observers have
a hunch that Lehman Brothers sent an unwritten
memo in late December 2007 or January 2008 that
it was prepared to allow auctions to fail. As
one attorney speculated, Lehman might have sent
"a signal" to the rest of the industry
that the game was over. Winner take all!
"You
have to wonder why all the players allowed the
market to collapse on the same day?" this
attorney said.
According
to Aaron Sheanin of Girard Gibbs, "Had
the SEC been more active five years ago, we
might have had a different outcome. Peeling
back the onion of the scandal has revealed a
common scheme to manipulate the market for these
securities in order to take money from investors."
Where
does the SEC fit in? Not long ago, I lunched
with a high-ranking Bush Administration official
who spoke anonymously on background. I pressed
him on the administration's deregulation mantra
and how it may have contributed to current economic
meltdown.
"It
was a factor," this official admitted.
"In hindsight, no question about it."
I
wondered if former SEC Chairman Christopher
Cox enabled the administration-wide caveat emptor
philosophy.
"Well,
Chris wanted to be a circuit judge in the Ninth
District of California," he replied. Senator
Barbara Boxer (D., CA) was opposed to the appointment
and blocked it. ARS investors would have been
better off if Cox had returned to his native
California. A legislator who spent 17 nondescript
years in congress, Cox was "tired of the
game," the official said. "There was
a vacancy at the SEC. He was a conservative,
so we offered him the chairmanship."
The
appointment of Cox in 2006 was a tacit signal
to the financial markets.
"What
else could Chris Cox do?" the administration
source shrugged. Cox was a "free market
guy." Like President Bush, he believed
in self-correcting and self-policing mechanisms-the
market as demi-god. A convenient belief, if
one also believes that Zeus and Hera once controlled
the destiny of Mankind.
"He
wasn't going to over-regulate," the cabinet
official said. Thus the method was given official
blessing from the White House and the Department
of Justice. "Chris believes markets work
themselves out," the former official explained.
In
a recent Bloomberg article, it was revealed
that FINRA officials claimed not to know the
market was headed for oblivion. FINRA's sale
of its own auction-rate securities in advance
of the crash could not be seen as connecting
any of the methodical dots, according to Herb
Perone, the agency's spokesman.
And
Mary Shapiro, FINRA's former CEO and now SEC
chairperson, has made it clear that FINRA's
purchase and sale of auction-rate paper was
based on the advice of a "professional
investment committee, in consultation with professional
investment managers." It's hard to imagine
that so many professionals were unaware of market
fractures. But then ignorance, real or feigned,
fits neatly into the toolbox of method.
Larry
Doyle, an institutional money manager with 23
years of Wall Street experience, says the actions
of FINRA and SEC in the auction market scandal
"smacks of incompetence and negligence."
But Richard Ketchum, Ms. Shapiro's successor,
said bankers in touch with Washington regulators
had every reason to suspect the market was doomed.
The
game played in Washington has by now instilled
in state securities regulators distrust of congressional
proposals to create a federal systemic risk
regulator-a kind of Risk Czar. It has been suggested
that the Federal Reserve might play such a role.
What gives pause to state securities regulators
is that the idea is supported by the Securities
Industry and Financial Markets Association of
New York and Washington, hardly the most objective
of organizations.
Monica
Lindeen, Montana state auditor and commissioner
of insurance and securities, has argued that
the federal government needs to keep state regulatory
powers intact. She believes the states have
been strong, active players in the securities
venue. However, a number of state AGs remain
on the sidelines in the ARS debacle. Given the
depth of the overall financial crisis, the idea
of a monolithic federal Risk Czar "does
make me nervous," Ms. Lindeen says.
Sen.
Susan Collins (R., ME) has introduced legislation
to create a council to oversee systemic risk.
The Financial System Stabilization and Reform
Act would create an independent "Financial
Stability Council" (FSC) to oversee Wall
Street. Similar legislation has been introduced
in the House by Rep. Michael Castle (R., DE).
State legislators insist on being part of the
mix.
It's
not a bad idea. But if lessons learned from
the ARS fraud are any indication of how additional
regulation may play out, chances are a future
FSC will be co-opted and made yet another piece
of the method by which banks continue to loot
the U.S. Treasury and mug investors.
Clarification:
Larry Doyle was incorrectly identified as an
institutional money manager in the May 1 opinion
column (above). During his 23 year career on
Wall Street, Doyle traded and sold mortgage
securities. He now writes financial commentary
at his Internet site, "Sense on Sense,"
and was the first to discover FINRA's ARS holdings,
later reported by Bloomberg News.
April
29, 2009
Finra
Oversees Auction-Rate Arbitrations After Exiting
Market
By
Darrell Preston
April
29 (Bloomberg) -- The Financial Industry Regulatory
Authority, supervising 344 investor arbitration
cases over auction-rate bonds, skirted losses
from the securities by selling its holdings
months before the market collapsed.
Finra,
responsible for educating and protecting investors,
owned as much as $862.2 million of the debt
before exiting the market in the spring of 2007,
less than six months before auctions began to
fail, according to spokesman Herb Perone. The
Washington-based group is conducting arbitration
hearings filed against banks by bondholders
stuck in the $176 billion market.
Investors
who were sold the securities as money-market
alternatives say Finra, a non-profit corporation
owned by banks that oversees 5,000 brokerage
firms and 659,000 brokers, failed to protect
them. The market froze in February 2008 when
banks, which had supported the debt for two
decades through periodic dealer-run auctions,
stopped buying bonds that investors didn’t
want as losses from subprime mortgages spread.
“Nobody
was defending any investors,” said Mike
Offit, a 52-year-old real estate capital markets
consultant in New York. In a Finra arbitration
claim Offit blames Charlotte, North Caroline-based
Wachovia Corp. because he lost access to cash
he had tied up in auction-rate debt. “This
is a banker-created problem,” he said.
Auction-rate
bonds are long-term notes and preferred stock
with interest rates reset through sales every
seven, 28 or 35 days. Auctions failed when banks,
beset by mounting losses on bonds tied to subprime
mortgages, stopped buying bonds that went unsold.
Borrowers were forced to pay penalty rates of
more than 20 percent and investors got stuck
with unwanted securities.
Dozens
of auctions continue to fail daily, according
to data compiled by Bloomberg.
“If
they had these securities, they had to know
the market was in trouble,” said Ed Dowling,
54, the owner of a clothing manufacturer in
New York City, referring to Finra. Dowling said
he has $2.25 million of auction-rate securities
he can’t sell.
Finra
didn’t know the auctions were poised to
weaken, Perone said. The regulator issued its
first guidance for investors caught in the debt
on March 31, 2008, more than a month after the
failure rate rose to about 80 percent.
The
national organization followed state regulators
led by Massachusetts and New York in punishing
Wall Street banks that sold the securities.
“The
states went ahead and did it themselves,”
said Peter Chepucavage, a former attorney with
the U.S. Securities and Exchange Commission
and the National Association of Securities Dealers,
a precursor to Finra. “The states were
able to get it done.”
Finra’s
regulation didn’t have anything to do with
the market’s collapse, Perone said. The
organization doesn’t regulate “over-the-counter
securities transactions” such as trades
in auction-rate bonds, which aren’t listed
on an exchange, he said.
The
regulator has been involved in more than two-dozen
investigations “into firms’ conduct
with respect to auction- rate securities,”
Perone said. Finra enforcement has returned
$2 billion of investor money, he said. States
and the SEC have recovered more than $50 billion.
Finra,
known as the National Association of Securities
Dealers until its 2007 merger with the regulatory
unit of the New York Stock Exchange, invested
in auction-rate securities with funds from the
$1.6 billion sale of the NASDAQ electronic trading
system starting in 2000, Perone said.
NASD
held $257.5 million in 2003, according to its
annual report. By July 2006, the investments
totaled $862.2 million.
“It
was for cash that we needed to have parked for
a temporary period of time,” Perone said.
“It was common to take cash you needed
to hold and put it in auction-rate securities.”
Finra
decided to invest in auction-rate debt after
a committee review, according to Mary Schapiro,
Finra’s former chief executive officer
and the current SEC chairman. The SEC will have
a role in reforming how securities markets are
regulated after credit markets froze and stock
markets tumbled last year.
“Decisions
as to how to invest Finra’s assets are
developed through a professional investment
committee in consultation with professional
investment managers,” Schapiro said in
a prepared statement. “The procedures for
researching, analyzing and recommending investments
are well established and publicly disclosed.”
Finra
also owned stakes in hedge funds, Treasuries
and exchange-traded funds, according to financial
statements.
The
SEC was investigating auction-rate dealers while
Finra was buying the securities, and fined 15
dealers $13 million in May 2006 over practices
that included bidding to prevent failures. The
dealers, who didn’t admit or deny wrongdoing,
were allowed to continue the practice as long
as it was disclosed.
“To
me it smacks of incompetence and negligence,”
said Larry Doyle, who worked 23 years on Wall
Street and runs a Web site called Sense on Cents.
“Finra is supposed to police the market.”
Finra’s
predecessor, the NASD, reclassified its auction-
rate holdings in July 2006 as “trading
securities” instead of “available-for-sale,”
its annual report for that year shows.
The
new designation signaled the securities could
less easily be converted to cash. Corporations
that invested in the debt were also moving the
investments from short-term or cash- equivalents
to long-term investments in their financial
reports.
“The
market was functioning normally when NASD was
investing in these securities,” Perone
said. At the time, auction-rate securities “were
viewed as high-quality cash equivalents and
as acceptable investment for institutions,”
he said.
Individuals
bought auction-rate securities in 2007 even
as “institutional investors and companies
were dumping their shares,” Schapiro said
in an October speech at Dominican University
in Forest River, Illinois.
“Many
institutions understood the risk in terms of
their own investments, but the question is:
Was that information freely shared with individual
investors?” Schapiro said in the ethics
and leadership lecture on regulation. “There
was both a legal and ethical obligation to do
so.”
Bankers
knew the market was going to fail, said Richard
Ketchum, Schapiro’s successor, at a Finra
seminar on March 23. “The impending scarcity
of new buyers at auction was, at some point,
no real secret.”
Some
investors said Finra didn’t move fast enough
to protect investors after the market failed.
“I’ve
got doubts about the efficacy of the regulatory
system,” said W.E. Benton, 60, a retired
attorney in Little Rock, Arkansas, stuck with
$25,000 of auction-rate securities.
To
contact the reporter on this story: Darrell
Preston in Dallas at dpreston@bloomberg.net.
April
28, 2009
Oppenheimer
Faces Massive Class Action Suit;
New York Court Filing Alleges "Egregious
Conduct," Market Manipulation, Insider
Trader of ARS; 'TARP' Relief Seen As Unlikely
"Hail Mary" Strategy
By
Phil Trupp (MVA News Service)
Washington,
April 28: Oppenheimer & Co. "continues
to dodge responsibility" to its auction
rate securities clients and engaged in "egregious
conduct" by off-loading its own ARS inventory
when company executives knew the market was
failing in 2007, according to a comprehensive
class action suit filed April 10 in the Southern
District of New York.
Lead attorney Norman E. Siegel of Stueve Siegel
Hanson LLP told Auction Rate Preferreds.Org
that Oppenheimer and its affiliates created
a "façade of liquidity they knew
was coming to an end," yet continued to
push ARS-ARPS on its clients.
Openheimer's Canadian parent, Openheimer Holdings,
Inc., based in Toronto, has asked shareholders
to approve incorporation in Delaware, placing
the firm in line for a potential bailout from
the U.S. Treasury's Troubled Asset Relief Program
(TARP). The move, according to the company,
may act as an "assist" in repurchasing
illiquid ARS-ARPS.
Mr. Siegel scoffed at the TARP tactic.
"It's a Hail Mary strategy, and they know
it," he explained. "It's a very long
shot and highly unlikely."
Mr. Siegel said the class action covers all
Oppenheimer clients. He could not place an exact
figure on the frozen cash being held by Oppenheimer
clients. It is estimated that retail clients
are stuck with at least $930 million in illiquid
debt. Last November, the Massachusetts Securities
Division filed an administrative action to compel
Oppenheimer to make state residents whole to
the tune of $56 million.
The company last month was told that US Airways
Group, Inc., and Hansen Beverage Co., have filed
arbitration claims with FINRA. US Airways, based
in Tempe, AZ., is demanding that Oppenheimer
buy back $250 million in ARS. Hanson is seeking
payment of $60 million.
In late March, Oppenheimer admitted the obvious:
that its failure to redeem auction rate securities
from its customers "presents a significant
issue for us with our clients and regulators."
The company added that TARP, "might under
certain circumstances provide the liquidity
necessary" to unfreeze the cash. Oppenheimer
failed to define what those "certain circumstances"
might involve.
Mr. Siegel pointed to allegations in the Massachusetts
case as an example of the insider game played
by Oppenheimer before the February 2008 collapse
of the market. He said the company pushed auction
rate paper to its clients while Chief Executive
Officer Albert Lowenthal and other members of
the management team sold their personal holdings.
Mr. Siegel said Oppenheimer's "TARP play"
appeared to be smoke and mirrors, little more
than a ploy designed to mollify legions of furious
investors. He said that long maturity dates
on most auction rate paper, much of it extending
20 to 30 years, likely disqualifies it from
the Treasury program. "Auction rates aren't
exactly the kind of assets the government wants
to assume," he explained. The long maturities
would likely create deep discounts.
Mr. Siegel cautioned that earlier ARS-ARPS settlements
by other banks and broker-dealers may not set
a precedent for the upcoming Oppenheimer case.
"People think those cases have solved the
problem," he said. "This is a dangerous
assumption."
Oppenheimer Holdings, formerly Fahnestock Viner
Holdings, owns Oppenheimer & Co., which
is now incorporated in Delaware. The company
is separate from OppenheimerFunds, Inc., which
is a part of Massachusetts Mutual Life Insurance
Co.
This latest court case, filed April 10 in the
Southern District of New York, is docketed as
Civil Action No. 08-CV-4435 (LAP), a consolidated
action complaint for violation of federal securities
law. Defendants are Oppenheimer Holdings, Inc.,
Oppenheimer & Co., Inc., and Oppenheimer
Asset Management, Inc.
The plaintiffs allege Oppenheimer sold auction
rate paper to "thousands of customers"
represented in the class action. It was noted
that separate actions by individual class members
would create a risk of "inconsistent and
varying adjudications."
Mr. Siegel charged that Oppenheimer manipulated
the auction market and underwrote billions of
dollars worth of ARS that carried "insufficient
maximum rates to ensure the liquidity of those
securities if the auctions failed."
He said underwriters encouraged issuers to establish
maximum yield in order to gain AAA ratings,
"creating the appearance of quality and
safety." Oppenheimer touted the ratings
in its sales pitches to clients.
The court filing paints a stark picture of deception:
"Unbeknownst to investors, however, the
same maximum rates that enabled…AAA ratings
also limited the liquidity of those securities,
and ensured that, once an auction failed, investors
would receive interest rates that were below
market value and insufficient to compensate
for the lack of liquidity."
To mask this problem, Oppenheimer allegedly
engaged in a wide range of tactics to conceal
the liquidity characteristics of the securities,
"while protecting themselves from the consequences
of intervening in auctions to prevent failures."
The suit claims Oppenheimer misrepresented and
omitted facts about the market and obscured
inherent risks.
The company earned "lucrative commissions
and fees" for selling and underwriting
the securities, and directed its financial advisors
throughout the U.S. to present "uniform
sales presentations" with assurances of
liquidity and cash equivalency. .
"Oppenheimer knew or was grossly reckless
in not knowing that auction rate securities
were not equivalent to cash," according
to the complaint. It noted that since March
2005, the "Big-4" accounting firms,
the Financial Accounting Standards Board (FASB)
and the SEC said that ARS did not meet the standard
for cash equivalents. The securities carried
long-term maturities and lacked any guarantee
that ARS holders would be able to liquidate
holdings.
The liquidity pitch by Oppenheimer's financial
advisors was promoted and pushed by "management
directives," the court document stated.
Financial advisors also sold ARS, under directions
from Oppenheimer management, without disclosing
how the market operated, and "without transparency
to investors, thus enabling manipulation by
broker-dealers."
"Oppenheimer contacted investors with significant
cash holdings…via unsolicited telephone
calls and encouraged those investors to invest
their cash in auction rate securities,"
according to the court documents. "At all
relevant times, Oppenheimer financial advisors
uniformly failed to disclose" important
facts concerning the real fragility of the market.
Other allegations include:
* Oppenheimer failed to provide mandatory instruction
or compliance training to its financial advisors;
* Financial advisors lacked "rudimentary
understanding" of the securities they were
selling or the ARS market conditions;
* Oppenheimer's practice was not to deliver
prospectuses;
* As the market unraveled, Oppenheimer sought
to enrich itself rather than protect its clients.
The company worked to deter clients from selling
their ARS prior the market's collapse, though
the crash was seen in advance by Oppenheimer
management;
* In a July 11, 2007 email, Oppenheimer instructed
its Auction Rate Securities Desk to ensure that
its clients held any new purchases for a "minimum"
of two to four auctions: "These holding
periods are in place to ensure that Oppenheimer
continues to maintain and build positive long-term
relationships with underwriters…continues
to be shown these new issues, and receive favorable
allocations…";
* If a client "must sell prior to the minimum
holding period," Oppenheimer would financially
penalize an advisor who allowed the early sale.
The company's own advisors described this practice
as an "in-house rule" running contrary
to the interests of their clients;
* In early February 2008, only days before the
market collapsed, insiders began selling their
holdings. Among those named were Greg White,
an Oppenheimer ARS specialist who sold $300,000
of his own ARS holdings; Louis Gelonmino, the
desk supervisor of the ARS department liquidated
$75,000 of ARS holdings. On February 7 and 11,
Oppenheimer's Chief Operating Officer, Lawrence
Spaulding liquidated $700,000 of his personal
ARS. Between January 29 and February 12, 2008,
Oppenheimer chairman and CEO sold $1.7 million
of his personal ARS holdings;
* "While Oppenheimer senior management
was unloading their personal holdings…and
despite the fact that Oppenheimer was well aware
that the (ARS) market was near collapse, Oppenheimer
made no effort to correct its prior false statements
or material omissions related to the (ARS) it
had sold to its customers. Instead, Oppenheimer
continued to encourage investors to purchase
(ARS) through the first half of February 2008,
despite increasing turmoil in the…market."
Norman
Siegel was emphatic that the class action suit
might be a "last best hope"
for Oppenheimer clients. On a more positive
note he added, "I believe we'll get a fair
shake form the judges" and end the misery
of Oppenheimer's frustrated and long-suffering
clients.
April
26, 2009
E*Trade
should be in your "Hall of Shame"
Hello
Harry,
E*Trade
has been totally intransigent, unresponsive,
and demonstrated nothing but stonewalling and
plain rude behavior. Complaints with FINRA about
E*Trade just seem to languish. ( The same is
true of Ameritrade and Schwab I understand.)
I
have been "frozen" in $250K ARS trash
at E*Trade since February 2008. As you are well
aware E*Trade is one of the worst of the scum.
I won't give you my details on them as it is
the same recounting as others have well documented.
I digress.
My
nominee is:
Fred
J. Joseph, Colorado Securities Commissioner
Colorado Div. of Securities
1560 Broadway Ste 900
Denver, CO 80202
This
"regulator" has demonstrated, so far,
a total disregard, complete unresponsiveness,
and lack of concern in this matter. I have been
writing his office, to his attention, for a
year asking for help and an investigation into
this matter and I have not even received a "
thank you for contacting your State Securities
division."
One
gets the feeling he is in the pocket somehow
of the likes of E*Trade, TD Ameritrade. The
State of Colorado seems to be viewing this ARS
fraud as essentially a non-event or of no concern,
unlike some states such as NY, MO, PA, MA.
Here
is a synopsis of my correspondence to his office
I will share with you.
March
16th, 2009 ( as well as three dates prior starting
with April 2008.)
Colorado Div. of Securities
1560 Broadway Ste 900
Denver, CO 80202
RE:Auction
Rate Securities
Dear
Fred J. Joseph, Colorado Securities Commissioner:
I
want to bring to your attention the fact that
many Colorado residents - and people throughout
the country - are still trapped in auction rates
through firms like Oppenheimer, E*Trade, Charles
Schwab, and TD Ameritrade. Actually, the number
of people trapped in each one of these firms
easily surpasses the number trapped through
Citibank.
