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July 21, 2010 Colorado
securities regulators file complaint against E-Trade The Colorado Securities Division has filed a complaint against New York based broker-dealer E-Trade Securities LLC, alleging that E-Trade falsely represented auction rate securities as liquid, short-term investments to Colorado investors without discussing the risks, officials said on Wednesday. The administrative complaint, which is before an administrative law judge, seeks to revoke, suspend or impose conditions on E-Trade’s Colorado broker dealer license. No hearing date has been scheduled yet. Over the past two years, Colorado Securities Commissioner Fred Joseph and Securities Division staff have targeted a number of companies that marketed auction rate securities prior to 2008. Settlements have been reached with nearly a dozen, including TD Ameritrade Inc., Deutsche Bank Securities, Citigroup Global Markets, Bank of America Securities, Credit Suisse Securities, JP Morgan Chase, Merrill Lynch, RBC Capital Markets, Wachovia Securities, and UBS Securities LLC and UBS Financial Services Inc. Auction rate securities are long-term bonds whose rates reset in periodic auctions. According to the complaint, E-Trade brokers repeatedly misrepresented the securities’ liquidity risks by comparing them to money market funds, selling auction rates securities as suitable for cash management purposes, or otherwise telling customers they would always be able to retrieve their cash. In February 2008, the auction rate market failed, leaving many investors holding long-term bonds and tying up funds they needed in the short term. In its complaint, the division alleges that E-Trade Securities violated the Colorado Securities Act by making false representations to investors, failed to adequately supervise its sales force, and engaged in unfair and dishonest dealings by making unsuitable recommendations to its customers. Compiled by the DBJ's Renee McGaw | denvernews@bizjournals.com June 23, 2010 This comes from the web site Sense on Cents.
Credit
Suisse To Pay $9.8M In Auction Rate Case NEW YORK (Dow Jones)--A Financial Industry Regulatory Authority arbitration panel has ordered Credit Suisse Securities (USA) LLC to pay an investor $9.8 million in a case related to auction-rate securities backed by student loan pools. Credit Suisse Securities (USA) LLC is the U.S. broker dealer unit of Credit Suisse Group (CS, CSGN.VX). The investor, Catalyst Health Solutions Inc. (CHSI), a Rockville, Md., company that manages prescription drug benefits, filed the case in 2009. It accused Credit Suisse of fraud, negligence, selling unsuitable investments, and other allegations, according to a Finra panel award dated May 27. Catalyst Health Solutions originally sought $11.9 million in compensation, plus the return of all fees and commissions, another $25 million in punitive damages, and other relief. The Final panel found Credit Suisse liable in the case, according to the award. The $9.8 million award represented the face value of the auction rate securities held by Catalyst Health Solutions, according to the panel. It also ordered Catalyst Health Solutions to transfer the securities to Credit Suisse. May 13, 2010 I know fraud when I see it Larry Doyle of senseoncents has posted the following: ARS Investors Targeting Andrew Cuomo I know fraud when I see it. I also know a miscarriage of justice when I see it. The manner in which auction-rate securities were distributed was a fraud. The manner in which this fraud has been largely adjudicated has been a massive miscarriage of justice. No miscarriage has been greater than that laid at the feet of those auction-rate securities investors who purchased ARS from Oppenheimer and Company. In
true American patriotic spirit, these ARS investors are not taking this
injustice sitting down. I have never owned an auction-rate security,
but I welcome joining their fight and highlighting their cause. On that
note, Andrew Cuomo should watch out. A group of Oppeneheimer ARS investors
just released the following statement:
If you care about decency and fairness in our society, please share this commentary with friends, family, and colleagues. The auction-rate securities market remains the single greatest fraud ever perpetrated. Cuomo’s settlement with Oppenheimer is nothing more than a massive insult added to a debilitating injury. In agreeing to this settlement, Cuomo shows himself to be a fraud as well. April 25, 2010 Finding value in the ARS wreckage MuniFund Term Preferred Shares is one way to refinance collapsed auction-rate securities By Patrick W. Galley, InvestmentNews Many investors are all too familiar with auction-rate preferred securities. For those who aren't, auction-rate preferred shares are a senior class of stock issued by a closed-end fund. Closed-end funds issue primarily auction-rate securities to create leverage, with the goal of boosting the yield and total return to the common shares. Auction-rate securities are typically rated triple-A and pay dividends at a floating rate that in most cases resets weekly, pursuant to a Dutch auction process. Although auction-rate securities often have a perpetual duration (stated clearly in the prospectus), many investors erroneously considered these securities to be weekly money market investments because the regular auctions provided them with liquidity to sell their shares. Beginning in February 2008, the roughly $64 billion of auction-rate securities issued by closed-end funds began to experience widespread auction failures, and there hasn't been a successful auction since. As a result, investors in auction-rate securities have limited liquidity unless they sell at a discount to par, their brokerage firm agrees to purchase back the securities or the closed-end fund redeems the securities — most likely due to refinancing. To date, almost 60% of the outstanding auction-rate securities have been redeemed. With more than $25 billion still outstanding, some closed-end-fund sponsors have been refinancing the outstanding auction-rate securities aggressively to provide liquidity to the holders. One of the most aggressive firms is Nuveen Investments LLC, which has been on a tear recently — successfully launching MuniFund Term Preferred Shares to refinance auction-rate securities issued by their municipal bond closed-end funds. The MTP is a fixed-rate form of preferred stock with a mandatory redemption period, in most cases five years. It offers investors an attractive tax-exempt yield, most recently near 2.65%, and liquidity within five years. For the fund issuing the MTP, a low historic yield is locked in for about five years, taking advantage of current historically low interest rates. The investment case for these newly issued MTPs is compelling for those investors seeking tax-exempt income. For starters, the tax-exempt yield is attractive, relative to other tax-exempt options and Treasuries. Five-year triple-A-rated muni general-obligation bonds now yield about 1.9%, almost 30% less than the MTP yield. On a tax-equivalent basis, the MTP yield is about 4.1%; five-year Treasury bonds yield 2.55%. Each MTP is backed by a diversified pool of muni bonds and, per the Investment Company Act of 1940, the required asset coverage is 2-to-1, meaning for every $1 of outstanding MTPs, the fund must maintain $2 of assets. This strong asset coverage results in a high-quality triple-A rating. MTPs also have medium-term maturity. The mandatory redemption in five years gives investors a limited-duration security, ideal for those concerned about interest rates' increasing. In addition, as an exchange-traded security on the New York Stock Exchange, MTPs offer daily liquidity to investors typically within 30 days of issuance, as well as the ability to sell the security above or below par, depending on secondary-market demand. To date, all Nuveen MTPs are trading above their $10 par value, an indication of strong secondary demand and contrary to the equity of a closed-end fund, which typically trades at a discount. Why aren't all fund sponsors issuing MTPs or similar securities? The MTP yield is about five to six times that of the ARS current yield. Because of this increase in cost of leverage, the equity holders of the closed-end fund bare the increased cost. Long-term equity holders who believe that short-term rates will rise sharply in the near term should welcome the issuance of MTPs. Obviously, some fund sponsors, such as BlackRock Inc. and Pacific Investment Management Co. LLC, don't share that view, as both firms have been reluctant to using alter- natives to refinance outstanding auction-rate securities. Their case is valid from the perspective that either the fund must take on increased-interest-rate risk or credit risk, or be in the position of earning a negative carry, until yields increase enough to out-earn the cost of leverage. Patrick W. Galley is the chief investment officer of RiverNorth Capital Management LLC. The firm specializes in quantitative and qualitative closed-end-fund strategies, and is the investment adviser to the RiverNorth Funds. April 11, 2010 Schwab continues to assert its innocence in ARS case Firm
seeks dismissal of charges; N.Y. attorney general Cuomo presses on The Charles Schwab Corp. continues to dig in its heels over New York Attorney General Andrew Cuomo's claim that it sold auction-rate securities to investors fraudulently. Although 14 securities firms have reached settlements with Mr. Cuomo and dozens have settled with other regulators over alleged sales abuses in the auction-rate market, Schwab is seeking dismissal of the complaint that New York filed last August, according to a person close to the case who was not authorized to discuss the issue. Schwab lost an attempt earlier this year to move the case to federal court from New York State Supreme Court, where Mr. Cuomo has more leeway to press his claims. Mr. Cuomo, a likely candidate for New York's 2010 Democratic gubernatorial nomination, has charged Schwab with misleading clients into thinking that auction-rate securities were as liquid as money market funds, even after the auction-rate market froze in February 2008, the person said. Sarah Bulgatz, a spokeswoman for Schwab, declined to comment. A spokesman for Mr. Cuomo didn't return calls seeking comment. Schwab, a so-called downstream seller of auction-rate securities, was less involved in the market than the organizers of the auctions, The Goldman Sachs Group Inc. and UBS AG. Although other downstream firms, including Oppenheimer & Co. Inc., have reached multimillion- dollar ARS settlements with regulators, Schwab is taking an unusually aggressive stance in asserting its innocence. The auction-rate market collapsed in February 2008, leaving thousands of investors unable to redeem billions of dollars of securities marketed as being highly liquid. Lawyers and securities analysts contend that Schwab is less worried about the financial damages that it could suffer from lawsuits than about the consequences of allowing outsiders to dictate how it operates its business. In a Wall Street Journal Op-Ed last summer, founder Charles R. Schwab waved the flag of investor choice and suggested that regulators and litigators trying to hold his firm responsible for those choices jeopardize the integrity of the discount-brokerage model. Some 90% of Schwab clients who bought auction-rate securities, which paid slightly higher interest rates than money market funds, actively requested the instruments, he wrote. “Unfortunately, we are now seeing a conscious effort to limit — if not eliminate — all risks for the individual investor, whether through consumer "protection,' fiduciary liability for brokers or the threat of litigation that attempts to make our firm, and others like us, more like an insurance company than a broker,” Mr. Schwab wrote. “The logical outcome would be that individual investors would be constrained to a small set of plain-vanilla investments — Treasuries for all — or would be forced to pay us a fee to manage their account.” TD Ameritrade Holdings Inc., another discount firm that argued that it shouldn't be liable for selling auction-rate securities that it didn't help create, last year agreed to repurchase some $400 million of frozen securities. “We decided to put this behind us and move the organization forward,” chief executive Fred Tomczyk said in an interview at the time. He cited a desire to stanch negative publicity and stem lawsuits. TD Ameritrade recently said that investors have redeemed only about $300 million of the securities. When Mr. Cuomo sued Schwab, some analysts estimated that its clients were holding less than $200 million of auction-rate securities, a relatively small amount by comparison with many competitors' exposure and with the company's $5.1 billion of equity capital. However, Schwab's tenacity could incrementally hurt its capital base, along with its reputation, at a time when it is facing other legal battles, lawyers and analysts said. “Schwab's position may indeed be appropriate, given its discount model and its non-originating role for the ARS product,” said Bill Singer, a plaintiff's attorney at Stark & Stark. “But my caution to the Street is simple: You all need to rebuild the public's confidence in your integrity. Think carefully about when and where you choose to play hardball.” Alex Neihaus, an individual investor who said that he is stuck with $75,000 of auction-rate securities purchased from Schwab after selling the bulk of his position, argued that the firm is “hiding behind principle” in refusing to settle. “It's so minor that they could make people like me go away for almost nothing,” he said. “But their marketing and salespeople have no ethics.” Mr. Neihaus said that Schwab forced him to close his account after he attacked the firm on his blog and in newspaper interviews. Ms. Bulgatz declined to respond to Mr. Neihaus' comments. Schwab's stance is “more about the principle” than the money, said Richard Repetto, an analyst at Sandler O'Neil & Partners LP. In an April 1 report, Sandler O'Neil warned of a potentially more serious capital issue stemming from Schwab's legal battles over its YieldPlus mutual funds. The Securities and Exchange Commission is weighing a lawsuit over the marketing of the funds, which were heavily concentrated in uninsured mortgage-backed securities and which plummeted in value during the market collapse of 2008 and 2009. A judge in the U.S. District Court for the Northern District of California ruled March 30 that Schwab illegally boosted YieldPlus' mortgage-backed holdings without getting shareholder approval. Schwab also faces arbitration claims and class actions from investors who allege that it marketed YieldPlus as a conservative investment. The litigation could end up costing Schwab $400 million, resulting in a capital hole of $385 million to $635 million, Mr. Repetto wrote in his April 1 report. “There are far too many variables and unknowns in the equation at this time to be able to draw these particular conclusions,” Greg Gable, a Schwab spokesman, wrote in an e-mail at the time. Dan Jamieson contributed to this story. E-mail Jed Horowitz at jhorowitz@investmentnews.com. February 25, 2010 Investors
Say Auction-Rate Pacts Come Up Short NEW YORK -- Two recent deals with regulators will ease the woes of some Oppenheimer & Co. clients stranded in illiquid securities, but offer little more than promises to some higher-net-worth investors more than two years after their troubles began. Among those investors is Rick Polisky of Los Angeles, who's still holding between $12 million and $13 million in auction-rate securities he purchased through Oppenheimer. He's fuming that neither deal will help him. A conversation with his broker's supervisor at Oppenheimer, a unit of Oppenheimer Holdings Inc. (OPY), left Polisky believing that it could take years before his shares are redeemed. Oppenheimer clients have a total of $800 million to $950 million outstanding in auction-rate securities, which are debt instruments whose interest rates are meant to be reset periodically at auctions. The market seized up in February 2008 as the credit crisis spiraled, leaving investors locked into long-term investments that many brokers promoted as safe and liquid. On Wednesday, Massachusetts announced an agreement with Oppenheimer to make redemptions over the next year to 60 of the 70 residents of that state with money tied up in auction-rate securities. Each of those benefiting from the agreement has less than $2 million invested, and the total settlement will be $4.3 million.