I
know my brokerage, E*Trade, has done business
in Colorado for almost ten years. Many individuals
who live in Colorado are trapped in auction
rates sold them by E*Trade and the other brokerages
above, to the tune of $X,X00,000's individually.
The
frozen auction rate money is money that would
be used to purchase goods and services and homes
in Colorado and throughout the nation.
Anything
you can do to bring E*Trade and the others to
justice is appreciated. As you know these securities
were grossly misrepresented by the firms who
sold them, and many of those trapped are elderly.
I know of one elderly woman who is unable to
pay for her cancer medication because her money
is frozen. Anything to can do to right this
travesty is appreciated.
The State of Colorado should revoke the securities'
licenses of the aforementioned firms to do business
in Colorado until they redeem all of the ARS
for those investors who want them redeemed.
FINRA is nothing but a kangaroo Court and is
biased to the brokers, the expense notwithstanding
to folks who can ill afford to pay arbitration
fees just to get their own money back.
Sincerely,
John Oughtred
April
23, 2009
Read
the followings two stories and ask yourself
why Wells Fargo is acting so stupidly. All the
big brokers have caved in and redeemed all the
ARPS at par. Why not Wells Fargo? My guess is
twofold: they're getting fees every month from
"managing" these things. Money is
money. Second, they'll cave in shortly when
they discover -- surprise, surprise -- that
they don't have a leg to stand on. But meantime,
Wells Fargo attorneys are billing hours and
more hours. Someone ought to read the attorneys
the riot act. -- Harry Newton
Wells Fargo
accused of securities fraud by state lawsuit
Attorney General Jerry Brown says customers
were misled into believing that auction-rate
securities were safe. Wells Fargo disputes that,
and says it aided customers hit by the collapse
of the market.
By Martin Zimmerman of the Los Angeles Times
April
23, 2009: California today sued investment subsidiaries
of Wells Fargo & Co. for securities fraud,
alleging that the San Francisco financial services
company misled investors by selling $1.5 billion
worth of risky securities that it peddled as
being as safe as cash.
The
securities "were sold to customers on the
basis that they were like cash and people could
get their money back in eight days," Atty.
Gen. Jerry Brown said in an interview. "Now,
it turns out they were not like cash and people
can't get their money back even after many,
many months, and they're mad as hell."
The
lawsuit, filed in state court in San Francisco,
seeks to recover money invested in what are
known as auction-rate securities, which Wells
Fargo subsidiaries sold to Californians. As
the name implies, interest rates on auction-rate
securities are reset in periodic auctions. Billions
of dollars worth of the securities were sold
to investors nationwide in recent years.
Regulators
have charged that many investors were misled
into believing the securities were safe and
the equivalent of cash. But when the $330-billion
market for auction-rate securities collapsed
early last year, many investors couldn't sell
the securities, or could only sell them at a
loss.
About
2,400 Californians bought auction-rate securities
from Wells Fargo, according to the attorney
general's office.
Brown's
lawsuit names Wells Fargo Investments, Wells
Fargo Brokerage Services and Wells Fargo Institutional
Services as defendants.
Wells
Fargo disputed the state's allegations, saying
that it had taken steps to help customers hit
by the collapse of the auction-rate securities
market, including offering loans to tide them
over.
"We
fully understand and deeply regret the effects
this prolonged liquidity crisis has had on our
clients," Charles W. Daggs, chief executive
of Wells Fargo Investments, said in a statement.
"Wells
Fargo could not have predicted these extraordinary
circumstances, and even with the benefit of
hindsight is not responsible for them."
Several
financial services companies that marketed auction
rate debt to investors have agreed to repurchase
billions of dollars worth of the devalued securities.
Last
month, Wachovia Corp., the bank acquired by
Wells Fargo last year, agreed to repurchase
$1.5 billion of the securities from California
investors in a settlement with regulators. Brown
said that case didn't involve the securities
at issue in the lawsuit he filed today.
Last
June, the attorney general sued Countrywide
Financial Corp., accusing the mortgage lender
of causing thousands of home foreclosures by
deceptively marketing risky loans to borrowers.
That suit, which sought restitution for borrowers
who were deceived by Countrywide, was settled
in October when the lender agreed to reduce
loan payments and provide other benefits that
could total as much as $8.7 billion nationally.
To
see the attorney general's press release, CLICK
HERE.
To
see the attorney general's lawsuit, CLICK
HERE.
To
see Wells Fargo's statement, CLICK
HERE.
April
22, 2009
Wells
Fargo ARS Practices Targeted
By Washington State Regulators as Bank
Reports Record $3.05 Billion First Quarter;
$3.93 billion ARS/ARP Probe May Crack Bank's
Refusal to Thaw Assets Frozen Since February
2008
By Phil Trupp, (MVA News Service)
Washington,
April 22, 2009-Calling for redemption of $3.9
billion in frozen ARS and ARPS assets, Washington
State securities investigators have charged
Wells Fargo Bank and its divisions with misrepresenting
and failing to "disclose material information"
to clients about its sales of auction-rate securities.
Washington State Securities Administrator Michael
E. Stevenson said regulators are poised to move
ahead rapidly with their case if the bank continues
to refuse "full cooperation" with
the State Securities Division.
In a series of blistering allegations released
yesterday to MVA News Service, state securities
officials have threatened to suspend the bank's
broker-dealer investment adviser registration
if the legal foot-dragging continues.
Ironically, the threat came one day before Wells
Fargo reported record first quarter earnings
of $3.05 billion. There was no indication of
how the $25 billion taxpayer bailout figured
in the calculation. Nowhere it its quarterly
report did Wells President and CEO John Stumpf
mention the bank's impending clash over its
ARS and ARPS redemption problems.
Instead, Mr. Stumpf offered comforting bromides
to shareholders. "We remain focused on
proactively identifying problem credits,"
he said, adding that the bank is sensitive to
"troubled borrowers" who will "receive
the attention and help they need."
He did not mention the firm had spent $700,000
on lobbying in the first quarter.
Wells Fargo began selling ARS in 2001 as short-term
"cash equivalents" to retail and institutional
investors. The bank is still receiving compensation
for its auction management and dealer services,
while "all purchasers who wish to sell
their shares…are forced to continue holding
their positions," according to Washington
State securities officials.
These officials allege the bank actively solicited
customers for ARS, touting higher yields and
safety. Referrals were prized within the organization.
"Both on the banking side and on the investment
side, the number of internal referrals an employee
made was used as part of a matrix to determine
eligibility for bonuses," according to
the state's official court filing. Regulators
complained that customers were not informed
of risks or other pertinent details, even after
the auction-rate market began to fail in August
2007.
State investigators found an alarming lack of
knowledge about the auction market among Wells
Fargo employees. Many were "generally unaware
that auctions could fail and were failing,"
they said. Nor were many Wells Fargo employees
aware that PriceWaterhouseCoopers had issued
an interpretive opinion on March 4, 2005 stating
that under existing Financial Accounting Standards
Board (FASB) guidelines, ARS could not be classified
on bank balance sheets as cash or cash equivalents.
Clients were later shocked to learn that Wells
Fargo "salespersons" were aware that
several ARS market-makers were involved in a
2006 settlement with the S.E.C., and that 2007
was riddled with auction failures.
"It was all a big game," one former
Wells Fargo client said. "And they're still
acting like, 'What, me worry'?"
Washington securities officials said Well Fargo
failed to disseminate information about market
problems to bank salespersons and their supervisors.
They alleged that Wells Fargo "knew of
increasing (market) risks" as early as
May 2005, but changed none of its practices.
In November 2007, the bank's Trust Department
prepared a document titled, "Fixed Income
Update: Failed Auction Risk in the Auction-rate
Preferred Market," according to state officials.
They said despite this warning, Wells Fargo
made a decision to keep pushing its auction-rate
sales, making sure not to disclose how the auction
failures might affect liquidity.
The state's allegations reveal a stunning lack
of accountability by the bank. For example,
the securities officials found that "the
fixed income desk failed to communicate material
information to salespersons," and that
bank supervisors provided no "product training
for ARS." The regulators said Wells Fargo
"failed to obtain prospectuses, disclosure
documents" or other details helpful to
understanding ARS products.
These investigators said when the bank first
began offering ARPS, it placed its orders after
contacting Nuveen. Later, the bank placed its
orders for ARPS "exclusively through Oppenheimer."
Both Nuveen and Oppenheimer provided ARS/ARPS
brochures to Wells Fargo. Even though the brochures
failed to address market risks, Wells Fargo
did not make the documents available to clients,
investigators explained.
"Branch managers regularly approved ARPS
for customers with low tolerance for risk,"
they charged, citing yet another securities
violation.
In January 2008, the Fixed Income Desk learned
of an auction failure of a Nuveen ARPS for which
Lehman Brothers acted as the auction's managing
dealer. State investigators said Wells Fargo
remained mum, avoiding any mention of the failure
to its clients.
Following the February 2008 collapse of the
market, the bank arranged loan programs for
its ARS customers. The first such program was
a margin loan of 50 percent of par value of
the security. Later, this amount was boosted
to 90 percent.
In a long preface detailing the many hardships
suffered by Wells Fargo ARS clients, the investigators
claimed the bank had "no ARS guidelines
for determining the suitability of a recommendation
to a customer…" Thus many retired
or soon-to-be retiring clients found themselves
strapped for cash at a most pressing time in
their lives.
Investigators said the bank has continued to
dodge important questions.
"Respondents have not provided a complete
response to requests for discovery" by
the Washington State Securities Division. The
bank has failed even to produce witnesses, according
to the state's court filing.
One source following the case noted with some
irony that it was unseemly for a bank which
boasts $1.3 trillion in total assets to refuse
to "make its ARS investors whole."
But CEO Stumpf, in his first quarter report,
was proud to announce that Wells Fargo had opened
14 new retail outlets, bringing the bank's total
to 6,638. Mr. Stumpf also reported mortgage
applications amounting to $190 million, up 64
percent in the quarter.
All very nice for Wells Fargo. Not so nice for
its long suffering ARS victims.
April
15, 2009
State
collects $2.3 million in fines from Citigroup
and Wachovia
By
Jay Greene, Crain's Detroit Business
The Michigan Office of Financial and Insurance
Regulation on Wednesday announced it will recover
more than $2.3 million in fines in a settlement
with Citigroup Global Markets Inc. and Wachovia
Capital Markets over the sales practices of
auction-rate securities.
“This
deal is good for Michigan investors and pumps
over $2 million into the general fund,”
said OFIR Commissioner Ken Ross in a statement.
“Consumer protection pays dividends for
Michigan.”
In
a multi-state investigation, Michigan and other
states alleged that Citigroup and Wachovia misled
investors regarding the liquidity risks associated
with investing in the securities.
Auction-rate
securities are debt instruments with rates that
vary and are sold generally on a weekly basis
in auctions overseen by brokerage firms.
Since
February 2008, when most auctions have failed,
the market has been frozen, and many corporate
or municipal bond holders have lost money or
did not have access to it.
Last
September, Michigan Attorney General Mike Cox
announced that Comerica Bank agreed to buy back
$1.46 billion of the auction-rate securities
from its customers. Nearly $1 billion was held
by Michigan residents, he said.
Comerica
also agreed to pay Michigan a civil penalty
of $10,000 and $100,000 to the Michigan Investor
Protection Trust Fund.
Citigroup
and Wachovia also agreed to offer full buybacks
to any eligible customer who purchased the securities
from the brokerage firms, including up to $717
million from Citigroup and up to $159 million
from Wachovia.
Citigroup
agreed to pay Michigan a $1.72 million administrative
fine and Wachovia a $654,000 fine. Some 90 percent
will be deposited into Michigan’s general
fund and the remaining amount will go into OFIR’s
Michigan Investor Protection Trust.
April
15, 2009
Citigroup
Global Fined Over Auction-Rate Debacle
By Gordon Gibb, LawyersandSettlements.com
Phoenix, AZ: Long after the auction rate securities
market dried up practically overnight, the fallout
over the products and how they were sold continues.
Auction rate securities were sold 'as good as
cash,' but many an investor who went the auction
rate route soon found out that things were not
as they seemed.
This week Citigroup Global Markets Inc. was
ordered to pay almost a half-million dollars
in fines over its role in misleading investors
with regard to auction-rate security sales in
Arizona.
Investment LossMisleading investors in the auction-rate
securities arena seems to have been a common
occurrence.
At one time auction-rate securities were a relatively
easy and lucrative way for investors to temporarily
park cash. Securities could usually be purchased
and sold fairly quickly and interest rates were
attractive compared with competing products.
It was not uncommon for investors to park cash
for a college or vacation fund, or for any other
reason.
The word on the street, as well as the words
in the vending agent's office, were that the
auction-rate security was safe, liquid and 'as
good as cash.'
That was the sell. In reality, auction-rate
securities were anything but—long-term
investments subject to a complex auction process
that had the potential to lead to illiquidity
and lower interest rates.
For holding back that little tidbit of truth,
Citigroup Global Markets Inc. was fined $455,128
by the Arizona Corporation Commission for its
role in leading investors down the garden path.
As part of the settlement Citigroup also agreed
to buy back the now-vilified securities and
reimburse those investors who sold at a loss
(if they were lucky enough to sell at all).
That bill totals about $97.7 million worth of
auction–rate securities from some 839 investors.
It seemed, at the time that everyone knew exactly
what the auction-rate security was. Everyone
perhaps, save for the investor. He was left
out in the cold. He didn’t know that what
he was really buying was a long-term product,
such as a municipal bond with something like
a 30-year term to maturity.
When the market was hot there were buyers a-plenty
and investors were flipping auction-rate securities
like real estate moguls flip properties.
However that only works when you have buyers.
Without the buyer, you can't sell. And once
that begins to happen, you're going to stop
buying.
That's how a massive market for auction-rate
securities that had been steaming along for
years, ground to a halt almost overnight.
Suddenly, investors are holding investment products
they can't sell. Instead of the expectation
of selling an auction-rate security over the
course of a couple of weeks or a month, investors
suddenly were made to realize the truth about
their investment and the scope: without access
to those funds, they couldn't fund the kid's
college tuition, or carry on with whatever plan
or need the money was intended for.
If brokers knew the score they either weren't
telling, or were actually beginning to believe
the auction-rate security was as good as cash
themselves. Who would believe the bubble would
burst and the market would implode as quickly
as it did?
The Arizona Corporation Commission investigation
was part of a 12-state inquiry probing the behavior
of prominent Wall Street firms with regard to
allegations that they knowingly misled investors
into thinking they were buying completely liquid
products with full and unfettered access to
their money, without disclosing the risks.
Observers have stated the funds currently tied
up in failed auction-rate securities would go
a long way in helping stimulate the US economy,
were those funds to get back into circulation.
Instead, the auction rate is dead and a robust
auction-rate securities market is but a distant
memory. However, the loss and pain are still
being felt. If you count yourself as one of
them and have not derived any satisfaction from
the vendor, you would be well advised to seek
out an auction-rate securities attorney to discuss
the possibility of launching an arbitration
case to recover your losses.
April
14, 2009
GETTING
PERSONAL:
Activist
Buys Auction-Rate Shares
By
Daisy Maxey
A
DOW JONES NEWSWIRES COLUMN
NEW
YORK (Dow Jones)--Activist investor Karpus Investment
Management has scooped up a large portion of
one closed-end mutual fund's auction-rate shares
at a discount on the secondary market, and hopes
to pressure the fund to refinance them.
It's
a move that could be emulated by other activist
investors as frustrated auction-rate preferred
shareholders, many now stranded for more than
a year, look to sell.
The
Pittsford, N.Y.-based investment manager purchased
nearly 88% of the auction-rate preferred shares
issued by closed-end fund First Trust/Four Corners
Senior Floating Rate Income Fund (FCM) at a
significant discount on SecondMarket, a marketplace
for illiquid assets.
In
an April 9 letter, Karpus notified the fund
that it has nominated two candidates - Phillip
Goldstein, principal of Bulldog Investments,
a Purchase, N.Y., hedge fund; and Brad Orvieto,
president of Strategic Asset Management Group,
of Plantation, Fla. - for election as preferred
directors to its board in September, when two
such positions come open. Preferred directors
are elected by preferred shareholders, but serve
both common and preferred shareholders.
Karpus
wants the board to find some way to refinance
its auction-rate shares. "This fund hadn't
announced a definitive plan to refinance, so
we're doing this to sort of pressure the board
to do something now rather than later,"
said Cody Bartlett, managing director of investments
at Karpus.
First
Trust Advisers, the fund's investment adviser,
didn't return calls seeking comment on Karpus'
proposal. The fund used debt to redeem about
$35 million, or 61%, of its $57 million in outstanding
preferred shares last year.
The
fund now faces a decision on whether to allow
two dissidents on its board or find some way
to redeem the shares, said Cecilia Gondor, executive
vice president at Thomas J. Herzfeld Advisors,
a Miami investment-advisory firm.
For
years, closed-end funds issued auction-rate
preferred shares to boost income for common
shareholders. In February 2008, buyers pulled
back from the auctions, leaving many investors
stranded.
Karpus
started buying the preferred shares on the secondary
market in April 2008 and is still buying, Bartlett
said. He said they're being sold by shareholders
that need liquidity or are simply tired of waiting
for some other solution.
The
new investors will be less patient than retail
investors have been, Bartlett said. "They
have the capital, and they aren't going to get
paid 1% on auction-rate securities."
Art
Lipson, sole manager of Western Investment LLC
and another activist investor, says he's not
involved with auction-rate preferred shares,
but wouldn't be surprised to see more activists
getting involved.
Among
the shares issued by the fund are four shares
George Karpus, president of Karpus Investment
Management, bought at $16,250 on Oct. 30, according
to a filing with the Securities and Exchange
Commission. At par, they're worth about $25,000.
Karpus
"paid 65 cents on the dollar for a triple-A
investment, and they can afford to wait a long
time to capitalize on that gain and still have
a decent return," said Lipson.
Kevin
O'Connor, managing director and co-head of SecondMarket's
auction-rate securities market, said that from
December to late January, the market was "extremely
active" and probably traded more than $200
million of closed-end fund preferred shares.
Activity then eased, before picking up again
in recent days. Shares are selling at approximately
70% of par value, he said, with both institutional
and individual investors selling.
Many
shares were left in the hands of institutions
after settlements with regulators, in which
many banks and fund companies bought back shares
sold to retail investors.
Former
publisher Harry Newton, who had $4.5 million
stranded in auction-rate preferred shares that
have since been redeemed, called Karpus' move
brilliant. "When these activists start
screaming and shouting and carrying on, these
funds will just buy them off at par," he
said.
Newton
continues to run an online hub of information
on auction-rate preferred securities at www.auctionratepreferreds.org.
He said there's a lot of frustration on the
part of investors still stranded.
"People
would be very happy to get rid of them maybe
at 75%" of par, he said. "Nobody in
their wildest dreams thought they'd be sitting
here in April 2009, more than a year from when
this thing locked up ..."
(Daisy
Maxey is a Getting Personal columnist who writes
about personal finance. She covers topics including
hedge funds, annuities, closed-end funds and
new trends in mutual funds, and can be reached
at 201-938-4048 or at daisy.maxey@dowjones.com)
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April
10, 2009
There is some good news. Slowly, but surely,
more and more attorneys-general are on the case
and getting investors' ARPS money back. This
is slow and painful. If you're still stuck,
you need to get on your local AGs' case big-time.
Point out to him (or her) that how many AGs
(or similar) from many states -- including New
York, Massachusetts, and Missouri -- have helped
their local investors big-time. The latest is
Missouri which has settled with Stifel Financial
(a big hold-out). See right-hand column. --
Harry Newton.
April
10, 2009
Call
to Oppenheimer Clients. Get Off Your Duff
Harry,
We are told there are thousands of Oppenheimer
clients still frozen in ARPS. Missouri would
force Oppenheimer to settle if they got enough
complaints. So far only seven (7) of the thousands
of Opco clients have bothered to file with Missouri.
(They take your complaint over the phone, it
takes about 3 minutes). This is appalling. Any
chance we can appeal for Opco clients to contact
Missouri on your site? The contact person in
Missouri is Judi.Lahr@sos.mo.gov.
Thanks. Ed Dowling and Brad Jeffries.
April
10, 2009
Bank of America
pays $4.7M securities fine to Massachusetts
By Gaurav Singh, Universal Business News
Bank
of America Corp. (BAC) paid a $4.7 million fine
to the Massachusetts Securities Division after
an investigation of its marketing and sales
of auction-rate securities, Secretary of the
Commonwealth William F. Galvin said Wednesday
(April 8)
The
bank last year agreed to buy back about $4.5
billion worth of auction-rate securities held
by roughly 5,500 customers nationwide as part
of a settlement agreement with state regulators.