"This was the best arrangement we could get with Oppenheimer that gave the most people their money back," a spokesman for Secretary of the Commonwealth William Galvin's office said Thursday. The office considers the matter settled, and a March 1 hearing on fraud charges against Oppenheimer is now off, a spokesman said. The agreement does stipulate that, should another regulator reach a better deal with Oppenheimer, those terms would also apply to Massachusetts residents. A day before that settlement, Oppenheimer reached terms with New York Attorney General Andrew Cuomo, promising to provide $31 million in liquidity to some auction-rate shareholders. Cuomo's office called it a first step, noting that the face value of customers' frozen securities "exceeds the resources" Oppenheimer can pledge for a buy-back under regulatory requirements. Oppenheimer committed to additional buy-back offers if and when it obtains additional capital or access to credit, it said. Under the Cuomo settlement, more than 1,246 accounts nationally and 230 accounts in New York can obtain an immediate buy back. All individuals, charities and small businesses with accounts of less than $1 million at Oppenheimer will be eligible for $25,000 in liquidity; that includes 43 of the Massachusetts accounts mentioned in the Galvin agreement. That helps some smaller investors, but doesn't do much for those with more significant sums, says Todd Higgins, a managing partner at New York-based Crosby & Higgins LLP. He is counsel in five auction-rate-securities-related arbitration cases against Oppenheimer, all for clients with more than $1 million invested. Higgins says he understands Oppenheimer's need to balance investors' needs with its own financial position. Still, "I can understand how a client would have a very bad taste in their mouth right now, when Oppenheimer doesn't stand up and take responsibility," he said. As part of the New York settlement, Oppenheimer neither admitted nor denied allegations it misrepresented the securities during sales. However, Oppenheimer has previously denied the allegation. Cuomo's office agreed to suspend its probe of Oppenheimer for now, but could still bring charges if Oppenheimer doesn't make enough of an effort to help investors. The attorney general's office said Thursday that its investigation of the auction-rate securities issue is still ongoing. It had no further comment. An Oppenheimer spokesman said the settlement recognizes the importance of using its available funds. It "begins to remove a large issue for the company," which can continue to conduct its day-to-day business, he said. That's little consolation for Barry Rosenbloom, a New York resident with seven figures stranded in auction-rate preferred securities at Oppenheimer. Rosenbloom expects nothing from the settlement, and has no idea how long he'll have to wait. "From one side of its mouth, [Oppenheimer's] saying, "We're a rock solid company,'" Rosenbloom said. "Then you say, "Redeem my ARPS," and it says, "We don't have enough money to do that; that would put us under.'" The settlement commits Oppenheimer to a financial review every six months to see if more funds are available, in light of financial and regulatory capital constraints, to make additional purchase offers to investors. The company must report to Cuomo's office on those reviews. --(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 212-416-2237 or at daisy.maxey@dowjones.com) February 12, 2010 HIGH
& LOW FINANCE Would you buy a “XXX” security? Those securities do exist, providing evidence of the perversion of finance during the credit boom that ended so abruptly in 2007 and 2008. That perversion was not of the type you might associate with the label XXX. The letters instead refer to the number of a regulation that insurance companies found inconvenient, and wished to get around. Here are some of the features that make XXX securities memorable: ¶ They were based on the assumption, endorsed by the bond rating agencies, that insurance regulators were requiring life insurers to retain too much capital. ¶ Therefore, investors could take on a large part of the risk of the insurance with complete safety. That would be only the “excess” part, as calculated by the insurance company ¶ The securities were sold as virtually risk-free cash equivalents, enabling the investor to get out, at par, once a month. Supposedly sophisticated investors sank more than $30 billion into them. ¶ The securities were explained in complex prospectuses that almost nobody even obtained, let alone read. ¶ They were guaranteed by bond insurers, like Ambac, further persuading people there was nothing to worry about. There was, it turns out, plenty to worry about. Espen Robak, the president of Pluris Valuation Advisors, says some of the securities are trading from 5 to 28 cents on the dollar. The continued existence of these securities provides a reminder that the auction-rate securities market, which collapsed two years ago, is not going to go away. Low-yielding securities remain on the books of unfortunate investors or the brokerage firms that were forced to buy back the securities from some, but often not all, of their customers. Some of these investments will be around for decades, offering a reminder of a time of financial folly. To make it even more galling for the investors, the brokerage firms that sold the paper to them get additional payments from the issuer every time there is a failed auction. Auction-rate securities were supposed to accomplish the magic of allowing borrowers to get long-term money at short-term rates. They accomplished that by holding Dutch auctions, usually every week or month, to set the yields for the next period. There were penalty rates to be imposed if auctions failed, which were supposed to assure that borrowers, if they remained creditworthy, would refinance the debt. We now know that for months the auctions were becoming harder and harder to complete. The Wall Street firms that had underwritten the securities put in their own bids to prevent failure, while at the same time stepping up marketing of the securities. Finally, in the Valentine’s Week massacre of 2008, virtually all firms stopped supporting auctions. The market collapsed. Since then, there has been a gradual shrinkage of the market. More than 80 percent of the $165 billion of municipal auction-rate securities have been redeemed, but just a quarter of the $85 billion in student loan paper has been redeemed. The other major market was auction-rate preferred securities, often issued by closed-end mutual funds. About half the $60 billion of those has been retired, according to Pluris figures. Then there is the toxic part of the market. That includes the XXX debt. Regulation XXX, as issued by insurance commissioners, required life insurers to use government mortality tables when they calculated how much they needed to keep in reserves. The insurers deemed that unreasonable because they did not insure just anyone. They excluded those who might be greater risks. So they should be able to hold lower reserves than the rules required. Wall Street came up with a way to lay off the excess risk onto a nonrecourse company. That company would be financed by investors who bought an array of auction-rate securities that reset every month. Unfortunately for the investors, if too many people died, and the reserves were not really excess, the original insurance company could grab the cash. That protected policyholders, but it made the investments risky. After the auction-rate market froze, holders of securities began to try to find out what they owned, and what it was worth. That turned out to be difficult. Most of the holders, Mr. Robak said, “could not produce prospectuses.” It had never occurred to them to get such documentation on what they thought was a cash equivalent investment. So they called the brokers who had sold the securities, and found they did not have them either. Finding them took time. The prospectuses now provide an incredible and perplexing reading experience. Take one of the larger issuances, for something called Ballantyne Re, an entity set up in Ireland by Scottish Re to spare it the need to hold those “excess” reserves. A 2006 offering underwritten by Lehman Brothers raised $1.65 billion in nine different classes of securities. One tranche of that issue, originally rated AAA by Moody’s, Fitch and Standard & Poor’s, now has a CC rating from S.& P., which is about as low as you can go before default. The other agencies have withdrawn their ratings. Pluris values it at 14 cents on the dollar. It is making full payments only with help from the bond insurer Ambac, which itself is in trouble. I have read a lot of prospectuses over the years, but I cannot recall any as baffling as this 240-page document. The purchasers of the securities may be just as well off for not having read it, although perhaps the sheer complexity would have led them to wonder whether they really wanted to invest money on terms that would yield no more than two percentage points over one-month Libor, a total now under 2.3 percent. The prospectus includes complicated diagrams of how the cash would flow and page after page of sometimes opaque risk factors. But my favorite part is an analysis by Milliman, an actuarial firm. It was provided by Ballantyne to help investors weigh the likelihood that the insurance policies would perform as expected — that is, whether the “excess” reserves really were excess. “In order to fully understand this report,” Milliman cautioned, “any user of the report should be advised by an actuary with a substantial level of expertise in areas relevant to this analysis to appreciate the significance of the underlying assumptions and the impact of those assumptions on the illustrated results.” In other words, the expert tells you that you cannot hope to understand his work unless you hire your own expert. Would you need to hire another expert to understand that expert’s work? Imagine some future doctoral student in financial history coming across this prospectus and trying to understand why anyone would have bought the securities. He or she is likely to be puzzled. The potential upside was minimal; the potential downside was immense. If the Ambac guaranty somehow turned out to be less than solid, there were a lot of things to be considered. Factors that would determine whether the securities would pay off, the prospectus helpfully said, “include, but are not limited to” whether assumptions were correct about mortality, future interest rates, investment performance and policyholder decisions to cancel or replace policies. Why did the securities sell? Not because of anything in the prospectus. The securities promised a little better yield than other AAA-rated paper. That mattered to some money managers and corporate treasurers. Anyway, they were told by brokers, they could always sell at the next auction, for full face value. Why waste a lot of time evaluating a one-month investment? Only after disaster struck did people start to find out what they had bought. The lucky ones had municipal paper that would be redeemed within a year of two. The unlucky ones had XXX securities. It was an era of trust. Because that trust is not likely to return quickly, those who want to revive the securitization market have an uphill road ahead of them. Floyd Norris comments on finance and economics in his blog at nytimes.com/norris. Copyright 2010 The New York Times Company ++++++++++++++++++++++++ Oppenheimer did not issue auction rate preferreds securities, but it did sell a lot of them. It hasn't repaid any of them (or any we know of). And it probably never will. But it has been using repaying of ARPs to its long-suffering clients as an excuse. Read on. February 11, 2010 Oppenheimer
Frustrated At Elusive Auction-Rate Solution NEW
YORK (Dow Jones)--As many holders of auction-rate securities remain
frustrated at their inability to find a way to sell the instruments,
Oppenheimer & Co., which sold some of the shares, says it is frustrated,
too. DJ
Hearing Delayed On Oppenheimer's Auction-Rate Share Sales NEW YORK (Dow Jones)--An administrative hearing on fraud charges filed in Massachusetts against Oppenheimer & Co. over the sale of auction-rate securities has been postponed until March 1. To the exasperation of shareholders, it's at least the fourth time the hearing has been postponed. Once set for Nov. 4, it was pushed back to Nov. 16, then delayed again until Dec. 8, then postponed until Jan. 25. The latest delay occurred because one of the parties requested it, according to a spokesman for the office of Secretary of the Commonwealth William Galvin. The spokesman declined to elaborate. The Massachusetts complaint, filed in November 2008 by Galvin's office, charges that Oppenheimer "significantly misrepresented not only the nature of ARS, but also the overall stability and health of the ARS market when marketing the product to clients." Oppenheimer did not immediately return a call seeking comment Thursday. The company has previously said that the allegations have no basis in fact or law, and that it intends to vigorously defend itself. Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction. Financial advisers promoted the securities as safe, liquid instruments, but the $330 billion market seized up in February 2008 as credit markets tightened and left investors stranded. In a January update that some Oppenheimer clients received, it said it has been actively seeking a solution, including pressing issuers of the shares to redeem or otherwise liquidate the shares, which has met with limited success. "We have made a claim against several of these lead underwriters in a legal proceeding in which we allege and believe, that the underwriter, as opposed to Oppenheimer, should be the entity required to make any restitution required since they (along with the issuers) artificially supported the auctions," Oppenheimer said in its update. Oppenheimer has been subject to ongoing investigations in connection with the securities, with which it is fully cooperating, by the Financial Industry Regulatory Authority and various state regulators, it said. At present, Oppenheimer does not have the financial capacity to repurchase, within Securities and Exchange Commission capital requirements, a significant amount of its clients' ARS without access to a lending facility or pool of liquidity, it said in its January update. Oppenheimer began in June 2009 to build a government securities trading business to qualify as a primary dealer with the Federal Reserve Bank of New York in the hopes of attaining a liquidity facility from that institution, the company said. However, despite spending a significant amount of time, effort and money to build that business, it has not yet been successful in being appointed a primary dealer. Two developments may affect its ability to become a dealer and access a liquidity pool to buy back the securities, it said. In December, the Federal Reserve Board said it will begin in February removing programs that were instituted to deal with the emergency conditions associated with the credit crisis, and mentioned the Term Asset-Backed Securities Loan Facility, the primary dealer credit facility and others, the company said. In addition,
on Jan. 11, the Federal Reserve Bank of New York published a revised
policy for the administration of primary dealers. Foremost among the
requirements for eligibility to be appointed a primary dealer are
a minimum net capital standard, which was raised to $150 million from
$50 million and a "seasoning" requirement that was increased
to a minimum of one year, Oppenheimer said. Based on the fact that
its participation in Treasury auctions began in June 2009, Oppenheimer
believes the new requirements may mean that its application to be
a primary dealer won't be considered until at least June 2010, it
said. Tuesday, January 20, 2010 Citi
Settles $72 Million Lawsuit Involving Auction Rate Securities Two
months ago we reported that Citigroup Global Markets, Inc. had asked
a New York court to dismiss a $72 million lawsuit filed against it
by KV Pharmaceutical Co. Last week it was announced that Citi had
agreed to settle with KV. Auction
rate securities (ARS) are debt instruments – usually municipal
bonds or preferred stock-- for which interest is regularly reset through
a Dutch auction. Auction rate securities were once routinely marketed
as safe, cash equivalents that were highly liquid, but the broker-dealers
who sold them failed to disclose that liquidity was entirely dependent
upon the success of the auction process, which was being artificially
supported by the undisclosed participation of brokers bidding in auctions
where they had an interest. Auctions were held every 7 to 35 days
by the brokerage firms that dealt in auction rate securities, but
because of the subprime lending crisis and its effect upon the financial
markets, ARS auctions ground to a halt in February 2008 because they
were no longer viable investments and broker-dealers who had previously
propped up the market by bidding in their own auctions were no longer
inclined to invest in them. The result has been that ARS holders have
been unable to cash out even at a loss, and investors who were led
to believe that they were purchasing cash equivalents have learned
that they essentially have no liquidity at all. According
to Craig T. Jones, an attorney with the Atlanta law firm of Page Perry
LLC who is representing several investors in auction rate securities
cases, “Citigroup is not alone because this was a flawed product
that was misrepresented by everyone involved in the auction rate market.