More
than a dozen banks and securities companies,
including Citigroup Inc. (C), UBS AG (UBS) and
JPMorgan Chase & Co. (JPM), last fall reached
agreements with regulators to repurchase more
than $50 billion in auction-rate securities
at the full amount, mostly from retail and smaller
investors.
Under
that agreement North Carolina-based Bank of
America said it would buy back securities at
the value at which customers purchased them.
Massachusetts
Secretary of State William Galvin said Wednesday
the fine paid by the bank signals the end of
the investigation. The money will go into the
state’s general fund.
April
10, 2009
Investment
firms fined by Delaware officials
BY NICK REES
WILMINGTON, Del. (Legal Newsline) - Misleading
investors about the safety of the auction rate
securities market has lead to fines of more
than $309,000 for two investment firms in Delaware.
Wachovia
Securities, LLC and Wachovia Capital Markets,
LLC sold more than $60 million in auction rate
securities in Delaware, while Citigroup Global
Markets Inc. sold more than $92 million.
The
securities were marketed as cash alternatives
by Wachovia and investors were told that they
would be provided with one-day or same-day liquidity
for redeeming the securities. In February 2008,
however, when the securities market crashed,
Wachovia stopped abiding by its offer.
"These
agreements send a clear message to investment
firms that we will hold them accountable for
misleading investors about the sale of these
supposedly safe and liquid investment products,"
said Delaware Securities Commissioner James
Ropp.
Auction
rate securities, which are long-term financial
instruments with interest rates that reset through
weekly or monthly auctions, can be bought and
sold on a regular basis when the auctions are
run properly.
There
were not enough buyers for the securities being
sold by the companies, however, causing the
auctions to fail and forcing investors to hold
onto their auction rate securities until the
next successful auction. The majority of these
auctions have failed since early 2008, causing
investors to be unable to sell their frozen
holdings.
A
multistate investigation into the failure of
the auction rate securities market lead to a
settlement in November between state and federal
securities regulators and 11 investment firms
offering the securities for sale.
The
firms agreed to repurchase more than $60 billion
of auction rate securities from investors nationwide.
The firms also agreed to notify investors of
the repurchase offer.
April
6, 2009
Wells
Fargo Trust Division Research Said 'No' to ARS
in '07
But Data Failed to Reach WF Brokers;
Possible Investigation Underway by Washington
State AG
By Phil Trupp
Washington,
April 6-- Auction-rate securities posed too
much risk for Wells Fargo's Trust Division,
which pulled out of the market two years ago,
according to financial advisors who claim they
were "left out of the Trust Division's
research loop."
The Trust Division, which serves institutional
investors, researched the now-collapsed auction
market in 2007, these sources said. But the
data allegedly was not passed "down the
line" to financial advisors (FAs) who service
retail accounts .
Many Wells Fargo ARS investors remain stuck
with frozen cash, and FAs apparently have faced
a non-stop pounding by furious clients.
"We still can't get information on the
(auction) market," according to one source.
"It's locked up at the top."
The FAs said regulators in various states where
Wells Fargo does business may be viewing the
bank as a possible "underwriter" of
ARS/ARP, allegedly opening the way for lawsuits
and penalties.
According to one FA, the Washington State Attorney
General's office began investigating the bank's
role in the market six month ago, but so far
has taken no action.
"The Trust Division tried to pass on its
data to us," a source told Auction Rate
Preferreds.Org. "But the FAs never saw
that research." He indicated the data has
been deliberately withheld.
But how could the FAs have missed the details
of auction-rate woes, a reporter asked?
"As a rule," an FA explained, "we're
very busy with our clients. We rely on the research
department. We understood that ARS are different
from ordinary money market mutual funds. We
were paid a small commission to sell them. That's
about all we knew. As for new brokers--ARS isn't
even in their vocabulary."
Chief Financial Officers have been fired over
ARS scandal, sources said. "These were
very sophisticated people," one source
explained, "and even they didn't have a
thorough grasp."
One source noted that many of the illiquid ARS
are still rated AAA. "It's mind-boggling,"
he complained. "I'd like to see Wells Fargo
step up and follow Wachovia's lead."
Wachovia settled ARS fraud allegations following
a July 17, 2008 raid on the company's offices
by a multi-state task force led by the Missouri
Securities Division. As was the case with Wachovia,
Wells Fargo management has warned its FAs not
to speak with the media.
Raymond James brokers recently broke silence
and voiced complaints over management's alleged
decision not to redeem frozen securities. Since
the market collapse in February 2008, there
appears to be a widening gulf of frustration
between management and FAs at a number of broker-dealer
operations. FAs are taking the brunt of client
complaints and suffering an exodus of accounts
in the wake of the ongoing $336 billion ARS
debacle.
A Wells Fargo FA said, "It's the worst
year of my career--and it has nothing to do
with stocks falling. If I were a client (with
frozen cash) I'd be screaming, too. There's
no justification for this."
One source was even more blunt: "We have
to kick butt. My boss is frustrated. His boss
is frustrated" with information pooled
at the top and a moat of silence surrounding
it
April
1, 2009
UBS
Dismissal: The End of Auction Rate Securities
Lawsuits?
reprinted with permission from The D&O
Diary, by Kevin
LaCroix
A
federal judge has ruled that securities class
action plaintiffs who availed themselves of
UBS’s auction rate securities regulatory
settlement cannot separately maintain claims
for damages against UBS. But while this ruling
would seem to represent at least the beginning
of the end for many similarly placed plaintiffs,
we may still be a long way from the end of the
auction rate securities litigation, despite
the regulatory settlements.
Background
UBS
was one of the 21 different companies named
as defendants in the wave of auction rate securities
lawsuits filed during 2008. The names of all
of the auction rate securities lawsuit targets
can be accessed here.
Background regarding the case against UBS can
be found here.
Essentially
the plaintiffs alleged that UBS had failed to
disclosure the liquidity risks associated with
the auction rate securities, and also failed
to disclose that UBS and other broker dealers
regularly intervened in the market for the securities
to maintain trading --and allegedly to manipulate
the market as well. When the broker-dealers
simultaneously stopped supporting the market
on February 13, 2008, the market for the securities
collapsed and investors were left with securities
for which there was no active market.
On
August 8, 2008, UBS announced a nearly $20 billion
settlement with regulators regarding the auction
rate securities (about which refer here).
In the settlement, UBS agreed to buy the securities
back from retail investors at par value, or
to make up the difference to retail investors
who had already sold for less than par.
The
plaintiffs in the UBS auction rate securities
settlement took advantage of the regulatory
settlement and redeemed their securities as
par. The defendants moved to dismiss the lawsuit
on that basis.
Judge
McKenna’s Ruling
In
a March 30, 2009 opinion (here),
Southern District of New York Judge Lawrence
McKenna granted the defendants’
dismissal motion, with leave to amend. Judge
McKenna found that
Given
that Plaintiffs have availed themselves of the
relief provided in the Regulatory Agreement,
Plaintiffs cannot now allege out-of-pocket damages.
When Plaintiffs elected to have UBS buyback
their ARS at par value, they received a full
refund of the purchase price. Therefore, Plaintiffs
have already been returned to the position they
were in before they purchased the ARS and before
any fraud ensued….Plaintiffs’ out-of-pocket
damages are necessarily zero because after choosing
to rescind the ARS purchases, Plaintiffs have
effectively paid nothing for their ARS.
Plaintiffs
argued that they were entitled damages despite
the regulatory settlement because "UBS’s
fraudulent acts prevented Plaintiffs from receiving
a sufficiently high rate of interest or dividends
to compensate them for the risk of illiquidity
associated with their ARS investments."
Essentially, they were arguing that if they
had been appropriately informed about the securities’
liquidity risk, they would demanded and would
have been paid higher interest rates or otherwise
have enjoyed a higher investment return.
Judge
McKenna rejected this argument because plaintiffs
in securities actions must choose among prospective
remedies, between rescission and out-of-pocket
damages. Having elected rescission, the plaintiffs
"may not now seek additional interest or
dividends as benefits of ARS purchases they
have already elected to disavow."
Finally,
Judge McKenna found that the class plaintiffs
lack constitutional standing to asset claims
on behalf of "class members who purchased
UBS-underwritten ARS from brokerage firms other
than UBS and investors who transferred to another
brokerage firm ARS they purchased from UBS before
October 2007."
Discussion
Judge
McKenna’s ruling might seem to suggest
that the regulatory settlements represent the
end of the auction rate securities lawsuits.
However, conclusions along those lines could
well prove to be premature.
First,
Judge McKenna granted the motion with leave
to amend. Although there is ample reason to
doubt that these plaintiffs can circumvent Judge
McKenna’s concerns in an amended pleading,
the case itself is not over yet.
Second,
other courts may decline to follow Judge McKenna’s
conclusions. Indeed, in a March 31, 2009 AmericanLawyer.com
article (here)
Alison Frankel quotes the plaintiffs’ attorney
from the UBS case as saying "we’re
not convinced other courts will rule the same
way."
Third,
there are still the claims of those erstwhile
class members who were frozen out of the UBS
regulatory settlement, such as those who bought
the auction rate securities from a non-UBS broker
or who transferred their account away from UBS.
As the plaintiffs’ lawyer from the UBS
case also is quoted as saying in the American
Lawyer article, "the key to the auction
rate securities litigation is plaintiffs whose
securities were not bought back by the banks."
This
category of investors who were shut out of the
regulatory settlements also includes the investors
who bought their securities from banks or broker
dealers who have not yet entered regulatory
settlements.
Fourth,
in all the regulatory settlements, institutional
investors’ interests were treated differently.
For example, in the UBS settlement, institutional
investors cannot hope to have their investment
redeemed until at least 2010. These investors’
liquidity issues continue to give rise to new
litigation; for example, I described in recent
post (here) the lawsuit that KV Pharmaceuticals
filed in late February against Citigroup, in
which the company alleged that the illiquidity
of its auction rate securities investments was,
among other things, forcing the company to lay
off workers.
And
finally, there is the separate category of litigation
that has arisen against auction rate securities
investors, rather than against the auction rate
securities sellers. These cases involved companies
whose balance sheet exposure to auction rate
securities has harmed their financial condition,
and who face litigation from their own shareholders
who claim the companies failed to disclose their
exposure. The most recent of these cases, involving
Perrigo Company, is discussed here.
In
short, while Judge McKenna’s opinion unquestionably
represents a significant milestone, it by no
means represents the finish line for auction
rate securities litigation. Unfortunately, these
cases likely will be around for some time to
come.
All
of that said, Judge McKenna’s opinion does
hold out the hope that a large portion of these
cases can eventually be cleared out, and the
problem at least reduced over time, perhaps
to more manageable levels.
I
have in any event added the UBS dismissal to
my roster of settlements, dismissals and dismissal
motion denials in connection with the subprime
and credit crisis related lawsuits. The roster
can be accessed here.
March
30
Citigroup,
Wachovia Settle Auction Rate Probe With California
By Michael B. Marois
March
30 (Bloomberg) -- Citigroup Inc. and Wachovia
Corp., the bank purchased by Wells Fargo &
Co., reached an agreement with California regulators
under which their brokerage units will return
$4.7 billion to buyers of auction rate
securities.
Wachovia
agreed to repurchase $1.5 billion of the debt,
while Citigroup agreed to repurchase $3.2 billion
of auction- rate obligations it sold to customers
in California, Corporations Commissioner Preston
DuFauchard said in a statement.
Across
the U.S., about 20 banks and securities firms
have agreed to repurchase more than $50 billion
in debt to settle federal and state claims they
improperly touted the investments as safe, cash-like
investments. Banks managing frequent auctions
of the securities abandoned the $330 billion
market in February 2008, leaving thousands of
investors unable to sell their holdings.
“Today’s
multibillion-dollar agreement is an important
and timely relief for investors who lost funds
in the collapse of the auction-rate securities
market,” DuFauchard said.
The
market unraveled when banks that supported auctions
of the securities for two decades with their
own money as buyers of last resort pulled back
to preserve capital amid the mortgage market
collapse that has led to $1.3 trillion of credit
losses and writedowns worldwide.
States,
student-loan agencies and closed-end mutual
funds were the primary issuers of the securities,
long-term bonds with interest rates set at weekly
or monthly auctions. The debt, marketed by bankers
as cash equivalents, offered investors yields
of a quarter-percentage point or more above
conventional money-market funds, indexes show.
When
the market flourished, borrowers paid dealers
on average quarter-percentage point a year of
the par value of the debt to run the auctions,
generating about $825 million annually based
on the amount of sales. Citigroup increased
the commission its financial advisers earned
selling the bonds to investors as the market
stalled.
To
contact the reporter on this story: Michael
B. Marois in Sacramento at mmarois@bloomberg.net
March
30
If
Oppenheimer Gets Handout, Blame Canada
Commentary by Susan Antilla
March
30 (Bloomberg) -- With word out that the U.S.
is offering generous new welfare benefits, it
was only a matter of time before those opportunistic
foreigners who provided Lou Dobbs with his shtick
started crossing the border with their hands
out.
This
time, the benefits are bailout goodies for banks
and other financial institutions, and the grovelers
are management of a Canadian brokerage firm.
Oppenheimer
Holdings Inc., based in Toronto, said in several
regulatory filings this month that it wants
to reincorporate in Delaware and perhaps seek
federal rescue money.
Oppenheimer
“is exploring becoming a U.S. corporation
and a U.S. bank holding company in order to
help resolve the ARS problem for our clients,”
the company said in its annual letter to shareholders
released last week. (Toronto’s Oppenheimer
& Co. isn’t related to OppenheimerFunds
Inc., a unit of Massachusetts Mutual Life Insurance
Co.)
The
"ARS problem," of course, is the nasty
pickle Oppenheimer has gotten itself into with
customers who hold $929.6 million in auction-rate
securities, the ill-fated investments that
flat-lined in February 2008. The auction-rate
meltdown left investors at Oppenheimer and many
of its Wall Street brethren unable to liquidate
positions that had been marketed as, well, pretty
darned liquid, to customers who often had no
clue about the product’s risks.
Regulators
and the public cried foul, and firms including
Citigroup, Merrill Lynch & Co. and UBS AG
ponied up the money to make customers whole
after getting strong-armed by state regulators
and the Securities and Exchange Commission.
While
those firms caved, so-called downstream firms
like Oppenheimer dug in their heels in the face
of an onslaught of arbitrations, private lawsuits
and assorted allegations by securities regulators.
Downstreamers
said that they weren’t responsible for
the mess to the same degree as underwriters
like Merrill and Citigroup were. Hey, all they
did was sell the stuff, not underwrite it. Over
time, though, some downstreamers such as Fidelity
Investments bowed to pressure and made customers
whole, which increasingly makes Oppenheimer
look the part of the piker.
And
don’t think they don’t know it. If
ARS markets stay frozen, more client claims
may come, the company said in its annual report
filed with regulators on March 3. Worse, it
could mean “a competitive disadvantage”
now that competitors have settled similar litigation
with clients, Oppenheimer wrote.
Not
enough of a disadvantage to move them to buy
out their customers’ frozen positions,
though. “The company does not currently
believe that it is obligated to make any such
purchases,” it said.
Not
“currently” perceiving an obligation
to make good to customers could turn on a dime,
though, should Oppenheimer shareholders vote
for that move to Delaware and seek federal funds.
It
isn’t a slam-dunk that Oppenheimer will
actually move its base to Delaware; nor is it
certain that the company will ask for or get
any dough out of the various U.S. financial
rescue kitties. Oppenheimer has spilled a fair
amount of ink, though, in describing the possibilities
of leaving Canada, then attempting to secure
federal money.
Brian
Maddox, a spokesman for Oppenheimer, says the
firm’s reasons for seeking to incorporate
in Delaware include goals that are unrelated
to getting aid from the Troubled Asset Relief
Program or other government programs.
In
regulatory filings this month, the firm said
that the move, if approved by shareholders,
would simplify its corporate structure, establish
Oppenheimer unambiguously as a U.S. corporation
(its operations are largely in the U.S. anyway),
and enhance shareholder value by giving it a
larger role in U.S. capital markets.
That
“shareholder value” part might get
tricky, though, if the day comes that Oppenheimer
does accept bailout money. In the March 3 filing,
Oppenheimer said that should it become a bank-holding
company, which is under consideration, its financial
condition “could be adversely affected
by new regulations.” The company may also
be required to issue preferred shares or warrants
to the government, which might dilute current
shareholders, the company said.
Asked
why U.S. taxpayers should help Oppenheimer repay
its customers, Maddox said the company “has
not yet been able to find a viable private sector
or market solution” to the auction-rate
problem. “Oppenheimer believes that the
federal programs recently adopted were instituted
to add liquidity to markets where no market
solution exists.” Ah, remember the days
when Wall Street officials pounded the table
that the market always had an answer?
Come
one, come all, to America. Because it is only
here that you can peddle a product that blows
up on customers, fight the regulators who tell
you to give customers their money back, and
then rush to the government breadlines when
you see Uncle Sam whipping out his checkbook.
Presto, before you know it, taxpayers are paying
one another back for money they lost at the
hands of their trusty brokers -- even if the
brokers work for companies based outside the
munificent U.S.A.
Susan
Antilla is a Bloomberg News columnist. The opinions
expressed are her own. To contact the writer
of this column: Susan Antilla in New York at
santilla@bloomberg.net
March
26, 2009
Oppenheimer
May Seek TARP Funds to Repay Auction-Rate Clients
By
Miles Weiss
March
24 (Bloomberg) -- Oppenheimer & Co.’s
Canadian parent said it may seek money from
the U.S. government’s financial- bailout
programs to repay brokerage customers facing
losses on frozen auction-rate securities.
Oppenheimer
Holdings Inc., based in Toronto, asked shareholders
to approve an incorporation switch to Delaware,
which would make the firm more likely to qualify
for the rescue funds, according to a March 13
proxy statement. Money from the Treasury’s
Troubled Asset Relief Program “could assist
us” in repurchasing securities from clients
trapped when the $330 billion auction-rate market
seized up, the company said in the filing.
“It
takes your breath away,” Anthony Sanders,
a finance professor at Arizona State University,
said in an interview. “We’re going
to ask taxpayers, the people who got hurt by
these securities, to pay for buying them back.”
Sanders, a former head of mortgage-backed securities
research at Deutsche Bank AG, testified before
Congress this month on TARP fund use.
Federal
and state regulators forced companies including
New York-based Citigroup Inc. and UBS AG of
Zurich to buy back more than $50 billion of
auction-rate securities that plunged in value
in February 2008 after underwriters pulled out
of the market. Oppenheimer Holdings, whose retail
clients were stuck with about $930 million of
the debt, said in a March 3 regulatory filing
that repurchasing the securities “would
likely have a material adverse effect”
on its financial condition.
Brian
Maddox, a spokesman for the company, said getting
TARP money is only one reason to reincorporate
in the U.S. The move also would simplify its
corporate structure and provide greater access
to U.S. capital markets.
‘No
Assurance’
“We
have no assurance that we would qualify for”
U.S. bailout funds, Oppenheimer Holdings said
in the proxy statement, “nor have we determined
that we would participate in any of these programs.”
Oppenheimer
Holdings, formerly Fahnestock Viner Holdings
Inc., owns Oppenheimer & Co., which is already
incorporated in Delaware. The New York-based
unit’s roots go back to the late Leon Levy
and Jack Nash, founders of the hedge fund Odyssey
Partners LP. The company is separate from OppenheimerFunds
Inc., a unit of Massachusetts Mutual Life Insurance
Co. of Springfield, Massachusetts.
Auction-rate
securities typically are long-term bonds or
preferred shares whose interest rates are set
at weekly or monthly auctions run by broker-dealers.
Wall Street firms marketed the securities as
a cash equivalent that offered higher yields
than conventional money-market funds.
Massachusetts
Action
Many
investors got stuck holding auction-rate securities
when outside bidders disappeared and investment
banks that ran the auctions refused to buy the
securities.
After
getting underwriters such as Citigroup to buy
back the securities at face value, state regulators
began focusing on banks and brokerages that
resold the auction-rate debt.
In
November, the Massachusetts Securities Division
filed an administrative action seeking to compel
Oppenheimer & Co. to make state residents
whole on as much as $56 million of auction-
rate securities.