But not everyone is settling these cases.” Jones points out that
the statutes of limitations in some states are now beginning to bar
claims relating to the sales of auction rate securities. “It
is important that anyone who invested in a auction rate securities
that are still illiquid get a lawyer and make a claim as soon as possible,”
he says. “Once the legal deadlines expire, it will be too late.” Monday, January 5, 2010 Tom
James apologizes for auction rate security purchases Clients of Raymond James Financial Inc. have substantially reduced their holdings of auction rate securities. The firm’s clients currently own about $1 billion in auction rate securities and auction rate preferred securities, less than half the $2.3 billion in securities they owned as of Feb. 12, Thomas James, chairman and chief executive, wrote in a Jan. 2 letter. Auction rate securities are investment vehicles whose interest rates are reset through periodic auctions. In February, the auctions began failing en masse, meaning there were more sellers than buyers, and the securities became nearly impossible to trade. It was the first time in almost 20 years that there was a significant number of failed auctions, James wrote in his letter, which was filed with the Securities and Exchange Commission Monday. For clients who purchased the securities through Raymond James, “I apologize for being involved in your purchase of these securities,” said James. Several firms, primarily underwriters of the securities, have begun to repurchase the securities, and James said he had hoped most of them would have been refinanced by now. However, the lack of liquidity and credit in the financial markets has yet to be alleviated in spite of regulatory efforts, James said. James said Raymond James has not repurchased the securities it sold because it does not have access to the needed financing at this time to buy back anything near the $1 billion outstanding. However, he said the company might be able to get a bank loan to buy back the securities when it becomes a bank holding company, a process it expects to complete by June. James also said that if the company could buy back the securities, regulators would not give Raymond James any “regulatory net capital” credit for the securities, because they are illiquid. “The illiquidity of auction rate securities is one of the manifestations of the ‘perfect storm’ in the financial markets,” James wrote. James also disclosed that he personally owned a large number of auction rate securities on Feb. 12, when the auctions failed, and still owns a large number. “We will redeem all customer holdings prior to redeeming the holdings of our employees,” he said. Meanwhile, the securities are well-collateralized with plenty of coverage to pay their appropriate returns, and in most cases, clients are receiving a higher rate of interest than the contract rate, he said. Raymond James Financial (NYSE: RJF) is a financial services firm headquartered in St. Petersburg. December 29, 2009 Stifel
reaches auction-rate securities settlement ST. LOUIS (AP) - Financial services firm Stifel Nicolaus & Co. will complete the buyback of auction-rate securities from individual investors six months early under a settlement reached Monday with Missouri and other states. The regional brokerage and financial services firm based in St. Louis will return up to $41 million to investors by the end of 2010, with everyone to be paid in full by the end of 2011. Stifel had originally set a deadline of June 30, 2012, to buy back all auction-rate securities held by its retail investors who bought them prior to the February 2008 collapse of the market for the securities. Missouri Secretary of State Robin Carnahan said 1,200 Stifel clients nationwide are owed a total of $180 million. Partial payments will be made to investors as early as Jan. 15, said Carnahan, who oversees securities in the state. "This is a win for investors, and we're pleased to have helped investors get their money back a lot sooner," she said. The settlement resolves lawsuits or other complaints by Missouri, Indiana, Colorado and other state members of the North American Securities Administrators Association, a Stifel spokesman said. The settlement announced Monday also requires Stifel to hire a securities-industry expert to oversee its employee training, marketing and selling of nonconventional financial products, so that customers can better understand their potential risks. The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions, some as frequently as once a week. Many investors bought the securities believing they were similar to a money market, a traditionally safe and liquid investment. But they found their funds frozen when the ARS market fell apart last year amid the downturn in the broader credit markets. A dozen banks and investment firms have agreed to buy back the securities. Stifel announced a voluntary plan in February to buy back all auction-rate securities held by individual investors. The firm called Monday's settlement a "significant enhancement" over the voluntary plan. Under the settlement, Stifel also must work with a bank to loan money to affected investors who need immediate cash. The firm also must pay a $525,000 penalty that will be shared by states participating in the NASAA settlement. Stifel also must pay $250,000 to Missouri and $25,000 to Indiana for their costs to investigate the case. Those
eligible for a buyback are investors who bought ARS through Stifel
before the securities' collapse and continue to hold them at Stifel.
December 17, 2009 Don't
Believe Your Lawyers Here's what we know about lawyers: 1. Most know nothing about auction rate preferreds. They're reluctant to get involved with them because: 2. Most think the legal process is stacked against them and their client -- the one stuck in ARPs. They're right. When you sign up with a broker, they get you to sign a sneaky little agreement that says if anything happens your problem will go to arbitration, not to the courts. Arbitration is heavily stacked against , you and us, the common investor. You have a greater chance of getting away with killing your wife or husband than winning in investor arbitration. Most lawyers don't like dealing with clients who are confused, gutless and intimidated by the brokerage firms -- as most are today. Stop calling us with your woes. We've spent months filling this column with useful advice. Follow it. By the way, we figure $160 billion of ARPs still have not been redeemed. How big is that? That's 20% of the $787 billion TARP money. If that $160 billion were returned to its rightful owners and spent, it could create a heck of a lot of jobs. Why hasn't Washington paid ARPs any attention? Because you -- the ARPs owners -- have done nothing. See above about being confused, gutless and intimated. Sorry for the blunt language. We write it as we see it. December 15, 2009 Karpus
Flexes Muscle On Auction-Rate Shares NEW YORK (Dow Jones)--Only months after pressuring one closed-end fund to buy back its outstanding auction-rate preferred shares, activist investor Karpus Investment Management is flexing its muscle with another fund. Karpus, a Pittsford, N.Y.-based investment manager, has been buying up auction-rate preferred shares of Kayne Anderson MLP Investment Co. (KYN) and now holds 31.5% of its outstanding auction-rate preferred shares. Disappointed that the fund hasn't announced a plan to buy them back, Karpus recently told the fund that it plans to nominate Phillip Goldstein, activist and principal of Bulldog Investments, a Purchase, N.Y., hedge fund, to serve as a preferred-share director on the fund's board. The term of the current preferred-share director expires at the fund's annual meeting in June. The position is elected by preferred shareholders, so Karpus, with its chunk of those shares, has a good chance of getting its candidate chosen. According to regulatory filings, most of the remainder of the fund's outstanding auction-rate preferred shares are in the hands of big brokerages, with only about 9% in the hands of retail investors, said Cody Bartlett, managing director of investments at Karpus. "We are disappointed that the fund has not publicly announced any intent to consider providing liquidity to its auction-rate preferred shareholders, despite having completed a private placement of $110 million of senior unsecured fixed- and floating-rate notes that the fund indicates will be used to repay 'certain of the company's current borrowings,'" Bartlett said in a letter Monday to David Shladovsky, chief compliance officer at Kayne Anderson MLP Investment Co. In June, another closed-end fund, First Trust/Four Corners Senior Floating Rate Income Fund (FCM), made a tender offer to buy back its outstanding auction-rate preferred shares after Karpus notified the fund that it planned to nominate Goldstein and Brad Orvieto, president of Strategic Asset Management Group., to serve as preferred directors. In an interview, Bartlett noted that Tortoise Energy Capital Corp. (TYY), another closed-end fund with an investment objective similar to that of Kayne Anderson MLP Investment, recently announced plans to redeem all of its outstanding auction-rate shares, using a credit facility and proceeds from the issuance of mandatory redeemable preferred shares. "It's an option certainly that Kayne {Anderson} has at their disposal, or a tender offer is another option," Bartlett said. KA Fund Advisors LLC, the fund's adviser, had no comment on Karpus's move or on any efforts to redeem the fund's auction-rate preferred shares. 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 nominated Goldstein because he was elected to the board of the Insured Municipal Income Fund (PIF) this summer and immediately redeemed that fund's auction-rate preferred shares, Bartlett said. "He has a track record of addressing the ARPS problem quickly," said Bartlett. Karpus, which has a track record of activist investing, has been buying up shares of Kayne Anderson MLP Investment on the secondary market for a little more than a year at between 65 cents and 87 cents on the dollar, and now holds about 946 shares worth $23.65 million at par value, Bartlett said. Kayne Anderson MLP Investment has $1 billion in net assets. December 18, 2009 Buyers
For Auction-Rate Shares Still Emerge, NEW YORK (Dow Jones)--More hedge funds and other investors are gambling on the potential for profits in certain auction-rate securities, more than a year-and-a-half after the market failed en masse. In some cases, activist investors are buying up the shares at discounts on secondary markets, then pressuring funds to buy them out at or near par. Investors are seeking advantange in a market where many investors feel trapped and are struggling to trade in or establish a value for their illiquid securities. Financial advisory firm Duff & Phelps, which has been helping a variety of investors, mostly companies, value their auction-rate securities, is seeing increased interest in buying the shares at discounts, said Dwight Grant, managing director in the firm's San Francisco office and part of its financial engineering practice. Auction-rate securities are bonds with interest rates meant to be reset periodically at auction. Many financial advisers promoted them as liquid, but the $330 billion market seized up in February 2008 as credit markets tightened and auctions attracted no bidders. That left investors stranded. Some investors can afford to hold their auction-rate shares until a solution, and those aren't likely to sell for much less than 90 cents on the dollar, Grant said. Others need the money more urgently. Potential buyers are examining those holdings and, in some instances, offering 70 cents on the dollar with the expectation that they will have to hold the shares for two to three years before selling them. "There clearly is an acquisition market," and purchases are happening even more frequently now, he said. Some hedge funds are carefully "identifying securities that they believe have particularly desirable characteristics," Grant said. "There's a great uncertainty around exit and it's going to vary a great deal by issuer, but it is occurring," he added. As shares are redeemed, more of the securities will be concentrated in the hands of large institutions, which have an interest in getting the issue resolved, and can go directly to the issuer and try to work out solutions, he said. Maury Fertig, chief investment officer at Northbrook, Ill.-based Relative Value Partners, which oversees $400 million in customized accounts for wealthy families and small institutions, has purchased about $55 million in auction-rate securities issued by closed-end funds, mostly Nuveen Investments, some at 70 cents on the dollar. He has made purchases as recently as last week, and has had about $15 million of the shares redeemed at par. He's confident there'll be more redemptions in 2010. "It's going to be a slow, steady climb in terms of redemptions," he said. A key factor in valuing auction-rate securities is the formula that determines the maximum rate its issuer will have to pay shareholders when auctions fail. Some are tied to the London Interbank Offered Rate, an interest rate at which banks can borrow, and others have multiple indexes, Grant said. After getting a handle on the formula, Duff & Phelps attempts to determine the spreads on illiquid auction-rate shares by looking at trading in the comparable securities. The most challenging piece of the valuation puzzle, though, is determining how long the shares will be outstanding, Grant said. Perpetual preferred shares, for example, have no fixed maturity date. "Early on, we were trying to gauge what the response was likely to be from various issuers," he said. "We did not think these things would be outstanding forever, but at this point, you might say we got it closer for BlackRock [Inc.] (BLK) than we did for Oppenheimer [& Co.]. You have to have some sort of life expectancy in order to come up with some sort of value." BlackRock has redeemed many of its clients' auction-rate shares using tender option bonds and other vehicles. Oppenheimer said recently that it's continuing to explore options to help its clients liquidate their holdings. (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 212-416-2237 or at daisy.maxey@dowjones.com) November 19, 2009 DJ
Hearing On Oppenheimer's Sale Of Auction-Rate Securities Delayed NEW YORK (Dow Jones)--An administrative hearing on fraud charges filed in Massachusetts against Oppenheimer & Co. over the sale of auction-rate securities has been postponed until Dec. 8.
The hearing, set for Nov. 16, was pushed back due to various motions in the case. The hearing, which had been previously set for Nov. 4, has now been postponed at least twice.
"Oppenheimer continues to explore a range of options in helping its clients liquefy their holdings of auction-rate securities, and has been doing so since the market-makers ceased their intervention in this market last spring, sending the clients of downstream brokers, such as Oppenheimer and Raymond James, intoilliquid positions," a spokesman for Oppenheimer said Thursday.
The Massachusetts complaint, filed in November 2008 by Secretary of the Commonwealth William Galvin, charges that Oppenheimer "significantly misrepresented not only the nature of ARS, but also the overall stability and health of the ARS market when marketing the product to clients." It also alleges Oppenheimer executives and ARS department personnel sold their own ARS as they learned that the market was in danger, but failed to disclose that information to investors.
The charges were brought by the Enforcement Section of the Massachusetts Securities Division of the secretary's office. Oppenheimer has said that the allegations have no basis in fact or law, and that it intends to vigorously defend itself. The firm sold auction-rate securities in the same manner as the entire brokerage industry -- "as a cash management tool similar to a money-market fund," it said earlier in an emailed statement.
"Oppenheimer and its executives, like dozens of other 'downstream' brokerages nationwide, had no knowledge of the conduct of the major institutions which caused the entire auction-rate securities market to collapse," the statement said.
Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction. Financial advisers promoted the securities as safe, liquid instruments, but the $330 billion market seized up in February 2008 as credit markets tightened and left investors stranded.
Oppenheimer also said previously that "while there were sales by executives of auction-rate securities, there were also executive purchases during this period, and these same executives continue to hold millions of dollars of auction-rate securities (a fact oddly omitted from the complaint)."
Big banks that underwrote the offerings came under pressure from regulators and bought back the auction-rate securities. However, many of the banks and brokerages that resold the securities, but didn't do the underwriting, fell through the cracks in those buyback deals, and billions in auction-rate securities remain in the hands of investors.
November 19, 2009 Wells
Fargo to return $1.3B to auction-rate investors Wells
Fargo Investments LLC has agreed to return approximately $1.3 billion
to investors who suffered losses in the auction-rate securities market,
according to a statement released by the North American Securities
Administrators Association this morning. The company allegedly misled clients by assuring them that auction-rate securities were a safe, liquid alternative to cash, certificates of deposit or money market funds, NASAA said in its statement. Under the terms of the settlement, Wells Fargo agreed to buy back, at par value, all of the auction rate securities investors purchased through its brokerage before Feb. 13, 2008. Wells has agreed to repurchase these securities by approximately April 18, 2010. The company is also to reimburse some investors who sold their auction rate securities at a discount after the market failed, and consent to a special public arbitration procedure to resolve claims. The auction rate securities markets froze in Feb. 2008, triggering complaints to state securities regulators from hundreds of investors who could not withdraw money from their accounts. At the time of the market failures, customers of Wells Fargo Investments held an estimated $2.95 billion in the products, NASAA said. “Today's settlement demonstrates the value of states working in concert to benefit investors nationwide,” NASAA President and Texas Securities Commissioner Denise Voigt Crawford said in a statement. “State securities regulators continue to lead the effort to ensure that investors receive redemptions for their frozen auction rate securities, which were marketed as safe and liquid investments, and we will continue to seek much needed relief for investors who have suffered from the collapse of the ARS markets,” she said. November 8, 2009 A
Way Out of the Deep Freeze FOR many holders of auction-rate securities — investments that Wall Street once peddled as safe, sound and as fully liquid as cash — life in the frozen zone drags on. Not only are some brokerage firms still refusing to let customers redeem their securities — Oppenheimer and Raymond James are two examples — but also investors’ efforts to be repaid through class-action lawsuits are being stymied. Judges overseeing at least 23 auction-rate class actions have dismissed them in recent months, leaving investors who were hoping for some relief out of luck again. In September, one judge said the plaintiff was not specific enough in his allegations. Municipalities, student loan companies, closed-end funds and tax-exempt institutions like hospitals and museums all issued auction-rate securities as either preferred shares or debt instruments to companies and individual investors. The interest rates that issuers paid investors were supposed to reset periodically, usually every week, in auctions overseen by the brokerage firms that sold the securities. Problems in the market emerged in early 2008, when weekly auctions that allow investors to cash in their holdings simply stopped functioning. Wall Street firms sponsoring the auctions could no longer match buyers with sellers, and the machinery supporting the $330 billion auction-rate trade ground to a halt. State securities regulators have forced some of the larger brokerage firms in the market to redeem their customers’ holdings, but not all investors have been so fortunate. So what is an investor to do? On the corporate side, a coalition of executives from 25 companies holding $8 billion in frozen auction-rate securities backed by student loans is arguing that if companies and individual investors could cash in those securities, jobs would be created, investments would be made and money would be spent. The overall market for auction-rate securities backed by student loans is sizable: about $70 billion. James Butkiewicz and William Latham, economics professors at the University of Delaware, estimated in research conducted for the coalition that 15,000 jobs and $2.3 billion in spending would be created for every $1 billion redeemed in auction-rate securities backed by student loans. Michael J. Beyer, chief executive of Foresight Energy, a privately held company in Palm Beach Gardens, Fla., and a member of the coalition, says his company is stuck with $146 million in auction-rate securities. He has struggled to finance three mining projects his company has already begun in Illinois. Foresight raised capital for the projects in late 2007 and parked the money in auction-rate securities in early 2008, just as the market was starting to shut down. Since then, it has tried to get the securities redeemed by Citigroup, the bank that recommended them. Citigroup refused, but gave Foresight a $100 million line of credit against the securities. “We have been scrambling to find other alternative sources of cash,” Mr. Beyer said. “But at some point next year, we will end up short.” Citigroup said in a statement that it had “worked diligently with issuers, investors and regulatory authorities” on the frozen auction-rate securities, adding that “We have made progress on our efforts to help provide liquidity to our clients and remain committed to continuing our work on these initiatives.” Mr. Beyer says his coalition is trying to educate the Obama administration about the impact that this Wall Street failure has had on Main Street. “Our goal is to show the administration that this is money that could be creating jobs in a high-unemployment area,” he said. INDIVIDUAL investors, of course, don’t have the resources or reach of corporate coalitions, and