The
state said Oppenheimer & Co. promoted auction-rate
securities to clients as Chief Executive Officer
Albert Lowenthal and members of management sold
their personal holdings amid the market’s
decline. Oppenheimer Holdings denied the allegations
at the time and said it planned to “vigorously”
defend the brokerage unit.
Arbitration
Claims
A
Financial Industry Regulatory Authority arbitration
panel last month ordered Credit Suisse Securities
USA LLC of New York to pay some $400 million
in fees to resolve claims it misled STMicroelectronics
NV into buying auction-rate securities. At the
time, experts said it could lead to a spate
of other arbitration claims.
Oppenheimer
& Co. was notified last month that two clients,
US Airways Group Inc. and Hansen Beverage Co.,
had filed arbitration claims with FINRA, according
to the firm’s March 3 annual report. US
Airways, the Tempe, Arizona-based airline, wants
Oppenheimer & Co. to buy back $250 million
in auction-rate securities. Hansen Beverage
is seeking to have a $60 million purchase rescinded.
“Many
of our competitors have redeemed auction-rate
securities from their customers and our failure
to have done so presents a significant issue
for us with our clients and regulators,”
Oppenheimer Holdings said in its proxy statement.
Programs
such as TARP, “might under certain circumstances
provide the liquidity necessary” to redeem
auction-rate securities held by clients.
Daniel
Cravens, a spokesman for US Airways, declined
to comment on the airline’s arbitration
claim. Heather Marsh, an attorney at Hansen
Natural Corp. of Corona, California, the parent
company of Hansen Beverage, didn’t immediately
return a call.
March
17
Insurgent
FAs at Raymond James Stage Revolt;
Reveal
Company's Tactics to Push ARS
By Phil Trupp
Washington,
March 17: A group of irate Raymond James
financial advisors (FAs) have turned to insurgency,
charging the firm and its board of directors
"lied, manipulated the truth, and threatened...employees"
if disclosure of the company's policy regarding
the sale of auction rate securities was made
public. The company's board first discussed
the liquidity problems of auction rate securities
in October 2007, but failed to alert its clients
or brokers, according to these FAs.
In internal documents and e-mails made available
exclusively March 11 to AuctionRatePreferred.Org.,
the Raymond James FAs said their firm "aggressively
pushed ARS onto both financial advisors and
clients without regard to client suitability,"
describing the securities as "AAA and totally
safe" in company e-mails, booklets, and
on conference calls.
Sources said the company, while using the typical
sales pitch of ARS liquidity and safety, "just
like money market funds," dictated which
ARS issues would be placed in client accounts,
"without consulting either FAs or clients."
The company failed to provide a prospectus to
its FAs or its clients, these sources said.
When the market collapsed in February 2008,
the firm told its brokers and clients, "You
should have read the prospectus," according
to company sources.
As late as February 1, 2008, Raymond James warned
its FAs to avoid purchases of Nicholas Applegate,
but said "other ARS are still strong buys,"
according to an internal memo. The insurgent
FAs, many of whom are left holding frozen ARS,
said the February 1 message was followed by
a notice to certain board members and the Chairman's
Council to sell their ARS holdings.
They said the Investment Policy Committee pushed
ARS as "higher cash flows for your cash
balances, with a trail." At the same time,
a company research analysts assured FAs and
clients that proper research was conducted prior
to the market collapse on February 14, 2008.
Referring to the research analysts, the FAs
said the effort was "miniscule. They published
nothing."
"The firm has brazenly and repeatedly said
it has no intention of resolving complaints
unless forced to do so," these sources
said, adding: "On the last earnings conference
call for stock analysts, Mr. Tom Jones, the
CEO said, 'When it comes to auction rates, I
am not worried about class action lawsuits or
the government. The regulators are engaging
in extortion, pure and simple.'"
AuctionRatePreferred.Org received more than
150 internal e-mails from the aggrieved FAs.
The purpose of the supporting materials, they
said, was to demonstrate "how vigorously
the firm sold ARS as liquid cash equivalents,
both to financial advisors and to clients."
The FAs complained that there was no "natural
demand for ARS until Raymond James created it."
They said their clients are not wealthy people:
"Some have medical bills, some have kids
in college, and some could lose their homes,"
the FAs explained. "The firm is causing
real hardship for investors--and real hostility."
March 26, 2009
If
you haven't been fully redeemed yet....Update
5
You've
got to kick up a major stink with AGs, regulators,
the press and you should insist that your broker
do NO business again -- and ever -- with your
ARPS issuer until your ARPS issuer has redeemed
100%.
You
need to take legal action against your broker
(individually), against his firm collectively,
and against the issuer of your ARPS.
You
need to accept the fact that getting your money
back in full is NOW your full-time job. And...
You
need to accept the fact that if you want the
press (including this blog) to help you, then
you have to come clean and be prepared to publicly
reveal your situation -- including how much
you have at stake, who sold it to you, what
they told you when they sold it to your and
everything you've learned since. The press will
NOT tell your story if you don't tell your story.
And
you'd better start mobilizing people who are
still stuck in ARPS. The more names you have,
the more pressure you can bring on the various
government people who can help you -- like the
attorneys-general. Remember the only thing most
AGs care about is being elected governor. They
see their job as a stepping stone to the governorship.
You need to make them understand they also need
to help you the taxpayer/voter, and that you
represent lots of votes. I've suggested to every
reader who's emailed me that if you send me
your name and a small ad or press release, I'll
run it on this site for free. Then you can organize
your own group. But frankly, I'm not doing your
work for you.
Now,
I don't want to sound mean or unsympathetic,
but there are a heck of a lot of you out there
with unredeemed ARPS paying horribly low interest
rates, who somehow think that waiting and praying
will get you your cash back. You have to understand
that no one on Wall Street cares if your wife
is sick, if your ARPS money is the last money
you have, if you've been forced to sell your
house and you've been forced to eat in soup
kitchens. Many brokerage firms are still getting
fees off your ARPS. And the issuers are earning
big money and extra fees because they're using
your ARPS as cheap borrowing/leverage. Face
it: appealing to Wall Street's better nature
doesn't work. (I've read many of your letters.)
The people who invented and sold them to you
don't care about you. I repeat: they don't care
about you. They care about their fees. The only
action that will get your money back is when
the regulators threaten them with fines and
insist on redemption at par. Some of our Attorneys-General
have done well for ARPS holders -- New York
and Massachusetts stand out. And there are other
legal actions you can take. "Legal"
is all that's left to you. It's been over a
year. The evidence of ARPS wrong-doing is destroyed
as you read this. Get up and do something now!
If
I were still holding ARPS, I'd want to set myself
up as the contact point for people in my state
still stuck in ARPS and for people still holding
ARPS by my issuer and sold to me by my broker.
I'd want to collect names, numbers, addresses,
stories, etc. I'd alert everyone to the fact
that I'm doing this with the specific aim of
making a big enough stink to get our money back.
I'd take small ads in the Wall Street Journal.
I'd buy ads on Google. etc. The more names I
have the more power. Names are all that attorneys-general
care about. Remember they're political animals.
--
Harry Newton
|
March
12, 2009
PIMCO
to buy back $225 million of auction rate securities
DOW
JONES NEWSWIRES
Five
closed-end funds at Pacific Investment Management
Co. will buy back another $225 million in auction-rate
securities as the giant money manager looks to boost
its minimum asset coverage in order to resume dividend
payments.
The
funds were forced to suspend their March and April
dividend payments because of the falling value of
the auction-rate preferred shares.
The
buyback is reversal for Pimco, which had refused to
redeem these securities for months after the auction-rate
market froze up a year ago. But deteriorating markets
and legal requirements are forcing Pimco to do so
after all. Late last month, the funds announced plans
to buy back about $342 million of the securities.
The
purchases will push the company's asset coverage of
the auction-rate preferreds back above the 200% level
required for the funds to pay dividends.
The
Pimco funds involved in the move are the Corporate
Income (PCN), Corporate Opportunity (PTY), High Income
(PHK), Floating Rate Income (PFL) and Floating Rate
Strategy (PFN) funds. The buybacks begin March 30
for all the funds, except the Floating Rate Income
fund, which launches April 1.
Pimco's
closed-end funds, like dozens of others, have for
years issued auction-rate preferreds to borrow money
and add leverage to the funds. Such securities are
long-term debt with lower, short-term rates that are
set at periodic auctions.
When
the auction-rate market froze, holders wanted their
money back, so most closed-end fund shops started
redeeming some securities or worked on plans to do
so. But Pimco balked, pointing out that redeeming
the preferreds would reduce leverage in its funds,
which in turn would shrink income for closed-end fund
shareholders. The firm's preference for its common
shareholders incensed brokers and preferred holders.
-By
Lauren Pollock, Dow Jones Newswires; 201-938-5964;
lauren.pollock@dowjones.com
March
11, 2009
Oppenheimer
has been the worst -- totally intransigent and unsympathetic
-- according to ARPS holders who were sold their stuff
by Oppenheimer. Now the company has a new wrinkle
-- Get the U.S. Government to redeem the ARPS money.
This gives chutzpah a whole new meaning. Read on.
Oppenheimer Plans Move to U.S.
New
York Times Dealbook: As Washington considers putting
a tighter leash on Wall Street, some have expressed
concern that financial firms might flee in the face
of new regulation.
But
the opposite is happening with Oppenheimer Holdings,
a Toronto-based securities firm that announced Wednesday
it would seek shareholder approval to move to the
United States. The company, which last year bought
Canadian Imperial Bank of Commerce’s United States
investment banking business, said that one reason
for the shift is an attempt to gain access to the
plethora of financial lifelines being thrown to United
States-based firms.
Most
of Oppenheimer’s business is in the United States,
so being incorporated there as well would simplify
the firm’s corporate structure. It would also
provide tax benefits and could make its publicly traded
stock more attractive to investors, the company said.
The
possibility of getting bailout funds is also a factor.
In
Wednesday’s news release, Oppenheimer said one
of the principal reasons for moving was “potential
eligibility to participate in U.S. government finance
programs that are limited to entities organized in
the United States.”
“It
is a matter of corporate history that we found ourselves
in Canada, but the confluence of a number of factors
makes this an opportune time to make this change,”
Albert G. Lowenthal, Oppenheimer’s chairman,
said in the news release.
Like
most big financial firms, Oppenheimer was battered
by the banking crisis last year.
In
a recent filing with the Securities and Exchange Commission,
it called 2008 “the most difficult year in the
company’s history.” (And Oppenheimer has
a long history: Its roots date back to 1881, when
William Fahnestock, whose father was a financial adviser
to Abraham Lincoln, founded one of its predecessor
companies, according to Oppenheimer’s Web site.)
Oppenheimer
also faces the possibility of a large bill to redeem
auction-rate securities that it sold to customers
before the market for this paper dried up in early
2008.
While
Oppenheimer says it believes it will not have to redeem
the approximately $930 million in outstanding notes
sold before the market freeze, it also indicates in
regulatory filings that it has been in negotiations
with United States state regulators on the matter
— and the outcome is still unclear.
That’s
where the move to the United States could come in.
Oppenheimer said in its latest annual report that
bailout programs for United States-based firms might
provide it with the necessary liquidity to buy back
those securities.
To
take part in the programs, though, it might need to
sell preferred stock or warrants to the United States
government, the filing said.
Go
to Oppenheimer Press Release via PRNewswire »
Go
to Oppenheimer’s Latest Annual Report to the
S.E.C. »
March
10, 2009
Do
I have a Claim Against my Broker if I own Auction
Rate Securities?
from
a document by the law firm of Crosby & Higgins
LLP
Obviously,
this analysis will depend largely on the specific
facts of your securities, but below is a checklist
which sets forth some of the factors that may have
a bearing on recovery against your Broker:
+
Did the Broker make any representations to you about
the Auction Rate Securities?
+
Did the Broker disclose the risks associated with
Auction Rate Securities?
+
Did the Broker provide a prospectus with respect to
the Auction Rate Securities?
+
Did the Brokerage Firm list the Auction Rate Securities
as “cash equivalents” on your monthly statements?
+
Did the Brokerage Firm fail to mark down the value
of the Auction Rate Securities on your recent monthly
account statements?
+
Do you have exigent circumstances requiring immediate
access to cash that is now tied up in illiquid Auction
Rate Securities?
Crosby
& Higgins also have published a table on ARS
Settlement Summaries. It summarizes where each of the issuing and brokerage firms stand.
March
9, 2009
Stifel
to buy back all auction rate securities
St.
Louis Business Journal - by Kelsey Volkmann
After
first saying that it would buy back just some of the
frozen auction rate securities that 1,200 of its retail
investors hold, Stifel Financial Corp. said Monday
it would repurchase all $180 million of them.
Stifel
Financial Corp.’s subsidiary, Stifel Nicolaus
& Co. Inc. said it would voluntarily buy back
100 percent of the auction rate securities starting
in June and continuing over the next three years.
Stifel
said it would first help smaller investors by offering
to repurchase at par the greater of 10 percent or
$25,000 of auction rate securities (ARS) in June this
year, next year and in 2011. About 40 percent of investors
will receive 100 percent liquidity by this June, the
company said.
Stifel
said it would have until June 2012 to complete buy-backs
of the balance of any outstanding auction rate securities.
“Since
the collapse of the ARS market, redemptions and restructurings
have resulted in liquidity for many of our clients,
reducing retail client holdings by more than 50 percent,”
said Stifel Chairman and CEO Ronald Kruszewski, in
a statement. “Unfortunately, some clients have
had little or no relief. This plan ultimately will
provide liquidity to 100 percent of our ARS retail
clients.”
Missouri
Secretary of State Robin Carnahan, who had blasted
Stifel’s partial buy-back plan as inadequate,
also dismissed the expanded repurchase offer Monday
as "too little, too late."
“It
worries me that Stifel made open-ended statements
and no guarantees about getting clients full access
to their money," she said in a statement. "Their
clients deserve guaranteed repayments. I have heard
from investors in Missouri and over a dozen other
states who desperately need their savings, and in
three years it will be too little, too late. Many
other financial institutions have done the right thing
and guaranteed to make their investors whole. Now,
it’s time for Stifel to do the same.”
Kruszewski
had originally said last month that Stifel shouldn’t
have to repurchase all the auction rate securities
because the company didn’t know that the market
would collapse or all the risk involved.
“…Neither
Stifel nor its clients had access to the information
available to the major market participants regarding
the impending collapse of the ARS market,” Kruszewski
said Monday. “Had the major market participants
disclosed to the entire marketplace the material facts
known by them, Stifel would not have sold ARS to its
clients. While several larger firms have announced
more complete repurchase plans, Stifel’s lack
of knowledge of the impending market collapse is the
critical difference that serves the foundation of
Stifel’s position.”
Other
brokerages have also bought back auction rate securities
from clients.
Commerce
Brokerage Services Inc., an affiliate of Commerce
Bank, bought back $545 million of auction rate securities
from 140 investors last year.
In
August, Carnahan reached a $9 billion agreement with
Wachovia Securities that returned money to more than
40,000 investors.
While
these companies never admitted wrongdoing, Carnahan’s
office suggested that investors were misled about
the risk involved in auction rate securities. The
market collapsed in February 2008 when investors became
alarmed at the prospects of corporate borrowers covering
debt service on the securities, leaving investors
unable to access $330 billion in investments nationwide.
St.
Louis-based Stifel Financial Corp. (NYSE: SF) has
about 3,300 employees in more than 200 offices in
the U.S. and three in Europe.
March
2, 2009
These
are the people who are meant to protect Floridians
from fraud.
Note
I said "meant." Floridians got taken bigtime
by the ARPS fraud. Where are these people? The last
we heard from them was August 15, 2008 -- more than
six months ago.
Don Saxon of the Florida Office of Financial Regulation.
He looks like a bulldog.
In
their 8/15/2008 press release, the Florida Office
of Financial Regulation took credit for something
it did next-to zero work on:
TALLAHASSEE,
FL – TALLAHASSEE, FL – Don Saxon, Commissioner
of the Office of Financial Regulation, is please*
to report that the North American Securities Administrators
Association (NASAA), the New York Attorney General,
and the Office of the Missouri Secretary of State
announced today that a settlement has been reached
with Wachovia Securities (Wachovia) relating to
their sale of auction rate securities. The settlement
will give Wachovia clients, including those in Florida,
access to billions of dollars in funds that have
been frozen in the auction rate securities (ARS)
market.
Under the terms of the August 15th settlement, Wachovia
will offer to repurchase, no later than November
28, 2008, all illiquid auction rate securities from
all Wachovia individual investors, charities, not-for-profit
companies and institutional clients who have account
values and household assets of up to $10 million.
All other investors will be able to redeem their
auction rate securities no later than June 30, 2009.
Wachovia will also:
• Fully reimburse all retail investors who
sold their auction rate securities at a discount
after the market failed in February 2008;
• Consent to a special, public arbitration
procedure to resolve claims of consequential damages
suffered by retail investors as a result of not
being able to access their funds, in which Wachovia
will not contest its liability for the illiquidity
of the auction rate securities and in which Wachovia
will pay all forum fees;
• Reimburse all refinancing fees to municipal
issuers who issued auction rate securities through
Wachovia since August 1, 2007, and who refinanced
those securities after the market failed; and
• Pay $ 50 million in civil penalties to the
states.
As further details become available on the reimbursement
process the Office will post additional information
on its website at www.flofr.com .
The settlement concludes an investigation into allegations
that Wachovia Corporation misled its clients by
falsely assuring them that ARS securities were as
safe and liquid as cash. The ARS markets froze in
February this year, triggering complaints from investors
who could not withdraw money from their accounts.
The Florida Office of Financial Regulation has been
a participant in NASAA's special task force created
to provide remedies for investors. The NASAA task
force is continuing their investigations of other
companies involved in selling ARS products to investors.
Commissioner Don Saxon stated that “”the
Office of Financial Regulation is very pleased with
the continued success of the NASAA task force on
auction rate securities and the impact this settlement
will have on Florida investors.”
There
are dozens of other broker dealers who fleeced Floridians
out of millions of dollars. And Florida is not chasing
them. Why not? Too much golf? Has the sun got to their
brains?
P.S.
Saxon was meant to retire last September but there's
nothing on their miserable web site as to whether
he did, or didn't and who his replacement might or
might not be.
*
That please should be pleased. What do these Floridians
know about English? Clearly as much as they know about
chasing fraud.
Wednesday,
March 4
Carnahan
to Stifel: Buy back all auction-rate securities
from
the Kansas City Business Journal - by Kelsey Volkmann
Contributing Writer
Missouri
Secretary of State Robin Carnahan wants Stifel Nicolaus
& Co. Inc. to buy back all the auction-rate securities
its customers hold.
On
Tuesday, Carnahan called on St. Louis-based Stifel
Nicolaus, a unit of Stifel Financial Corp. (NYSE:
SF), to buy back all of the illiquid securities that
hundreds of investors hold. Auction-rate securities
are investments for which the interest rate is reset
regularly.
Stifel
Financial said last month that it would spend $35
million to $40 million to buy back some of its customers’
auction-rate securities. On Friday, it said it may
buy back more.
“Stifel’s
offer is inadequate, and their vague statement suggesting
they ‘may increase the amount’ has risked
the credibility they have with their customers,”
Carnahan said in Tuesday release. “I have heard
from dozens of investors who desperately need to know
when they will have access to their savings. After
many other banks have done the right thing and made
their investors whole, it’s time for Stifel to
step up to the plate.”
Stifel
said it would offer to repurchase the greater of 10
percent or $25,000 of auction-rate securities held
by each retail client who bought them at Stifel before
the auction-rate securities market collapse a year
ago. About 1,200 retail client accounts hold auction-rate
securities, and about 40 percent of these accounts
hold $25,000 in auction-rate securities, so they will
receive 100 percent liquidity. The remaining 60 percent
will get between 10 percent and 50 percent.
Stifel
has said it didn’t have as much knowledge as
the larger firms of the impending market collapse
so it shouldn’t have to buy back all the securities.
Commerce
Brokerage Services Inc., an affiliate of Commerce
Bank, owned by Kansas City-based Commerce Bancshares
Inc. (Nasdaq: CBSH) said in August that it planned
to buy $545 million of auction-rate securities from
140 investors .
In
August, Carnahan reached a $9 billion agreement with
Wachovia Securities that returned money to more than
40,000 investors.