their plight seems even more intractable given the host of recent court rejections. Still, one promising road remains open to them: filing an arbitration case against the brokerage firm that sold them their securities. For a variety of reasons, such cases have been much more successful than the class-action matters have been. (An arbitration is a closed-door hearing overseen by a small panel of officials appointed by the securities industry itself.) According to the Financial Industry Regulatory Authority, the large regulator that oversees investor arbitrations, almost 500 auction-rate claims have been filed by investors since the market seized up. A total of 253 are pending; 242 have been closed. Only 17 claims went all the way through the process. Of those, investors won in four cases; a $400 million award was handed down by a panel in one matter. But 146 of the 242 closed cases were settled by the parties involved in the dispute. Although the settlement terms aren’t public, lawyers who have handled these cases say that such deals typically involve refunding much, if not all, of investors’ money. Some settlements also involved “consequential damages” — extra money awarded to cover investors’ costs or opportunities they missed because they didn’t have access to their funds. According to Finra, investors have filed 32 claims seeking additional damages in auction-rate cases that were settled through regulatory enforcement actions. Of those, 14 remain open and 9 were settled. Five cases that went through arbitration produced three victories for the plaintiffs. It isn’t particularly surprising, legal experts said, that judges have rejected so many class-action suits. The legal hurdles that investors must clear under the Private Securities Litigation Reform Act of 1995 are far greater than those in arbitration, where the less arduous standard of “just and equitable principles of trade” is the guiding benchmark. For example, investors in a class action must convince the judge that the brokers who sold them the auction-rate securities knew they were problematic — not an easy task. And investors filing a class action cannot begin to conduct discovery until their case has survived a defendant’s motion to dismiss. This makes it hard to plead the specifics of their case early on. Protracted battles over who will be the lead plaintiff and the lead counsel can also arise in a class action, eating up time and money. And sometimes there are time-consuming disputes over the proper venue for the case. Arbitrations are likely to move along much more speedily and at lower cost. Of course, arbitration does have its costs and risks. But for so many investors still stranded with these securities almost two years after the market failed, taking matters into their own hands may be the only approach that holds any promise. October 21, 2009 Frozen
Auction-Rate Bonds Cost U.S. $63.5 Billion, Study Says Oct. 21 (Bloomberg) -- The U.S. economy would get a $63.5 billion boost if businesses were able to free up their funds trapped in the auction-rate debt market based on student loans, a study prepared for holders of the securities shows. Businesses haven’t had access to about $25 billion in the auction-rate bonds since February 2008, when trading collapsed after the investment banks that managed the sales quit serving as buyers of last resort. Including student-loan securities held by banks, a total of $75 billion of the debt is outstanding, according to Mark Murphy, a spokesman for SecondMarket Inc., a New York-based clearinghouse for illiquid securities. Cash from the government to restructure the auction-rate market would let businesses create as many as 441,000 jobs and begin expansion projects that have been delayed for lack of credit, according to the report by University of Delaware economics professors James Butkiewicz and William Latham. “People need to consider the fact that reducing the access of these firms to these funds is producing more of a drag on the economy,” Butkiewicz said in a telephone interview before today’s release of the study. “If there’s some way to get this money unfrozen, that money’s going to be put to work doing things.” The report was commissioned by a coalition of about 25 nonbank holders of auction-rate securities that are pressing for federal funding to reopen the market. The coalition members hold a total of $8 billion in frozen student-loan auction-rate securities. Members of the coalition include retailers Abercrombie & Fitch Co. of New Albany, Ohio, and Family Dollar Stores Inc. of Charlotte, North Carolina; technology companies Digital River Inc. of Eden Prairie, Minnesota, Texas Instruments Inc. of Dallas, Standard Microsystems Corp. of Hauppauge, New York, and Ariba Inc. of Sunnyvale, California; Duke Energy Corp. of Charlotte; Ash Grove Cement Co. of Overland Park, Kansas; and short-haul trucker Heartland Express Inc. of North Liberty, Iowa. Auction-rate securities were designed to offer borrowers short-term interest rates on long-term bonds by putting the debt up for resale at auctions typically held daily, weekly or every 35 days. Investors believed they would have ready access to their holdings through the auctions. The market collapsed last year when banks that had kept the auctions functioning by buying any securities that were not otherwise bid on stopped providing that support. Since then, 26 banks involved in the sale of auction-rate bonds have negotiated settlements with state and federal regulators, paying $575 million in penalties and agreeing to buy back more than $61 billion of securities. Texas Instruments in April sued New York-based Citigroup Inc., Morgan Stanley and BNY Capital Markets, now part of Bank of New York Mellon Corp., claiming the banks misled the company about the liquidity of auction-rate securities. During the first quarter of 2008, Texas Instruments reclassified its $533 million portfolio of the securities as a long-term asset and reported losses of $41 million on the holdings as of June 30, according to regulatory filings. Of 205 publicly traded companies that reported holding student-loan auction-rate securities, 96 percent had marked down their value by an average of about 12 percent, according to a study of regulatory filings by Pluris Valuation Advisors LLC, a New York firm that specializes in illiquid securities. To contact the reporter on this story: Dunstan McNichol in Trenton, New Jersey, at dmcnichol@bloomberg.net. October 20, 2009
Wachovia Settles $50 Million ARS
Claim in D.C. Washington,
October 20-If America's most dysfunctional local government, the District
of Columbia, can reach a multimillion dollar ARS settlement with a
major bank, it may be time to ask why more of the nation's attorneys-general
are still dragging their feet while their citizens face financial
hard times. Nearly
two years after the ARS market collapse, District officials have signed
an agreement with Wachovia Securities to settle its lawsuit against
the company. D.C. residents have been pressing the slow-motion local
government to pursue allegations that Wachovia used deceptive practices,
misleading investors about the safety of auction rate securities. Anyone
who has ever visited this website is more than familiar with these
allegations. Readers with cash still frozen in the ARS-ARPS market
are not only familiar with the charges, they are livid over the inaction
of many state regulators to take on the issuers of auction rate debt. A Wells
Fargo spokesperson forwarded a statement from Wachovia Securities
President and C.E.O. Daniel J. Luderman, dated August 2008, when the
negotiations were first being worked out. "Since
the issue arose in February (2008) when auctions first started to
fail, we have played a leading role in encouraging ARS issuers to
restore liquidity to all our clients," Mr. Luderman said. At
the time of the statement, Wells Fargo and Wachovia had worked out
a merger deal, which went into effect last January. The
statement, made public today by The Washington Post, is hardly
the reflection of Wachovia's position at the time. It is a public
relations ploy. The facts are depressingly different. Mr.