Although
these companies never admitted wrongdoing, Carnahan’s
office suggested that investors were misled about
the risk involved in auction-rate securities. The
market collapsed in February 2008 when investors became
alarmed at the prospect of corporate borrowers covering
debt service on the securities, leaving investors
unable to access $330 billion in investments nationwide.
Stifel
Financial is led by Chairman and Chief Executive Ronald
Kruszewski. The company has about 3,300 employees
in more than 200 offices in the United States and
three in Europe.
March
2, 2009
Top
Congressional Economist Says ARS Shutdown Was "Scripted
Failure"
House
Financial Services Committee Continues Earlier Investigation
While Obama Economic Team Weighs New "Liquidity
Facility" For Fraud Victims
By Phil Trupp
Washington,
March l: "No question it was a scripted failure,"
according to a high-ranking congressional economist,
referring to the February 2008 collapse of the auction-rate
securities market. The source, interviewed on background
to avoid compromising ongoing forensic examinations
of the $336 billion securities fraud, said he has
been contacted to "hundreds of people who were
let down. Fiduciary responsibility was neglected in
a lot of cases. It's a bloody mess."
The House Financial Services Committee, which held
hearings last September on the ARS debacle, could
hardly escape the "scripted" nature of events,
the source revealed. Since hundreds of banks and broker-dealers
refused to support the auctions "on cue"
last February, members of the Committee have tentatively
concluded that mass auction failures were orchestrated.
"There's no question" of broker-dealer collusion
on a massive scale, the source added. "But at
this stage of our investigation all we've got is anecdotal
evidence."
However, one apparent clue of scripting is the flurry
of broker-dealer insider trading of ARS paper just
days prior to the market's collapse. Investigation
by Massachsetts securities authorities of Oppenheimer
executives Albert Lowenthal, Robert Lowenthal and
Greg White has added to the scripted failure theory.
Evidence also indicates wide scale insider trading
at Merrill Lynch, among dozens of other broker-dealers.
"Plenty broker-dealers were preparing to pull
their support of the market knowing that the auctions
would collapse, " the source said. "Clearly
the nature and magnitude of the coming auction failure
was never conveyed to investors, he added.
The Committee last September heard detailed testimony
from regulatory and financial industry representatives
but did not issue a series of recommendations at the
conclusion of the hearings.
"The bank bailout got in the way," the source
explained. "We believe the SEC needs to come
up with a ruling that allows those still stuck in
the ARS market to get out," he said. Approximately
$110 billion in auction-rate securities remain illiquid.
He said closed-end funds have been reluctant to redeem
ARS "because it reduces profits to common shareholders.
So it's necessary," he continued, "to create
other kinds of securities to bring back leverage to
replace ARS losses."
Barney Frank (D., MA), chairman of the House Committee,
has suggested that the SEC "take whatever action
it can" to create a new leverage mechanism for
closed-end fund issuers. The congressional source
backed Frank's position. "The whole system,"
he said, "was the villain." He is pressing
for a restructuring of the Dutch auction mechanism--"what
remains of it" in order to make remaining investors
whole.
He indicated that President Obama's economic team
is prepared to create what he described as a new "liquidity
facility," a buyer of last resort headed by the
Treasury Department and the Federal Reserve bank,
to be funded with TARP money. "It (the proposed
facility) may issue short-term bonds to generate the
needed liquidity," the source explained.
He left little doubt that the committee will continue
to investigate details of the ARS shutdown. At the
same time, there is a general sense of anger and confusion
evident among members of the Committee from both its
democratic and republican members. The characteristically
understated Rep. Spencer Bachus (R., AL) told a reporter
after last September's hearings that the ARS market
was "almost like a roach motel, a financial roach
motel. They (investors) could get in but they couldn't
get out. It was a nightmare for our cities and counties
and our states."
He said the committee was "making real progress"
and is beginning see the auction market resolve its
outstanding liquidity problems. "I think that
will have positive implications for the economy,"
Rep. Bachus said.
+++++++++++
The
author is writing a book on the ARS scandal titled
MONEY ON ICE: How Ordinary Investors Beat the Biggest
Fraud In Wall Street History. If you wish to tell
of your personal ARS nightmare, please e-mail Phil
Trupp at PZBAR@COMCAST.NET or phone 202 686 1663.
February
22, 2009
Firms
still face big ARS claims
Institutional
investors, 'downstream' B-Ds begin to sue
By Dan Jamieson, InvestmentNews
Despite
having settled regulatory actions involving auction
rate securities, the big Wall Street firms aren't
out of the woods yet.
Citigroup
Inc., Merrill Lynch & Co. Inc. and UBS Financial
Services Inc., all of New York, and St. Louis-based
Wachovia Securities LLC are facing a number of individual
lawsuits from institutional investors who still have
huge sums locked up in the illiquid securities.
What's
more, last month, the first so-called downstream brokerage
firm case was filed, when Amegy Bank NA of Houston
and its broker-dealer affiliate Amegy Investments
Inc. filed an arbitration claim against Merrill Lynch.
Amegy
claims it purchased more than $240 million of ARS
from Merrill, which it said it then sold to its clients.
Amegy's suit seeks rescission of the remaining $140
million that its clients still hold, plus unspecified
damages.
In
a statement, Merrill Lynch spokesman Mark Herr said
the suit has no merit.
The
downstream firms, as well as institutional and wealthier
individual investors, weren't part of the ARS buyback
agreements announced last year. Those settlements
with regulators cover only retail investors at the
major firms.
The
underwriting firms "got regulators to believe
[that the ARS mess was] a point-of-sale problem"
rather than fraud by the underwriters, said an executive
with a regional firm who asked not to be identified.
The
market for ARS froze a year ago after all the major
underwriters stopped supporting auctions for the securities.
More
claims from downstream firms are coming, said Paul
Yetter, a partner at Yetter Warden & Coleman LLP
in Houston, which represents Amegy Bank.
He
said he has more such cases but could not yet comment
on those claims.
"It
wouldn't surprise me if other [downstream firms] took
action like this, especially if Amegy is able to get
some traction ... and get money back for its clients,"
said Michael Decker, co-chief executive of the Regional
Bond Dealers Association in Alexandria, Va.
He
estimated that $30 billion to $40 billion worth of
ARS are still held by downstream firms.
The
major firms are "leaving innocent [investors
and downstream firms] with no other option" but
to sue, Mr. Yetter said.
And
that's what they're doing. Some of the claims filed
so far:
•
American Eagle Outfitters Inc., a Pittsburgh-based
specialty retailer, this month filed a lawsuit in
federal court seeking to force Citigroup to take back
the $258 million worth of illiquid ARS the bank sold
to it.
•
Another suit against Citigroup, filed in federal court
in November by Hutchinson (Minn.) Technology Inc.,
is pending in arbitration.
Hutchinson
said it is stuck with $31 million of ARS it bought
from Citigroup.
A
separate claim against UBS by Hutchinson Technology
for rescission of $70 million of ARS was settled in
December, with UBS providing a no-net-cost $59.5 million
line of credit.
•
A federal lawsuit filed against UBS by Plug Power
Inc. was settled in December, with UBS providing a
no-net-cost line of $62.9 million, equal to the value
of Plug Power's frozen ARS, according to an SEC filing
by the Latham, N.Y.-based energy company. UBS also
agreed to repurchase the securities at any time from
June 30, 2010, to July 2, 2012.
•
In December, Hanna Steel Corp., a Fairfield, Ala.-based
tube manufacturer, sued Charlotte, N.C.-based Wachovia
Corp. and its broker-dealer units in federal court
seeking rescission of $12.9 million worth of ARS.
•
TGS-NOPEC Geophysical Co. ASA of Asker, Norway, filed
an arbitration in November against Merrill Lynch seeking
the repurchase of $64.5 million in frozen ARS.
Citigroup
spokeswoman Danielle Romero-Apsilos declined to comment.
UBS
and Wachovia had not responded to questions by press
time.
The
fights among the heavyweight investors and Wall Street
firms could get nasty.
Claimants
of all stripes said the big underwriting firms knew
by late 2007 that auction failures were imminent and
were reducing their inventories, but never disclosed
any impending problems to their clients.
Lawsuits
by institutional clients cite many of the charges
previously made by regulators.
But
unlike many retail investors, some institutional clients
say they had warning of ARS problems and specifically
raised concerns late last year with their brokerage
firms but got reassurance that all was well.
Several
claim that their brokers violated written investment
policy statements for cash reserves that prohibited
investments in long-term securities or anything with
limited liquidity.
Amegy
Bank's claim says it "bought the securities from
Merrill at the same informational disadvantage as
Merrill's direct retail customers."
Mr.
Herr begs to differ.
"Amegy
began selling ARS it purchased from Merrill Lynch
in 2004, and it is unfathomable that it would now
claim that when it sold these products to its clients,
it didn't know or understand what it was selling,"
the Merrill spokesman said in his statement. "It
appears Amegy failed to do even the most routine due
diligence."
Amegy's
claim said it performed an exhaustive analysis of
the credit quality of ARS in the summer and fall of
2007, "but no amount of research or analysis
could have led Amegy to learn of Merrill's deceptive
marketing and support of the ARS market."
Mr.
Herr said Merrill Lynch did disclose its role in the
auction process and informed purchasers that auctions
could fail.
E-mail
Dan Jamieson at djamieson@investmentnews.com.
February
20, 2009
Auction-Rate
Bonds Claim Victims Year After Collapse (Update1)
By
Michael McDonald
Feb.
20 (Bloomberg) -- Mike Stelzer expected to retire
after selling his cattle ranch south of Bakersfield,
California. Instead, the 73-year-old is raising Holsteins
on leased land, unable to quit because a chunk of
his $2 million nest egg is stuck in auction-rate securities
paying next to nothing.
“I
have lost all faith in bankers and Wall Street,”
said Stelzer, who invested the proceeds from the sale
of his ranch in the securities through San Francisco-based
Wells Fargo & Co.
A
year after collapsing, the one-time $330 billion market
for debt with rates typically set every 7, 28 or 35
days is still claiming victims. Investors are stuck
with as much as $176 billion of the securities even
after regulators forced banks to buy back more than
$50 billion of auction-rate debt that was marketed
as safe, cash-like instruments.
The
market’s meltdown, the result of the seizure
in credit markets, initially left investors with bonds
they couldn’t sell, though the securities paid
interest at rates as high as 20 percent. Now, rates
on securities auctioned every seven days pay an average
1.36 percent, according to an index from the Securities
Industry and Financial Markets Association, after
central banks slashed borrowing costs.
Investors
are stuck because interest on auction-rate securities
is lower than what issuers would have to pay on new
borrowings, giving them little incentive to refinance.
Other
options for investors are hoping that an auction succeeds
or selling their securities at a loss on the secondary
market. Of the 739 auctions reported the week ended
yesterday, 82 percent failed, according to the Municipal
Securities Rulemaking Board’s Electronic Municipal
Market Access web site.
Stelzer,
whose old ranch was in Corona, earns an annual interest
rate of less than 1 percent on $675,000 in so-called
auction-rate preferred securities issued by New York-based
money manager BlackRock Inc. He sold $675,000 of his
holdings in October at a loss of $103,000 and got
all his money back on $650,000 of debt that was refinanced
by the borrower.
Kathleen
Golden, a Wells Fargo spokeswoman in San Francisco,
said the company doesn’t comment on individual
clients.
UBS
AG and nine of the 10 other biggest underwriters of
municipal auction-rate debt reached agreements with
state and federal regulators last year to redeem at
par the bonds they sold to individual investors and
some institutions; Lehman Brothers Holdings Inc. declared
bankruptcy before settling.
The
last resolution occurred in October, when the Financial
Industry Regulatory Authority said City National Securities
of Beverly Hills, California, BNY Capital Markets
LLC of New York and Harris Investor Services of Chicago
would redeem $60 million of the debt.
Regulators,
including officials in Massachusetts and Illinois,
are now focused on banks and brokerages that resold
the securities, said Denise Voigt Crawford, the Texas
Securities Commissioner. Those companies didn’t
underwrite the securities or run auctions, so proving
they knew the market might fail may be more difficult,
she said.
A
resolution can’t come soon enough for Brad Dickson
of Los Angeles, whose holdings of BlackRock Inc. and
Van Kampen Investments Inc. securities purchased through
Oppenheimer Holdings Inc. pay less than 1 percent.
“I’m
getting paid virtually nothing,” Dickson said.
“This is money that’s frozen, that basically
has a zero return, and I’m stuck with it indefinitely.”
States,
student-loan agencies and closed-end mutual funds
sold auction-rate securities to raise money for 20
years or more. Yields on the bonds were reset at weekly
or monthly auctions run by the underwriters, providing
the borrowers with money-market rates.
The
market unraveled in February 2008 as dealers who supported
auctions for two decades with their own money suddenly
pulled back to preserve capital amid the mortgage
slump that led to $1.1 trillion of credit losses and
writedowns at the world’s largest financial institutions.
Individual
investors hold at least $20 billion of the debt, with
companies and institutions owning the remainder, according
to America’s Watchdog, a Washington-based adviser
on securities litigation.
An
arbitration panel ruled Feb. 13 that Zurich-based
Credit Suisse Group AG must pay STMicroelectronics
NV of Geneva more than $400 million to resolve claims
that it misled the semiconductor maker into buying
auction-rate securities.
“We
respectfully disagree” with the award, Credit
Suisse spokesman David Walker said. The bank is “reviewing
our legal options.”
About
$85.2 billion in municipal securities remain outstanding,
down from $211 billion a year ago, according to data
compiled by Bloomberg. About $33 billion in auction
preferred shares remain, according to Thomas J. Herzfeld
Advisors Inc. in Miami.
The
$176 billion of auction-rate debt that issuers haven’t
reclaimed includes $57.7 billion tied to student loans,
corporations and mortgages, Bloomberg data show.
Yesterday,
Moody’s Investors Service cut the credit ratings
on $5 billion of Brazos Student Finance Corp. bonds
backed by student loans because most are funded with
auction-rate securities. The interest Brazos collects
on loans financed by auction-rate securities failed
to keep up with the cost of borrowing, Moody’s
said in a statement.
“Most
of the trusts are expected to generate slightly negative
to zero gross excess spread,” Moody’s wrote
in its report, and said it was “unlikely”
that some subordinate bonds that lack collateral will
“be paid off in full by the legal maturity.”
Brazos
Student Finance Corp. is part of Waco, Texas-based
Brazos Group Inc., the largest municipal borrower
in the auction-rate market. The ratings on the bonds
were cut to as low as Ba3, or three levels below investment
grade.
Some
banks say they can’t buy bonds they sold because
of the dislocation in credit markets.
Thomas
James, the chief executive officer of Raymond James
Financial Inc., said in January that his company doesn’t
have federal bailout money for such an effort. Clients
of the St. Petersburg, Florida-based brokerage hold
$1 billion of the debt.
The
brokerage unit of St. Louis-based Stifel Financial
Corp. said on Feb. 11 it intends to buy back an estimated
$40 million of the $183 million held by its clients.
Missouri Secretary of State Robin Carnahan, who is
investigating the company, called the offer “inadequate.”
State
regulators in Washington filed a complaint on Nov.
20 against Wells Fargo that said the company failed
to disclose enough information to investors about
the risk of failing auctions. The bank requested a
hearing, which may occur in six months, said Michael
Stevenson, the state’s securities director.
Golden
declined to comment on the regulatory proceedings.
To
contact the reporter on this story: Michael McDonald
in Boston at mmcdonald10@bloomberg.net
February
11, 2009
BlackRock
Receives Lower Auction Fees
Break Is Offered When Shares Don't Sell
By
Daisy Maxey, The Wall Street Journal
Some
of BlackRock Inc.'s closed-end funds have negotiated
lower auction fees on preferred shares that are put
on the block but fail to sell.
The move could be copied by other companies that offer
closed-end funds and are looking for ways to cut costs
for common shareholders.
Auction-rate securities are financial products that
have interest rates reset at periodic auctions on
Wall Street. The market for such securities, which
were issued by municipalities, student-loan and mutual-fund
companies, and others to raise long-term funds at
short-term rates, collapsed in February when Wall
Street firms stopped supporting the $330 billion market.
The fees in question are collected by auction agents
for administering the auctions and by broker-dealer
firms for their efforts to make a market to sell preferred
securities.
An annual report for BlackRock MuniVest Fund II notes
that "in December 2008, commissions paid to broker-dealers
on preferred shares that experience a failed auction
were reduced to 0.15% on the aggregate principal amount.
The fund will continue to pay commissions of 0.25%
on the aggregate principal amount of all shares that
successfully clear their auctions."
This
reduction in fees, which will apply to all of BlackRock's
closed-end funds that are leveraged with auction-rate
preferred shares, pleases at least one investor. "It's
a good step," said Cody Bartlett, managing director
of investments at Karpus Investment Management, a
registered investment adviser in Pittsford, N.Y. He
added, however: "We would have liked to see them
not pay a fee at all."
Karpus had spoken out against the fees last autumn,
noting that closed-end-fund equity holders were saddled
with the auction expense in addition to the higher
rates they were paying on the failed closed-end preferred-auction-rate
securities. The firm's president, George Karpus, complained
about the fees last year in letters to the Securities
and Exchange Commission and the office of New York
state's attorney general, Andrew Cuomo.
A person close to the matter said BlackRock agreed
to continue paying reduced fees so that the auctions
could continue in their normal manner. The reduced
payments permit auction agents to take sale orders
from not only large broker-dealers, but smaller broker-dealers
who may not have their own auction desks.
"Funds and boards have been asking why the full
fees are being charged for auctions that are failing,"
said Cecilia Gondor, executive vice president at Thomas
J. Herzfeld Advisors Inc., a Miami investment-advisory
firm. "Auction agents argue that, aside from
the contractual obligation which spells out the level
of fees even in the event of auction failures, they
are still performing services with regard to the ARPs,"
BlackRock's public disclosure on the renegotiated
fees provides a starting point for other funds to
negotiate with their auction agents, Ms. Gondor said.
"Lower fees mean lower costs to maintain ARPs,"
she said. Three other closed-end issuers of auction-rate
securities -- Eaton Vance Corp.; Nuveen Investments,
which is owned by an investor group led by private-equity
firm Madison Dearborn Partners Inc.; and Pimco, a
unit of German insurer Allianz SE -- had no comment
on whether they were seeking to reduce or eliminate
the auction fees paid by their funds.
Mr. Bartlett of Karpus said the largest issue now
is the refinancing of auction-rate preferred shares
by replacing the shares with other securities or by
taking the leverage off the table.
"Now that long-term rates are low, it's a pretty
good time on the taxable side," Mr. Bartlett
said. "On the municipal side, it's not that easy.
Nuveen has been most aggressive with refinancing their
munis, and they've done a pretty good job."
February 6, 2009
The
Latest (update 1)
by Harry Newton
The ARS lockup continues for many individual investors
and for many corporations. Over 10 firms have told
regulators allegedly that they will be forced to file
for bankruptcy if they don't get their "cash-equivalents"
(their ARPS) to suddenly become cash.
Madoff
stole $50 billion. I'm guessing at least $100 billion
of ARPS are still out there not redeemed. This theft
is twice as big as Madoff.
The good news is that the Attorneys-General of New
York and Massachusetts are still on the case. And
now -- finally -- the sleepy SEC seems to have worken
up. But where is California's Gerry Brown?
Where
is Texas' Greg Abbott?
Where
is the AG of Florida, Bill McCollum?
I
searched for Auction Rate Preferreds on the California
AG's web site, the Texas AG's web site and Florida
AG's web site on February 6, 2009 and found absolutely
nothing on any of the three web sites. This is
staggering! ARPS are a gigantic Wall Street
fraud. These public "servants" do nothing.
And we, the taxpayers, pay their salaries.
The
bad news is that no one's going after the issuers
of auction rate preferred securities -- companies
like Blackrock, Nuveen MFS and PIMCO. To me they're
guilty of peddling a fraud -- selling "cash-like"
securities that weren't.
The
bottom line is simple, dear folks. I have all
my ARPS money back. If you don't, you need to get
off your tushy and do something. I spent several hours
updating this site tonight. I don't see any offers
of help, nor many "Thank yous." I am pleased
to report that one fine reader -- a real mensch --
sent me a bottle of fine wine for my efforts and as
a thank you. I'm not begging. But I'm also not terribly
interested in your misery -- especially if you done
very little to get someone's attention. I am not your
keeper.
Feburary
6, 2009
American
Eagle Outfitters sues Citigroup for fraud
PITTSBURGH
(AP) — American Eagle Outfitters Inc. sued Citigroup
Global Markets Inc. and accused it of fraudulently
inducing it to buy $258 million worth of auction rate
securities that it now can sell only at a significant
loss, if at all.
Citigroup
represented the securities as safe and liquid and
therefore compatible with the Pittsburgh-based clothing
retailer's conservative investment policies, according
to the suit. Instead, American Eagle claimed, Citigroup
knew there was not enough demand for the securities
to keep them liquid.
A
Citigroup Inc. spokeswoman declined to comment Friday.
In
the auction-rate securities market, investors buy
and sell instruments that resemble corporate debt,
except the interest rates are reset at regular auctions,
some as often as once a week. A number of companies
invested in the securities because they could treat
their holdings almost like cash.
The
market for auction rate securities collapsed last
February, leaving tens of thousands of investors nationwide
holding damaged securities that couldn't be readily
sold for cash, according to securities regulators.
Citigroup
represented itself as the auction rate securities
"market leader" and said it would provide
immediate liquidity by selling the securities to other
investors, or buying them itself, according to the
suit filed Wednesday in U.S. District Court in Pittsburgh
by American Eagle Outfitters and its subsidiary, AEO
Management Co.
"American
Eagle reasonably and justifiably relied to its detriment
upon Citi's material misrepresentations and omissions
of material fact and fraudulent conduct," the
suit said.
Citigroup
hid from American Eagle that it had internal limits
on how many of the Citigroup-brokered securities it
would buy and that the market for Citigroup-brokered
securities would collapse when it stopped buying them
last February, according to the suit.
Richard
Victoria, an attorney for American Eagle, said that
despite the auction rate securities problem, the company's
financial condition remains strong.
In
December, New York-based Citigroup and UBS AG agreed
to buy back a total of nearly $30 billion in auction
rate securities under a settlement approved by the
Securities and Exchange Commission. The banks neither
admitted nor denied wrongdoing under the settlements.
American
Eagle operates under the brands American Eagle Outfitters,
aerie by American Eagle, Martin + Osa, and 77kids.
It has more than 1,000 stores and about 30,000 employees
in the United States and Canada.
February
5, 2009
SEC,
Wachovia Reach $7B Deal Over ARS Crash
By
Christine Caulfield
Law360,
New York (February 05, 2009) -- The U.S. Securities
and Exchange Commission has finalized a $7 billion
settlement with Wachovia Securities LLC over the broker-dealer's
involvement in the collapsed auction rate securities
market, the agency announced Thursday.
Under
the deal, St. Louis-headquartered Wachovia will provide
liquidity to thousands of investors who bought auction
rate securities before the bottom dropped out of the
market in February 2008, the SEC said.
The
settlement resolves all claims by the regulator that
Wachovia misled investors about the risks of the securities
that the firm marketed, sold and underwrote.
The
deal is one of many “unprecedented settlements-in-principle”
the commission has negotiated with a number of broker-dealers,
SEC Enforcement Division chief Linda Chatman Thomsen
said.
“The
goal of the SEC in these matters was to return as
much liquidity to investors as quickly as possible,
while at the same time avoiding further disruption
in the financial markets,” Thomsen said. “Today's
final settlement with Wachovia represents substantial
progress toward fulfilling that goal.”
Without
admitting or denying the SEC's allegations, Wachovia
has agreed to buy back ARS from all investors who
bought the securities from the firm on or before Feb.
13, 2008.
The
first phase of the buyback — in which Wachovia
offered to buy ARS from individuals, nonprofit and
religious organizations, and other customers with
account values below $10 million — ended Nov.
28, with the broker purchasing more than $6.2 billion
in eligible securities.
The
second phase, which must begin no later than June
10 and end June 30, requires Wachovia to offer to
repurchase remaining ARS held by all other investors.
Wachovia
has also agreed to pay customers who sold their ARS
below par between Feb. 13 and Nov. 10 the difference
between the par value and the sale price, plus interest;
to reimburse customers who took out loans from Wachovia
after Feb. 13 because of concerns with ARS liquidity;
and to offer to lend its customers the full par value
of their ARS, pending the buyback.
The
settlement, which remains subject to court approval,
also implicates affiliate Wachovia Capital Markets
LLC, which has agreed to provide identical relief
to customers who bought ARS using their capital accounts.
The
settlement was first hashed out between Wachovia and
regulators in August. The deal was a global agreement
with the SEC; Missouri Secretary of State Robin Carnahan,
whose office led a multistate investigation into the
collapsed ARS market; and New York Attorney General
Andrew M. Cuomo.
The
probe was launched after investors complained that
ARS were marketed by Wachovia and other broker dealers
as equivalent to money market securities. The $330
billion ARS market collapsed in February 2008, leaving
investors unable to access their money.
Other
banks, including Morgan Stanley, JPMorgan Chase &
Co., Citigroup Inc. and UBS AG, have also reached
settlements with the regulator.
Citigroup
was the first bank to take a deal, agreeing Aug. 7
to buy back $19.5 billion of the securities from customers
and pay a $100 million fine. The following day, UBS
agreed to buy back $18.6 billion in ARS and pay a
$150 million civil penalty.
Morgan
Stanley and JPMorgan also agreed to a deal to buy
back a combined $7 billion in ARS.
The
SEC said Thursday it would decided whether to seek
a financial penalty against Wachovia “after Wachovia
has completed its obligations under the settlement
agreement.”
The
commission's investigation into the ARS market is
ongoing.
February
3, 2009
Auction-rate
securities a year later:
still more questions than answers
by
Stefan Maisnier, Medil Reports, Chicago
Medil Reports is written and produced by graduate
journalism students at Northwestern University’s
Medill school.
Houlihan Smith and Company Inc. Survey of third-quarter
SEC filings by 161 public companies with ARS exposure.
It
has been a year since the auction-rate securities
(ARS) market froze, and while the assets have not
become worthless, there remains no comprehensive solution
to what is a gigantic liquidity problem.
Approximately
145,000 individual investors were hit, according to
America’s Watchdog, a national advocacy group
for consumer protection. An untold number of institutional
entities were also left with large sums of suddenly
illiquid assets, and equally victimized were the cities,
states and other non-profit issuers that since the
freeze have had to redeem much of their issued ARS
at par and simultaneously lost a major market for
their bonds.
Auction-rate
securities are long-term variable rate bonds tied
to short-term interest rates that are reset through
auctions held at predetermined intervals, usually
7, 28 or 35 days.
In
Illinois, two of the largest institutional players
in the ARS market were Nuveen Investments LLC and
the Illinois Student Assistance Commission.
When
asked if the state had invested in or issued any ARS,
Illinois Treasury spokesman Scott Burnham breathed
a sigh of relief and said “thankfully, no.”
Chicago was not in the market either, according to
the City Treasurer’s Office.
All
told though, $330 billion was tied up in ARS at the
time the market seized last February due to a lack
of buyers.
“With
banks like Citi and Bank of America going down the
tubes no one cares about auction-rate securities,”
America’s Watchdog President M. Thomas Martin
said. “Madoff is horrendous but that was $50
billion, this is $330 billion. We still think this
is the worst case of fraud in U.S. history.”
Three
types of ARS were issued: student loan, tax-exempt
municipal and toxic/structured, according to Houlihan
Smith & Company Inc. ARS specialist Karl D’Cunha.
The
most damaging were the toxic ARS made up of credit
default swaps, mortgage-backed securities and other
dubious instruments which “never should have
been an auction-rate security,” D’Cunha
said.
There
was no benefit to taking on the more risky investment
of the toxic ARS, but “pretty creative guys”
at investment banks decided to use ARS as a way to
unload excess inventory of bad debt, according to
D’Cunha.
The
whole ARS market should have failed a lot sooner than
February 2008, D’Cunha said, for the toxic ARS
market froze the previous summer, but as trading in
the market decreased it was being propped up by internal
bank activity,
“ARS
as it has been structured will never be issued again,”
D’Cunha declared, stressing a need for transparency
and a put that would guarantee a percentage of investor
liquidity, but he added that even those safeguards
might not garner enough activity in the market.
Individual
or retail victims have been the most publicized since
the market seized. New York State Attorney General
Andrew Cuomo and Massachusetts Secretary of State
William Galvin have led the negotiating effort to
get banks to issue at-par redemptions to individuals
unable to get money back out of auction-rate securities.
In
light of the scrutiny, many banks, municipalities
and other issuers have offered voluntary redemptions
to avoid scrutiny or the possibility of punitive fines
from the government. Several institutions have had
to pay fines in connection with their involvement
in the ARS market failure.
According
to estimates from America’s Watchdog, somewhere
between $60 billion and 65 billion of approximately
$80 billion in retail investor money has been redeemed,
thanks to the efforts of Cuomo, Galvin and other officials
to negotiate settlements with brokers like UBS AG,
Bank of America Corp. and Citigroup Inc.
It’s
difficult to account for exactly how much is stuck
in the ARS market, due to a lack of transparency,
Martin said. “There’s no accurate numbers
on this stuff.”
Institutional
investors including banks, mutual funds and others
have also been saddled with suddenly illiquid assets.
There has been less disclosure from them as many are
reticent to come forward, partly due to the fact they’re
trying to figure out how to value the still-frozen
assets.
According
to a survey of 161 public companies following their
reports for the quarter ended Sept. 30 by Houlihan
Smith, there has been little consistency in how companies
have dealt with their ARS investments.
The
survey found that 20 percent of the companies marked
ARS at par, 45 percent recorded a temporary write-down,
31 percent recorded other-than-temporary write-downs,
and 4 percent recorded both temporary and other-than-temporary
write-downs.
It
is something that has to be analyzed case-by-case,
said D’Cunha, largely dependent on what a company’s
overall position is.
ARS
issuers have also been hit hard by the collapse and
now face dealing with buyers who want to get their
money out of suddenly illiquid assets that were said
to have been as liquid as cash.
Chicago-based
Nuveen Investments LLC, a subsidiary of Madison Dearborn
Partners, was a big issuer of what it called auction-rate
preferred securities (ARPS) prior to the market collapse
and has been working to redeem the securities in the
months following.
According
to Nuveen’s most current data, as of Jan. 29
a total of $5.3 billion in ARPS has been redeemed
or defeased, but that’s only about 35 percent
of the more than $11 billion in ARPS that Nuveen initially
issued. Nuveen plans to redeem all ARPS as soon as
possible, according to spokesperson Kristyna Sujata,
but cannot estimate when full redemption may occur.
Nuveen
has been sued by individual investors, but has not
been subject to the same sort of scrutiny by the State
of Illinois that investment firms in New York were.
“We
were really surprised Illinois wasn’t all over
this,” Martin said.
The
Illinois Student Assistance Commission had $3.7 billion
of its ARS outstanding at the height of its involvement
in the market. The commission redeemed $2.8 billion
in 2007 before the freeze as part of a portfolio reorganization
after realizing that 70 percent of its portfolio was
in non-Illinois paper, according to ISAC spokesman
Paul Palian.
Currently
ISAC has $884 million in outstanding ARS issued, and
is continuing to pay on the bonds.
“We’re
in a lucky position with our rates being around 2
percent right now,” Palian said. “It’s
very affordable.”
The
bigger concern for ISAC is the loss of a robust bond
market, and having to find other sources of credit.
In September ISAC issued $100 million in securities
to non-traditional lenders including eight Illinois
credit unions.
“As
we look to expand and meet the borrowing needs left
by the exit of many less committed lenders, we are
logically turning to our own local financial institutions
to partner with us in meeting the needs of Illinois
students,” ISAC Executive Director Andrew Davis
said in a statement.
Municipalities
have been hit hard too, including treasuries in other
states that weren’t as pragmatic, or as lucky,
as Illinois in avoiding the ARS market.
California
issued $500 million in ARS and following the collapse
converted $400 million to commercial paper.
The
state is trying to auction off the last $100 million
of ARS still, and as recently as Jan. 28 had attempted
a reset, in an auction brokered by JPMorgan Chase
& Co., California treasury spokesman Tom Dresslar
said. The auction failed.
California
will revisit the issue of what to do with the $100
million of ARS when the state adopts a budget, Dresslar
said.
With
ARS having been marketed as liquid but now illiquid
for a year, the only positive is that most municipal
and student-loan ARS issuers are still paying on their
obligations.
The
concern is what happens if the payments stop, according
to D’Cunha. “If more (issuers) were to default,
this $300 billion would be written down to $100 billion
faster than you could say A-R-S.”
January
4, 2009
Legal
status and wimps
by
Harry Newton
Billions
of dollars of auction rate preferreds still have not
been redeemed. (See next article) It is obvious that
some issuers like PIMCO, hope that redemption and
its legal and moral problems will simply fade, the
publicity will die down, the attorney generals will
find something else to do... and the poor ARPS owners
will forget they own them, or reconcile themselves
to owning them for the rest of their lives, and longer.
I
had a phone call today from an owner of PIMCO ARPS.
He asked me what he should do, since PIMCO was stonewalling
him. I asked him what he had done? The answer in two
words, "Very little." I asked had he gone
after the broker personally who had sold him the ARPS.
He said, "NO." I asked why not? He said
the guy had some "medical problems." I suggested
that he'd better go after him before the "medical
problems" become terminal.
In
short, for those of you who've exhausted every avenue,
know that the one remaining is to go after your brokerpersonally.
Nothing motivates a broker faster than the possibility
of a client besmirching his reputation by asserting
fraud.
But
-- wait -- there is "good" news. The price
of many muni bonds has fallen as investors have become
leery of their safety. This has messed up the mandated
asset backing of ARPS. Here's a recent article posted
on BestCashCow.com
which explains all.
Pimco
Municipal Income Fund Delays Dividend; In Irony Auction
Rate Preferred Shares to Blame
Article
Submitted by: Sam Cass
As
we close 2008, one of the biggest stories of the year,
the auction rate security meltdown, comes full circle.
Pimco, a company roundly criticized for not redeeming
investor money locked in illiquid auction rate securities,
has now delayed the divided payments from these funds
because it continued to hold auction rate security
cash, against the wishes of many investors. Talk about
irony. Investors have now been screwed on both sides
of the investment. But there might be a silver lining
for long suffering auction rate security holders.
While
Bloomberg reported on the delayed dividends it didn't
discuss the auction rate security side to it::
"Proceeds
from the Pimco Municipal Income Fund and the Pimco
New York Municipal Income Fund II were due today and
on Feb. 2, Newport Beach, California-based Pimco said
in a statement.
“The
funds intend to resume paying and declaring dividends
as soon as possible,” the company said. Pimco
said continuing problems in the capital market caused
the values of the funds’ portfolios to decline
and led to the decision.
Auction-rate
preferred shares, with which the funds borrowed money
to boost returns, must be backed by underlying assets
worth at least 200 percent, the company said. When
that threshold was missed, dividends couldn’t
be paid.
The
funds may redeem some of the auction-rate shares so
dividends may resume, Pimco said. Shares in the funds
are sold to investors and are exchange traded."
For
those that haven't followed this whole saga, this
is how the double-screwing works:
Investors
put money into Pimco auction rate security funds.
Auction rate securities at one time were short term
bond funds whose values were reset periodically via
a Dutch auction. For the bond issuer they presented
an opportunity to raise cash at lower rates, since
the money was more liquid than a typical 20 or 30
year bond. For the holder, they were a way of generating
a safe, liquid, and insured return that was generally
higher than a CD or money market account.
Early
this year as the credit crisis picked up steam, the
auctions for auction rate securities began to fail
and investors were often unable to cash out their
money. Investors in municipal auction rate securities
were often able to get out because their bonds held
provisions significantly increasing the interest rate
in the event of a failed auction. If you owned an
auction rate security from a municipality, a hospital,
a university, etc. and you couldn't redeem it at auction,
the rate you would receive would spike considerably.
At that point, the issuing entity had an incentive
to redeem the bond since they didn't want to pay such
an exorbitant amount of interest.
But
investment companies like Pimco issued auction rate
preferred shares to help leverage their close ended
bond funds. Funds like Pimco Municipal Income Fund
and the Pimco New York Municipal Income Fund II. These
auction rate preferred shares did not have the same
reset provisions as the municipal auction rate securities.
In most cases, they reset to slightly above the Fed
Funds rate or some other benchmark. The investment
companies had no incentive to cash out their customers
and make them liquid and as a result many have been
trapped in these investments since last February.
It's important to note that the funds have not lost
principle or interest but investors who thought they
were investing in a cash equivalent, liquid investment
have not been able to withdraw their money. Pimco
in particular has been singled out for not cashing
out investors.
Now,
it turns out that the auction rate security money
that Pimco has kept against many investors wishes
has forced it to suspend paying dividends. The credit
crisis drove down the value of the assets in Pimco
funds. The covenants around the auction rate preferreds
require that they be backed by at least 2x the amount
of underlying assets. Because the assets have shrunk
in value, Pimco has to suspend dividends to rebuilt
its assets and keep it at this ratio.
So,
auction rate security holders can't get their money
out, and bondholders can't get their dividends. Screwed
on both ends.
The
only bright side to this is that the drop in asset
values may finally force Pimco to redeem some of its
auction rate preferred shareholders to lower the assets
needed to maintain the 2x ration. In order to start
paying dividends again, the company told Bloomberg
it will begin to cash them out.
Auction
Rate Securities: $200 billion unfrozen, $135 billion
to go
by
Peter Cohan
Although it's still a far bigger scam than Bernie
Madoff's $50 billion Ponzi scheme, it has gotten a
relatively tiny amount of attention. I don't know
why but I suspect it's because the victims of the
$330 billion Auction Rate Securities (ARS) swindle
-- in which money invested in supposedly cash-like
investments in government bonds whose rates reset
in weekly auctions -- are not bold-faced names like
Kevin Bacon and Steven Spielberg.
Nevertheless,
when the ARS scandal broke in February 2008, those
investors found that their supposedly safe savings
were frozen when the auctions to reset those rates
stopped happening. My original post now has 7,343
comments from people who have been trying to get their
money back. The good news is that some $200 billion
worth of those securities have been unfrozen thanks
to Massachusetts and New York officials, Bill Galvin
and Andrew Cuomo, respectively, who fought on investors'
behalf.
Nevertheless,
there remain about $135 billion worth of these ARS
that remain frozen. There are many individuals whose
funds remain frozen with limited prospects of recovery.
And there are companies and non-profits whose funds
are still frozen as well. These include Vicor (NASDAQ:
VICR) with $38 million of its funds tied up until
2010 at the earliest; Tufts Health Care has $30 million,
which has half its cash tied up and no prospects for
recovering it; and Five Star Quality Care (AMEX: FVE),
with $75 million tied up in ARS and just just $39
million in cash.
Regulators
and issuers must thaw out the $135 billion in frozen
ARSs to relieve the victims of the endless stress
of not getting their cash. Unfortunately, once this
matter is settled, those victims are highly unlikely
ever to regain their trust in the financial services
industry.
Peter
Cohan is President of Peter S. Cohan & Associates.
He also teaches management at Babson College and edits
The Cohan Letter. He has no financial interest in
the securities mentioned.
Friday
December 19, 2008
Lack
of SEC oversight and enforcement at the center of
too many messes
From
BusinessWeek's Aaron Pressman
Once
again, the Securities and Exchange Commission is apologizing
for failing to do its job. This time it’s the
agency admitting that it had credible allegations
of wrongdoing at Bernie Madoff’s firm starting
in the 1990s and continuing for years and years that
were never properly investigated. Now, $50 billion
of alleged losses later, it’s way too late for
apologies.
If
you stop and think about it, the SEC failed to do
its job at almost every level of the current mess
we’re in. Who allowed Wall Street firms to increase
their leverage to 30 and 40 times their capital and
endanger the entire financial system? Why, the SEC.
And who was supposed to be regulating the rating agencies
and policing them for conflicts of interest as they
signed off on trillions of dollars of toxic mortgage-backed
securities? Again, the SEC. When it turned out that
Wall Street had rigged the entire $300 billion auction
rate securities market, who was then regulator that
investigated but did virtually nothing until after
it was too late? Right again, the SEC. And when Bear
Stearns was running a couple of over-leveraged, mislabeled,
highly-risky hedge funds, which regulator’s inspector
general said it had failed to act in time? Yep, the
SEC. Finally, which agency had an inside view of the
risk management procedures at all the big firms but
never asked any tough questions? Right again, SEC.
It’s
true — there are plenty of other actors here
who screwed up, including but not limited to banking
regulators, Congress, various White House crews, nefarious
mortgage brokers and on and on. But the SEC was in
a position to stop almost all of the bad stuff that’s
happened and failed to stop any of it.
Perhaps
the whole mess is best summed up by this simple Twitter
message from publisher Rex Hammock: Headline you won’t
see: ‘SEC Chairman admits his staff was too busy
busting Martha Stewart to investigate Madoff’
Thursday
December 18, 2008
I'm
back.
by
Harry Newton
I
have all my $4.5 million back but many of you don't.
The good news is that there is ongoing effort by some
attorney-generals. And more and more ARPS are being
redeemed. But the action has become a little desultory.
Auction Rate Securities have dropped off the media's
radar screen.
So
the question is what now?
It
may be time for legal action.
I
need your input. Email me where you stand.
I
also need to do a little more mulling.
And
the irony of all this? ARPS have been my best investment
in 2008. Bar none. The best. Thank you Todd and Rick.
Sunday
November 2, 2008
My
Personal nightmare is over, but yours may not be (update
1)
by
Harry Newton
I
am 100% out, at par. I no longer own any ARPS. They
were all Nuveens. Nuveen got me out of some. Deutsche
Bank got me out me of the rest. Thank you Andrew Cuomo,
New York Attorney-General.
Not
everyone else is out. I figure about $100 billion
of the original $360 billion that was locked in ARPS
are still locked, with some people facing a pretty
bleak future. For those people I offer this advice:
1.
You need to find each other and band together. Contact
FINRA. (See story below.)
2.
You need to do massive Attorney-General lobbying to
get them involved.
3.
You need to threaten to individually sue the broker
/ financial advisor who sold your your ARPS.
4.
If you haven't the stomach for all this, you can try
selling your ARPS on the secondary market. You won't
get 100% of your money back. But it may be preferable
to the ongoing aggravation and sleepless nights.
Here
are some general investing lessons I have learned:
1.
Never trust no one. Or, don't trust anyone. That includes
brokers and financial advisers. Do your own due diligence.
If you smell anything, stay out. Remember the old
adage, "When in doubt, stay out."
2.
Don't chase yield. Cash may not pay anything -- but
it certainly does preserve your capital. Most people
got into ARPS because they were chasing yield and
their brokers were chasing a small commission.
3.
We do occasionally get something for our taxes. Attorney-General
Andrew Cuomo of New York and Massachusetts Secretary
of State William Galvin did sterling work for us.
I wish some of the other AGs took their jobs more
seriously, e.g. California.
4.
Wall Street's advertising says it cares about its
clients long-term. The advertising and the sales pitches
are unmitigated horseshit. What Wall Street cares
about is making a commission or a fee and then going
onto the next thing. Wall Street has no interest in
insuring that what it sold you works out for you --
long-term or short-term. Wall Street is a product
machine -- pure and simple. It makes things to sell
to you. Some times they work. Some times they don't
-- e.g. auction rate preferreds securities. They don't
care. End of this story.
5.
You are your own worst enemy. It's an old aphorism
that has never been so true. As I wrote this site,
I met people who put their entire life savings into
ARPS, thus violating the fundamental rule of diversification,
etc. Today the world is moving so fast -- look at
the last few months -- that you can't predict. So
to put all or most of your money into one thing --
no matter how persuasive the arguments -- is not the
wisest idea. In fact, it's plain stupid.
There
is no free lunch.
October
23
FINRA
Announces Agreements in Principle with Three Additional
Firms to Settle Auction Rate Securities Violations
Agreements Include Offers to Repurchase
Over $60 Million of ARS Holdings at Par
Last
update: 12:30 p.m. EDT Oct. 23, 2008
WASHINGTON, Oct 23, 2008 (BUSINESS WIRE) -- The Financial
Industry Regulatory Authority (FINRA) announced today
that it has reached agreements in principle with City
National Securities (CNS) of Beverly Hills, CA, BNY
Mellon Capital Markets, LLC of New York and Harris
Investor Services, Inc. of Chicago, to settle charges
relating to the sale of Auction Rate Securities (ARS).
Each of the principle agreements is subject to being
formalized in an approved settlement document called
a Letter of Acceptance, Waiver and Consent (AWC).
Last month, FINRA announced similar agreements in
principle with five firms. Investigations continue
at a number of additional firms.
In the actions announced today, CNS, BNY Mellon and
Harris have agreed to offer to repurchase at par ARS
that were purchased by individual investors and some
institutions between May 31, 2006, and Feb. 28, 2008.
A total of more than $60 million of ARS are eligible
for repurchase. The firms have also agreed to make
whole individual investors who sold ARS below par
after Feb. 28, 2008. CNS will pay a fine of $315,000,
while BNY Mellon will pay a fine of $250,000 and Harris
is being fined $150,000.
The firms also agreed to the appointment of an independent,
non-industry arbitrator to resolve investor claims
for any consequential damages -- that is, damages
they may have suffered from their inability to access
funds invested in ARS. "In all of our Auction
Rate Securities investigations and settlements, FINRA's
primary goal continues to be the restoration of investors'
access to the millions of dollars they invested in
ARS," said Susan L. Merrill, FINRA Executive
Vice President and Chief of Enforcement.
In addition to individual investors, those eligible
for ARS repurchase and/or payments for ARS sold below
par include non-profit charitable organizations and
religious corporations or entities. Trusts, corporate
trusts, corporations, pension plans, educational institutions,
incorporated non-profit organizations, limited liability
companies, limited partnerships, non-public companies,
partnerships, personal holding companies and unincorporated
associations that made individual ARS purchases and
whose account value did not exceed $10 million will
also be eligible.
Each firm has agreed to provide notice to its eligible
customers promptly. Repurchases must begin no later
than 30 days after the settlement is approved and
must be completed no later than 60 days after settlement
approval. Beginning six months after settlement approval,
each firm has also agreed to make its best efforts
to provide liquidity to all other investors who purchased
during the same time period but who were not eligible
for the initial repurchase. Those best efforts may
include offers to repurchase ARS and/or offers of
low- or no-interest loans.
FINRA's investigation has found evidence that each
firm sold ARS using advertising, marketing materials
or other internal communications with its sales force
that were not fair and balanced and therefore did
not provide a sound basis for investors to evaluate
the benefits and risks of purchasing ARS. FINRA's
investigation also found evidence that each firm failed
to establish and maintain a supervisory system reasonably
designed to achieve compliance with the securities
laws and FINRA rules with respect to the marketing
and sale of ARS.
In the forthcoming formal settlement documents, the
firms will neither admit nor deny the charges, but
will consent to the entry of FINRA's findings.
Earlier this year, FINRA released guidance for investors
caught in the auction failures in the Investor Alert
Auction Rate Securities: What Happens When Auctions
Fail.
Investors can obtain more information about, and the
disciplinary record of, any FINRA-registered broker
or brokerage firm by using FINRA's BrokerCheck. FINRA
makes BrokerCheck available at no charge. In 2007,
members of the public used this service to conduct
6.7 million reviews of broker or firm records. Investors
can access BrokerCheck at www.finra.org/brokercheckor
by calling (800) 289-9999.
FINRA is the largest non-governmental regulator for
all securities firms doing business in the United
States. FINRA is dedicated to investor protection
and market integrity through effective and efficient
regulation and complementary compliance and technology-based
services. FINRA touches virtually every aspect of
the securities business -- from registering and educating
industry participants to examining securities firms;
writing rules; enforcing those rules and the federal
securities laws; informing and educating the investing
public; providing trade reporting and other industry
utilities; and administering the largest dispute resolution
forum for investors and registered firms.
Friday
October 24
Auction-Rate
Victims 'Fit to Be Tied' as Accords Ebb (Update1)
By
Michael McDonald and Darrell Preston
Oct.
24 (Bloomberg) -- Settlements between regulators and
banks over the improper sale of auction-rate securities
have slowed to a trickle, raising concern among investors
holding $135 billion of the debt that they will be
left out.
Ed
Dowling, a 53-year-old clothing manufacturer from
Huntington, New York, bought $2.6 million of the securities
from Oppenheimer & Co. on the belief that the
investments were as safe as money-market funds and
easy to buy and sell.
He's
been stuck with most of the debt since the $330 billion
auction-rate market collapsed in February, sparking
a series of regulatory probes into how brokerages
marketed the long-term securities. State and federal
regulators including New York state
Attorney
General Andrew Cuomo vowed to pursue dozens of brokerages
in August after they forced eight Wall Street banks,
including Citigroup Inc. and UBS AG, to agree to buy
back about $45 billion of auction-rate securities.
Since the initial flurry, 12 mostly smaller firms
have agreed to redeem $8 billion in debt. "It's
great that they got money back for those investors,"
said Dowling, who was planning to use the money to
build a new house in Huntington, on Long Island.
"A
large portion of the problem hasn't been resolved,
the portion I'm involved with." States, student-loan
agencies and closed-end mutual funds sold the securities,
locking in short-term rates on obligations due in
20 years or more. The long-term bonds had interest
rates set at weekly or monthly auctions run by New
York-based Citigroup, UBS in Zurich and the other
large underwriters.
Municipal
auction-rate securities yielded three-quarters of
a percentage point less, on average, than long-term,
fixed-rate bonds in 2007, according to industry indexes.
The yields were a quarter of a percentage point or
more above conventional money- market funds, indexes
show.
The
market unraveled in February. Dealers who supported
auctions for two decades with their own money suddenly
pulled back to preserve capital amid the mortgage
slump that led to $662 billion of credit losses and
writedowns worldwide. That left investors unable to
sell securities that were pitched as cash equivalents
and borrowers paying penalty interest rates as high
as 20 percent after auctions failed to find enough
buyers.
To
escape the high rates, borrowers refinanced or offered
to buy back at least $142 billion of the securities,
according to data compiled by Bloomberg News. Regulators
forced brokerages to agree to redeem another $53 billion,
leaving individuals and institutional investors stuck
with about $135 billion.
Corporations
owned $41 billion of auction-rate debt at the end
of September, according to a survey by Chicago-based
Treasury Strategies Inc. These large institutional
investors were excluded from the buybacks required
in the settlements.
Getting
large Wall Street underwriters to buy back securities
was easier because they managed the auctions and created
the products, said Massachusetts Secretary of State
William Galvin, who led probes into UBS and Merrill
Lynch & Co. of New York.
Investigations
into brokerages that essentially resold the bonds
will take longer, he said. "It's obvious that
we haven't had anything to announce recently,"
Galvin said. "It's a more complicated fact pattern.
It's more complicated, but it's not impossible."
New
York's Cuomo, who announced almost all the settlements
with the large Wall Street banks over three weeks
in August, said at the time his office had subpoenaed
about 25 firms, including Oppenheimer's parent, Toronto-based
Oppenheimer Holdings Inc., TD Ameritrade Holding Corp.
and Charles Schwab Corp. "We're working our way
down the list," he said on Aug. 15.
TD
Ameritrade, based in Omaha, Nebraska, continues "to
cooperate with regulators and other industry officials
regarding their inquiries related to this issue,"
spokeswoman Kim Hillyer said. Greg Gable, a spokesman
for Charles Schwab in San Francisco, declined to comment.
Cuomo
also said in August he was investigating individuals
at the firms that sold the securities. Alex Detrick,
a spokesman for the New York state regulator, declined
to comment on the status of the probes.
In
the two months since the first auction-rate settlements,
Cuomo has opened investigations into financial markets
amid the global credit crisis that led to the collapse
of Lehman Brothers Holdings Inc. on Sept. 15. He's
probing short-selling of financial-company shares,
the market for credit-default swaps and spending at
New York-based insurer American International Group
Inc., which received an $85 billion federal bailout.
Short
sellers attempt to profit by selling borrowed securities
and repurchasing them later at a lower price and returning
them to the holder.
Massachusetts
still has people committed to auction-rate probes,
Galvin said. Rex Staples, the general counsel of the
North American Securities Administrators Association
in Washington, said states are still coordinating
investigations, an effort that began earlier this
year.
"We
still have a task force constituted, and there are
still ongoing investigations," Staples said.
The
effort to force regional brokerages to buy back securities
stalled because firms are under pressure to preserve
capital after Lehman's fall prompted a meltdown in
credit markets, said Mike Nicholas, co-chief executive
of the Regional Bond Dealers Association in Alexandria,
Virginia.
The
group estimates regional dealers resold $60 billion
of the debt. Interest on some of Dowling's holdings
soared as high as 12.5 percent two weeks ago, as average
yields on municipal auction-rate debt surpassed the
records reached when the market imploded in February.
For him, that's cold comfort.
"Listen,
it's my money, it was sold to me as liquid cash,"
said Dowling, who has $2 million of the securities
left after $600,000 was refinanced. "What it's
paying is totally irrelevant." Brian Maddox,
an outside spokesman for Oppenheimer with Financial
Dynamics in New York, said the firm continues "to
explore all options available" for its customers.
Greg
McNelley, a 56-year-old investor from San Juan Capistrano,
California, remains stuck with $350,000 of student-loan
auction-rate securities he bought from San Francisco-based
Wells Fargo & Co., which hasn't agreed to buy
back auction-rate securities.
"I
am just fit to be tied," said McNelley, who retired
from his job at a health-maintenance organization.
"I was counting on this money to supplement my
income." Wells Fargo is working "closely
with our clients to address their liquidity needs"
by offering holders loans, spokeswoman Kathleen Golden
said.
The
Financial Industry Regulatory Authority announced
yesterday that a Bank of New York Mellon Corp. unit
and two brokerages in California and Illinois will
buy back more than $60 million of the securities.
Finra, a self-regulatory agency based in Washington,
revealed settlements with five firms on Sept. 18 and
opened more than 50 additional investigations, and
``more are expected."
The
regulator has questioned more than 200 companies and
conducted sweeps of firms distributing the bonds,
it said. Nancy Condon, a spokeswoman, declined to
elaborate.
The
U.S. Securities and Exchange Commission participated
in the settlements with the large underwriters. "Distributing
dealers that were not part of underwriting or managing
the auctions didn't know any more about the market
than the investors," said Nicholas of the Regional
Bond Dealers Association.
Thursday
October 23
FINRA
Announces Agreements in Principle with Three Additional
Firms to Settle Auction Rate Securities Violations
Agreements Include Offers to Repurchase Over
$60 Million of ARS Holdings at Par
WASHINGTON,
Oct 23, 2008 (BUSINESS WIRE) -- The Financial Industry
Regulatory Authority (FINRA) announced today that
it has reached agreements in principle with City National
Securities (CNS) of Beverly Hills, CA, BNY Mellon
Capital Markets, LLC of New York and Harris Investor
Services, Inc. of Chicago, to settle charges relating
to the sale of Auction Rate Securities (ARS). Each
of the principle agreements is subject to being formalized
in an approved settlement document called a Letter
of Acceptance, Waiver and Consent (AWC).
Last month, FINRA announced similar agreements in
principle with five firms. Investigations continue
at a number of additional firms.
In the actions announced today, CNS, BNY Mellon and
Harris have agreed to offer to repurchase at par ARS
that were purchased by individual investors and some
institutions between May 31, 2006, and Feb. 28, 2008.
A total of more than $60 million of ARS are eligible
for repurchase. The firms have also agreed to make
whole individual investors who sold ARS below par
after Feb. 28, 2008. CNS will pay a fine of $315,000,
while BNY Mellon will pay a fine of $250,000 and Harris
is being fined $150,000.
The firms also agreed to the appointment of an independent,
non-industry arbitrator to resolve investor claims
for any consequential damages -- that is, damages
they may have suffered from their inability to access
funds invested in ARS. "In all of our Auction
Rate Securities investigations and settlements, FINRA's
primary goal continues to be the restoration of investors'
access to the millions of dollars they invested in
ARS," said Susan L. Merrill, FINRA Executive
Vice President and Chief of Enforcement.
In addition to individual investors, those eligible
for ARS repurchase and/or payments for ARS sold below
par include non-profit charitable organizations and
religious corporations or entities. Trusts, corporate
trusts, corporations, pension plans, educational institutions,
incorporated non-profit organizations, limited liability
companies, limited partnerships, non-public companies,
partnerships, personal holding companies and unincorporated
associations that made individual ARS purchases and
whose account value did not exceed $10 million will
also be eligible.
Each firm has agreed to provide notice to its eligible
customers promptly. Repurchases must begin no later
than 30 days after the settlement is approved and
must be completed no later than 60 days after settlement
approval. Beginning six months after settlement approval,
each firm has also agreed to make its best efforts
to provide liquidity to all other investors who purchased
during the same time period but who were not eligible
for the initial repurchase. Those best efforts may
include offers to repurchase ARS and/or offers of
low- or no-interest loans.
FINRA's investigation has found evidence that each
firm sold ARS using advertising, marketing materials
or other internal communications with its sales force
that were not fair and balanced and therefore did
not provide a sound basis for investors to evaluate
the benefits and risks of purchasing ARS. FINRA's
investigation also found evidence that each firm failed
to establish and maintain a supervisory system reasonably
designed to achieve compliance with the securities
laws and FINRA rules with respect to the marketing
and sale of ARS.
In the forthcoming formal settlement documents, the
firms will neither admit nor deny the charges, but
will consent to the entry of FINRA's findings.
Earlier this year, FINRA released guidance for investors
caught in the auction failures in the Investor Alert
Auction Rate Securities: What Happens When Auctions
Fail.
Investors can obtain more information about, and the
disciplinary record of, any FINRA-registered broker
or brokerage firm by using FINRA's BrokerCheck. FINRA
makes BrokerCheck available at no charge. In 2007,
members of the public used this service to conduct
6.7 million reviews of broker or firm records. Investors
can access BrokerCheck at www.finra.org/brokercheck
or by calling (800) 289-9999.
FINRA is the largest non-governmental regulator for
all securities firms doing business in the United
States. FINRA is dedicated to investor protection
and market integrity through effective and efficient
regulation and complementary compliance and technology-based
services. FINRA touches virtually every aspect of
the securities business -- from registering and educating
industry participants to examining securities firms;
writing rules; enforcing those rules and the federal
securities laws; informing and educating the investing
public; providing trade reporting and other industry
utilities; and administering the largest dispute resolution
forum for investors and registered firms.
For more information, please visit our Web site at
www.finra.org.
SOURCE: Financial Industry Regulatory Authority (FINRA)
++++++++
Friday,
October 17, 2008
A
Short Update (update 3)
by Harry Newton
I'm
still around.
More
and more issuers are announcing buy-backs. This is
good news. According to Andrew
Cuomo's office, Bank of America will return
over $4.5 billion and the Royal Bank of Canada will
return over $850 million. There has been a total of
about $51 billion to be returned in combined settlements
to date, according to Cuomo's office.
More
good news is that the financial crisis has caused
many non-taxable auction rate preferreds to pay much
higher interest rates. My Nuveens have hit 11+%. They
reset every day, however.
If
you haven't been redeemed at 100% at par, please send
me an email
with your particulars, including what you've done
to make a noise.
Andrew
Cuomo's office continues to do great work. If you
have issues, contact his office.
You
might want to read the Tutorial
on Martin Act.
If
you're not being redeemed and you're getting completely
stonewalled, the only "solution" is to sue
your individual advisor personally.
Meanwhile
UBS is offering its ARPS owners a complex deal. From
reader, Michael A. Rogawski:
Subject:
UBS Rights Offering
Have
you seen the rights offering from UBS? They are
providing rights that allow you to sell your ARS
to them for par until 1/4/2011. However, if you
take the rights, they then have a call and can take
them from you at any time (for par). This means
that you lose out on the nice fat yield. I am happy
sitting tight for the moment as long as they backstop
me on the downside.
I
think that they will force my hand because if I
don't take the rights, I may get stuck permanently
with my tax-free ARS as it isn't clear that a market
will develop. Of course, with the current yields
they are paying, the ARS may actually be worth a
premium.
I
worry that the underlying bond fund is getting cheaper
every day and so there could be some credit risk.
Michael,
I haven't read the huge UBS document. From what I
gather, it's long and complex. My feelings are simple:
Don't be a yield hog. Pigs get slaughtered. Take the
cash. Stick it somewhere safe (e.g. treasuries and
solid muni bonds) and live in peace. One day the stockmarket
may even look interesting. Buffett thinks it's already
interesting.
I
also write a daily column, InSearchOfThePerfectInvestment.com.
You are all welcome to visit.
September
25, 2008
The
Devil is in the details
by Harry Newton
Many
brokerage firms have announced deals to redeem the
ARPS they foisted on their hapless customers. Many
of these "deals" are not finalized. The
headlines look great. But a lot of ARPS holders are
being screwed. You need to check where your deal sits
and scream (to the appropriate regulator) if you smell
your case may fall through the cracks.
Here
are some of the ways you may never see all your money:
+
Partial redemptions. They say they're redeeming
all the ARPS they sold. But somehow they're not redeeming
ARPS they sold to companies. Or maybe they're not
giving you all your money. Maybe they have a cutoff
of a million dollars?
+
Timing. Some brokerage firms are stretching their
redemptions out over years and years. God forbid,
you should die in the meantime. Who'll pay Uncle Sam
your death tax?
+
Various custody issues. UBS sold you your ARPS,
but you moved your account to Merrill Lynch. Who will
give you your money back? Anyone?
+
You sold at a loss – e.g. on the secondary
market. Who -- if anybody is going to make up your
loss? Some will. Some won't. Nothing is clear.
Here's
my latest thinking. For many of you with "issues"
now might be just the perfect time to sell your ARPS
on the secondary market. Interest rates are up. Most
ARPS are safe and paying reliably and well. Take the
loss. Save yourself further aggravation. Some of this
stuff could drag on for years. Get on with your life.
Read Daisy's excellent article:
Nonprofit
Left Out In Auction-Rate Deal
By
Daisy Maxey,
DOW JONES NEWSWIRES
NEW
YORK (Dow Jones)--The American Council on Science
and Health, a nonprofit education consortium, says
it's been left out in the cold in UBS Financial Services
Inc.'s settlement with regulators on sales of auction-rate
securities.
UBS
Financial Services, a division of UBS AG (UBS), won't
buy back the now illiquid $250,000 in auction-rate
shares the council bought through a UBS advisor because
they weren't custodied with UBS when the market froze,
said Jeff Stier, associate director at the council,
which seeks to foster education on issues ranging
from food and nutrition to chemicals and the environment.
And Fidelity Investments, at which the shares were
custodied when the market froze, said it won't buy
the securities because it didn't sell them in the
first place, he said.
"That's
where we fall through the cracks," said Stier.
"The attorney general is dealing with this on
a one-on-one basis with different firms and putting
together a patchwork of agreements. There are different
agreements with different terms with different banks,
so there are gaps - and we're falling through the
gaps."
UBS
declined to comment on the council's situation specifically,
but said, "Our settlement in principle was announced
on Aug. 8, and we continue working toward implementation."
Other
investors are likely to fall through the cracks of
the high-profile agreements the Securities and Exchange
Commission and state regulators have reached with
sellers of auction-rate securities. The auctions at
which the securities were sold locked up in February
when the banks that supported them for years stopped
buying due to credit concerns, leaving many investors
stranded in illiquid holdings.
"The
devil is in the details," said Harry Newton,
a retired publisher who had $4.5 million invested
in auction-rate shares when the market froze and still
has $3.2 million in the securities.
Newton,
whose Web site at www.auctionratepreferreds.org
has become a hub of information on the ARS crisis,
said he's been inundated by emails from investors
who are concerned they won't be covered by settlements
because they moved their accounts from one custodian
to another or because they sold at a loss on the secondary
market.
While
many of the agreements that have been made with regulators
will ensure that investors who sold at a loss on a
secondary market are made whole, many ignore the custody
issue. The SEC said it is aware of the issue with
those whose accounts have changed custody, and is
discussing it with UBS.
Some
are also suggesting that the escalating financial
crisis may jeopardize some of the settlements or voluntary
buyback agreements.
In
testimony before the House Committee on Financial
Services earlier this month, Leslie Norwood, managing
director and associate general counsel at the Securities
Industry and Financial Markets Association, said,
"Over the last few months, a number of firms
and banks have offered to buy back auction-rate securities
at par value from customers including retail investors,
charities and small- to mid-sized businesses. Many
firms are facing capital limitations as a result of
the continuing credit crunch. They have limited funding
available to buy back outstanding auction-rate securities."
Barry
Silbert, chief executive of SecondMarket Inc., formerly
Restricted Stock Partners, which makes a secondary
market for illiquid assets, said sales of auction-rate
securities from retail customers fell off when settlements
began to be announced. However, since Labor Day, his
company has seen an increase in the number of institutional
sellers, and over the past week, it has been fielding
more calls from retail investors, he said.
That's
partly because these sellers are realizing that the
buybacks won't come as quickly as they had hoped,
and partly because some realize they'll be made whole
by the settlements eventually even if they do sell
now on the secondary market, Silbert said. The economy
is also a factor, he said. As a result of what's occurring
in the capital markets and elsewhere, "in a number
of cases, people need cash, so we're seeing more motivated
sellers on the institutional side as well," he
said.
As
for the American Council on Science and Health, the
New York-based education consortium, which has a budget
of about $2 million, bought about $500,000 of different
types of auction-rate securities several years ago
through an advisor at UBS, Stier said. The shares
were touted as liquid money-market alternatives that
would be a good place to park the organization's six-month
operating expenses, he said.
"We
were never informed of the risk of this novel vehicle,"
Stier said.
Two
years ago, the council, dissatisfied with its overall
relationship with UBS, hired an independent advisor
who custodied the brokerage account at Fidelity Investments.
When that advisor informed the council of liquidity
problems brewing in the ARS market early this year,
it sold about half its shares. However, the remaining
$250,000 - in shares of a student loan auction-rate
bond, Iowa Student Loan Liquidity Corp. - remains
stranded.
Stier
and others at the nonprofit consortium were elated
when they learned in August that UBS Securities LLC
and UBS Financial Services had reached a settlement
with the SEC, the North American Securities Administrators
Association, New York Attorney General Andrew Cuomo
and others to repurchase billions in auction-rate
securities.
But
their hopes were dashed when they were told that UBS
had no plans to buy their shares because the securities
had been custodied with Fidelity when the market locked
up, Stier said. "That came as quite a shock."
The
UBS settlement with regulators includes "reimbursements
to all clients for losses incurred from sales of auction-rate
securities holdings between Feb. 13 and Aug. 8, 2008."
The
council's advisor then spoke with Fidelity, but was
told that since Fidelity didn't sell the securities,
it wouldn't buy them, Stier said. "Frankly, I
don't blame Fidelity," he said.
Fidelity
agreed earlier this month to buy at par illiquid auction-rate
securities held by retail customers who purchased
through Fidelity prior to Feb. 13, 2008. "The
buyback offer does not extend to customers who bought
the securities through other firms or advisors,"
a spokesman for Fidelity said.
Brian
McNiff, a spokesman for Massachusetts Commonwealth
Secretary William Galvin, said that, in all cases,
his office worked to make the best deals it could
to get "the most money back for the most people."
"When
people call with these situations, we try to do the
best we can for them," said McNiff. These settlements
have different features, he said, "but until
they were made, nobody was getting anything."
The
office of Connecticut Attorney General Richard Blumenthal
is aware that there are a variety of gaps in the agreements
that have been reached thus far that need to be filled,
a spokesman said.
"We're
very familiar with the problem of auction-rate securities
that were transferred to an investment advisor ...
and, therefore, seem to be outside the agreement reached
with UBS and others, and we're working on it,"
the spokesman said. The office is talking with other
attorneys general and other state regulators, he said.
New
York Attorney General Andrew Cuomo's office had no
comment on the matter.
(Daisy
Maxey is a Getting Personal columnist who writes about
personal finance; she covers topics including hedge
funds, annuities, closed-end funds and new trends
in mutual funds. She can be reached at 201-938-4048
or by email at daisy.maxey@dowjones.com.)
September
22, 2008
Salle
Krawcheck is an honest woman.
But she just got shafted by Citi.
From
Fortune:
Sallie
Krawcheck is leaving Citigroup. The exit of Krawcheck,
chairman and CEO of the bank’s global wealth
management unit, stems from disagreements with Citi
CEO Vikram Pandit and a decision, made by him last
week, to shrink her responsibilities inside the company.
Sources close to Krawcheck and Citi say that the tension
revolves mainly around the amount of money that Citi
owes clients who invested in hedge funds and auction-rate
securities that turned out to be toxic investments.
Krawcheck argued in favor of Citi’s responsibility
to pay clients back, in effect, for defective investments
distributed by her brokers and bankers. Citi’s
multi-billion-dollar auction-rate securities settlement,
announced in August, caused a rift in her relationship
with Pandit, who according to one source preferred
to take a tougher line with clients.
The settlement requires Citi to return to individual
investors, small businesses and charities all $7.5
billion that they invested in auction-rate securities
via Citi.
Comerica
must refund $1.46 billion in securities
By
KATHERINE YUNG • Detroit FREE PRESS • September
18, 2008
Michigan
Attorney General Mike Cox announced this morning a
$1.5-billion settlement with Comerica Bank over the
sale of auction rate securities, the largest such
agreement in the country by a seller of these investments.
Under
the settlement, Comerica agreed to buy $1.46 billion
worth of the securities back from more than 1,500
investors so they won’t lose any money. It will
also pay the state a $10,000 civil penalty, the maximum
under Michigan law, and provide $100,000 to the Michigan
Investor Protection Trust Fund.
The
bank, which last year moved its headquarters from
Detroit to Dallas, has also agreed to pay a $750,000
fine to the Financial Industry Regulatory Authority.
The
sale of auction rate securities has come under government
scrutiny because investors were promised that these
investments were just like cash. Instead, they haven’t
been able to sell these securities because the market
for them collapsed.
“The
representations ended up not being truthful,”
Cox said. “They couldn’t get their money
out. It was frozen.”
Of
the $1.46 billion in auction rate securities sold
by Comerica Securities, nearly $1 billion were held
by Michigan residents. Buyers of the securities ranged
from retirees and nonprofit organizations to institutional
investors.
Cox
said his office hasn’t seen anything that would
lead to criminal charges against Comerica, but “if
something odd pops up, we will look at it.”
Comerica
joins a growing list of other banks, such as Merrill
Lynch and Goldman Sachs, that have agreed to buy back
auction rate securities after pressure from state
attorney generals. Comerica’s buyback runs through
Dec. 19.
As
a result of the settlement, Comerica said it expects
to take a $75 million, or 50 cents per share, after-tax
charge to its third-quarter earnings, which will be
announced Oct. 17.
September
19, 2008
Congress'
Financial Services Committee Holds Hearing On Auction
Rate Securities Market Troubles
from
N.A.S.F.A.
Broker-dealer
firms that underwrote, marketed and sold auction-rate
securities (ARS) misled investors by not disclosing
the increasing risks associated with ARS and their
reduced ability to support auctions, according to
the testimony of Linda Thomsen, the director of the
Securities and Exchange Commission's Division of Enforcement.
Thomsen
testified Thursday at the House Financial Services
Committee's hearing on problems and potential resolutions
to the auction-rate securities market, which froze
up in mid-February when investors stopped buying ARS
- effectively drying up all the liquidity in the market.
ARS had grown into a $330 billion market by early
2008. Until the ARS market froze in mid-February,
auction failures were extremely rare and the market
was highly liquid.
The
current lack of liquidity in the ARS market and the
Asset Backed Securities market combined with recent
subsidy cuts has forced more than 130 Federal Family
Education Loan Program (FFELP) loan providers to suspend
or terminate a portion or all of their services. The
freezing of the ARS market has hit nonprofit lenders
especially hard because of their reliance on ARS to
raise capital.
In
her testimony before the committee, Tara E. Payne,
vice president of Corporate Communications at the
New Hampshire Higher Education Loan Corporation (NHHELCO),
explained that thousands of students were forced to
find a new, likely more expensive, student loan provider
because funds NHHECLO would have used to make loans
are frozen in the ARS market.
Payne
testified that NHHELCO's once solid financial base
had been significantly compromised by UBS Securities,
LLC, NHHELCO's "long-standing, trusted"
financial advisor and broker-dealer since 1997.
UBS
actively encouraged NHHELCO to extend its commitment
to student loan bonds, even when UBS knew that the
market for these bonds was on the verge of collapse,
according to Payne. UBS advised NHHELCO to reset the
maximum rate on NHHELCO's taxable bonds to 17% to
18% to ensure liquidity and prevent auctions from
failing.
"We
know now that this was a 'scheme' to make the securities
more attractive to investors and to keep NHHELCO in
the Student Loan Auction Rate Securities market,"
Payne said.
Additionally,
UBS would bid for bonds that went unsold to prevent
auctions they ran from failing, but it was actively
considering withdrawing its own holdings in the market.
At the same time, it was advising NHHELCO to stay
in the market. On February 13, 2008, UBS stopped supporting
the ARS market and it collapsed, leaving NHHELCO and
investors with billions of dollars frozen.
"UBS
never disclosed to NHHELCO that the ARS market was
at risk of freezing ... or that UBS was preparing
to ends its support of the market," Payne said.
On
August 14, 2008, the New Hampshire Bureau of Securities
Regulation announced that is was taking action against
UBS Securities, LLC for fraud and failing in its fiduciary
and moral duty to NHHELCO. .
Fortunately,
NHHELCO was able to raise $94 million from community
lenders in order to continue making loans. Congress
then passed the Ensuring Continued Access to Student
Loans Act, which allows the Department of Education
to provide liquidity to the market and enabled NHHELCO
to continue making loans.
Payne
and others testifying before the committee agreed
that it is unlikely that the ARS market will recover
in the near future, if ever. Payne urged lawmakers
to extend ECASLA to ensure students and families will
be able to finance higher education.
"In
New Hampshire we know that 82 percent of borrowers
in repayment believe that the opportunity to go to
college would not have been possible without access
to student loans," Payne said. "The credit
crisis has threatened many families' ability to get
a second mortgage or for students to qualify for private
education loans without parents as co-signers. As
a result, some low- and middle-income families may
be running out of college funding options. We understand
that some are turning to borrowing from 401k plans
and putting tuition on credit cards."
James
Preston, president and CEO of the Pennsylvania Higher
Education Assistance Agency (PHEAA) also advocated
for an extension of ECASLA, but noted that it was
only a temporary fix and a longer-term solution is
needed.
"Unless
Congress and the Administration address the underlying
causes of the current liquidity difficulties, there
will continue to be instability in the student loan
marketplace and participants will continue to cease
supporting student loans," Preston said.
Preston
and other nonprofit loan providers have been championing
a plan to have the Treasury replicate its efforts
to rescue Fannie Mae and Freddie Mac for student loan
providers. Under this plan, the Treasury would stand
in place of the global markets which are unable to
supply sufficient capital to student lenders.
NHHELCO's
experience is not unique.
Broker-dealer
firms that underwrote, marketed and sold ARS used
their sales forces, marketing materials, and account
statements to misrepresent to their customers that
ARS were safe, highly liquid investments that were
equivalent to cash or money market funds, according
to Thomsen.
"These
firms failed to disclose the increasing risks associated
with ARS, including their reduced ability to support
the auctions," she said. "By engaging in
this conduct, those firms violated the Federal securities
laws, including the broker-dealer antifraud provisions."
Federal
and state law enforcement and securities regulatory
officials have helped tens of thousands of investors
get billions of dollars of liquidity restored to them.
Before the hearing, the Financial Industry Regulatory
Authority announced it reached agreements with SunTrust
Banks Inc. (STI), Comerica Inc. (CMA), Washington
Mutual Inc. (WM) and First Southwest Co. to settle
queries about how they marketed and sold auction-rate
securities. Finra said the companies have agreed to
repurchase auction-rate securities bought by individual
investors, charities and small businesses with $10
million or less in their accounts between May 31,
2006, and Feb. 28, 2008. The companies didn't admit
or deny wrongdoing.
The
ARS market encountered significant problems during
early 2008 for several reasons, according to Thomsen.
One
factor was the significant increase in the size of
the ARS market, which had grown to $330 billion by
the time of the freeze. This larger market required
the firms to find more and more customers to bid in
the auctions.
An
additional reason for the market seizure is the rating
agencies' downgrades of the monoline insurers (e.g.,
Ambac Financial Group Inc, and MBIA Inc.), which provided
insurance for many ARS to ensure that holders would
receive repayment of their principal if the issuer
defaulted. These downgrades resulted in the loss of
customers willing to invest in ARS.
Another
factor that contributed to the freeze is the sub-prime
mortgage and credit crisis that unfolded throughout
the second half of 2007, which limited the firms'
ability to support the auctions with their own capital.
In fact, firms stopped supporting the auctions in
mid-February 2008, and the entire market froze in
a matter of days. The securities became illiquid,
leaving tens of thousands of customers unable to sell
their ARS holdings.
A
complete list of witnesses who testified, their testimony
and a review of the problems and potential resolutions
is available
online.
September
18, 2008
Deutsche
Bank does right by its clients.
Issues clarifying statement.
For the entire DB statement, click
here.
September
17, 2008
Auction-Rate Securities Suit Against
UBS Can Proceed
By
AMIR EFRATI, Wall Street Journal
A
lawsuit filed by an institutional investor that claims
UBS AG lied about the safety of auction-rate securities
it sold can move forward, a federal judge ruled on
Wednesday.
Gary
L. Sharpe, a U.S. district court judge in Albany,
N.Y., denied UBS's motion to dismiss the case filed
in June by Latham, N.Y.-based energy company Plug
Power Inc.
A
UBS spokesman said in a statement: "We are disappointed
that this case wasn't dismissed today and we intend
to vigorously defend ourselves in this action."
He added that UBS has offered clients the ability
to borrow up to 100% against their auction-rate holdings.
The
case is being widely watched by institutional investors
holding billions of dollars worth of auction-rate
securities they can't easily sell. Such civil cases
are the hope of institutional investors, who unlike
small businesses and individuals were not the beneficiaries
of agreements by numerous financial institutions to
buy back many of the securities they sold. The agreements
were part of settled fraud allegations brought by
state securities regulators.
The
auction-rate market, once as large as $330 billion,
froze in February amid the credit crunch, as buyers
for the securities disappeared. Auction-rate securities
let issuers borrow for the long term, but at lower,
short-term interest rates. The interest rates reset
at periodic auctions, thus the name.
The
case is proceeding despite a settlement between UBS
and the New York attorney general's office and other
regulators, in which the firm agreed to buy back $19
billion of securities from its clients. In the UBS
settlement, securities held by institutional clients
are expected to be bought back by 2010, but "we
need the funds before 2010, and they're not providing
us a [guarantee] that they will be able to pay us
in 2010," says Greg Carpinello, a lawyer at Boies,
Schiller & Flexner LLP, which is representing
the plaintiff.
The
UBS case is unusual because most of the legal action
against financial firms by auction-rate investors
has occurred through arbitration claims rather than
complaints filed in court.
In
its suit, Plug Power claims UBS assured Plug Power's
chief financial officer that auction-rate securities
backed by student loans were safe and liquid, despite
spikes in their interest rates that suggested otherwise.
The company had bought $62.9 million in auction-rate
securities backed by pools of student loans starting
in 2005, and the securities made up nearly half of
its total investment portfolio, according to the complaint.
September
15, 2008
Fidelity
does the right thing,
and steps up the plate.
Major kudos to Fidelity
by
Harry Newton
Fidelity
Investments has agreed to buy back $300 million in
auction-rate securities after reaching agreements
with New York and Massachusetts regulators. Fidelity
is the first retail brokerage (i.e. non-issuer) to
reach a settlement to redeem all the auction rate
securities its brokers sold.
This
is huge. Fidelity has done the right thing by its
customers. If you're a Fidelity customer, you have
to move quickly. Read this Fidelity
letter.
Now
it's time for every other brokerage firm to stand
up and act as honorably as Fidelity.
September
13, 2008
Congressional
ARPS Hearing begins this Thursday
Washington,
D.C. The House Financial Services Committee chaired
by Barney Frank (D-MA), will hold a hearing to review
problems and potential resolutions to the auction
rate securities market. Specifically, the hearing
will examine the continuing crisis in the markets
for auction rate bonds and auction rate preferred
securities.
It
starts: Thursday, September 18, 2008, 10:00 a.m.,
Room 2128, Rayburn House Office Building Full Committee.
To see a webcast of the hearing, Click
here.
Frank,
Ranking Member Spencer Bachus and Capital Markets
Subcommittee Chairman Paul E. Kanjorski announced
the hearing on July 31. You can read their entire
press release on their reasons for the hearing by
clicking here.
September
12, 2008
Harry
has not disappeared
I
have not disappeared or been hit by a bus. I have
had a little under half of my ARPS redeemed. So I
still have a major stake (nearly $3 million) in following
this business. I am following developments by the
hour. There hasn't frankly been much to report. And
few of you have emailed me with n |