Luderman said Wachovia's agreement in principle "underscores
our desire to ensure that clients who purchased ARS at Wachovia receive
the liquidity they need." He apparently did not mention that
the liquidity would be in the form of interest-bearing margin loans.
Oh, the inhumanity of borrowing against your own money! Mr.
Luderman did not mention the troubling fact that many, if not all,
Wachovia brokers in the District were under orders not to discuss
the ARS market breakdown with clients. This is not a way to win and
keep clients. But it's par for most financial instiutions whose interest
in clients stretches as far as securing their money, but not protecting
it. I was
a Wachovia client in February 2008. When I learned of the market failures,
I called my brokers (I had two of them at Wachovia) and asked pointed
questions. What had happened? How did this supposedly "safe investment"
suddenly become toxic and illiquid? I was told repeatedly that the
matter was not to be discussed with clients. My complaints were forwarded
to Wachovia headquarters in St. Louis, where the charade was being
played out on a different level. A protracted
and contentious series of exchanges took place with the St. Louis
office, none of which were informative or even vaguely helpful. I
received bland, poorly written boiler plate cover-up replies. My allegations
that deceptive practices pulled me into the market, and that my broker
failed the test of due diligence, was met, in the end, with a letter
informing me that Wachovia simply "disagreed" with my claims. It was
the equivalent of "so sue us!" The
allegations that Wachovia settled today in the District case, and
in other cases successfully pursued by New York Attorney General Andrew
Cuomo and Missouri State Secretary Robin Carnahan, were the very ones
I had made to my brokers and Wachovia officials in St. Louis-all of
whom flatly denied my claims and refused to discuss details. Raymond
James, Charles Schwab, and Oppenheimer, among others, are collectively
holding more than $2 billion in illiquid auction market paper. Class-action
suits are seeking multimillion dollar settlements are piling up, and
many cases await the tender mercies of FINRA arbitration. October 13, 2009 Massachusetts
Hearing On Oppenheimer's ARS Sales Reset For Nov. 16
NEW YORK (Dow Jones)--An administrative hearing on Massachusetts Secretary of the Commonwealth William Galvin's fraud charges against Oppenheimer & Co. in the sales of auction-rate securities has been reset to Nov. 16.
The hearing, originally set for Nov. 4, was pushed back due to various motions in the case.
The Massachusetts complaint, filed in November 2008, charges that Oppenheimer "significantly misrepresented not only the nature of ARS, but also the overall stability and health of the ARS market when marketing the product to clients." It also alleges Oppenheimer executives and ARS department personnel sold their own ARS as they learned that the market was in danger, but failed to disclose that information to investors."
The charges were brought by the Enforcement Section of the Massachusetts Securities Division of the secretary's office.
Oppenheimer did not immediately return calls seeking comment.
Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction. Financial advisers promoted the securities as safe, liquid instruments, but the $330 billion market seized up in February 2008 as credit markets tightened and left investors stranded.
Big banks that underwrote the offerings came under pressure from regulators and bought back the auction-rate securities. However, many of the banks and brokerages that resold the securities, but didn't do the underwriting, fell through the cracks in those buyback deals, and billions in auction-rate securities remain in the hands of investors.
October 9, 2009 Closed-End
Funds Still Feel the Pinch Lingering
issues with auction-rate preferred shares, which many investors are
stuck with a year and a half after the auction system froze, are seen
as hindering the closed-end fund industry's ability to launch offerings. Banks
and brokerages redeemed many investors' shares in settlements with regulators.
"Nevertheless, the ARPs process is still 'broken' and the lingering
problem has, in many ways, held back growth in the industry," said
a report from Thomas J. Herzfeld Advisors, a Miami investment-advisory
firm. Income-seeking
investors are buying closed-end funds at historically narrow discounts,
many with leverage. Some unleveraged funds are trading at discounts
and may be a better value for investors willing to give up some current
income in exchange for less downside risk, said Cecilia Gondor, vice
president at Herzfeld. Closed-end
fund providers have been shedding some leverage and shifting to other
forms such as tender-option bonds and new types of securities, but the
credit crisis has hamstrung those efforts. About 70% of closed-end funds
are using some form of leverage, and 67% of those still have some auction-rate
preferred shares outstanding, according to Herzfeld. Tender-option
bonds, which are derivative securities created from fixed-rate bonds
through a trust arrangement, have been one popular substitute, but use
is limited because bonds must be of high quality. New types of preferred
shares, with alternative forms of financing, also are being used. Nuveen
Investments, which used about $1.8 billion in tender-option bonds to
replace auction-rate securities, issued another $500 million in variable-rate
demand-preferred shares for four of its funds in August 2008. It said
that move was successful. While
it is less challenging now than six to nine months ago to find refinancing
partners, the cost of funding relative to the cost of leverage is an
issue. Replacing auction-rate shares with new securities, such as the
liquidity-enhanced adjustable-rate securities that BlackRock has proposed,
would cost significantly more. So fund companies continue to use tender-option
bonds to refinance at the margins. Fixed-rate
preferreds and the new floating-rate preferreds represent less than
5% of the leveraged closed-end fund market, according to Herzfeld. BlackRock
has redeemed $2.1 billion of the $8.2 billion in auction-rate securities
issued by its municipal funds, replacing most of them using tender-option
bonds. It has redeemed $1.09 billion of the $1.6 billion in auction-rate
securities issued by its taxable closed-end funds. Allianz's
Pacific Investment Management has redeemed $1.9 billion of the $4.28
billion in auction-rate securities its closed-end funds had outstanding,
the company said. It declined to comment further. Of the
$5 billion Eaton Vance had outstanding when auctions failed in February
2008, it had redeemed $3.8 billion by the end of that year. Progress
has been slowed by difficulties finding alternative financing and the
low rates at which the outstanding shares are resetting in failed auctions,
a spokeswoman said. Nuveen
plans to have all of the auction-rate preferred shares issued by its
taxable funds refinanced by Friday. But it still has about $8.7 billion
in auction-rate preferred shares outstanding. October 9, 2009 When
Law Obscures the Facts The collapse of the auction-rate securities market is a largely forgotten part of the financial crisis, a disaster that was soon overwhelmed by bigger ones — except for the investors who were caught up in it, The New York Times’s Floyd Norris writes in his latest High & Low Finance column. The investors thought they were buying safe short-term securities — sort of like a money market fund but with an expectation of a slightly higher return. The securities were supposed to be easy to sell for face value. Now, Mr. Norris says, many of the investors are stuck with securities that pay ridiculously low yields. In some cases, the securities will never mature, so the investors will never get their money back unless they sell them for a fraction of what they paid. Those who thought they were being safe and cautious in fact were taking huge risks. The biggest losers so far are corporations that bought the paper but now find they are not covered by settlements some Wall Street firms made to reimburse individual investors. But there are still individuals who are stuck with the securities, either because their brokerage firm refused to settle or because they moved from one firm to another and found that neither firm was willing to reimburse them, Mr. Norris notes. Some of those corporate purchasers may recall the old saying, “Be careful what you ask for. You might get it.” Those buyers of this paper are finding they cannot successfully sue because of a 1995 law that was strongly backed by corporate America as a way to curb frivolous lawsuits. That law, the Private Securities Litigation Reform Act, says that a case, when filed, must be very specific about the fraud that is alleged, or it will be immediately dismissed, Mr. Norris argues. In many cases, a plaintiff would need access to inside information to make such a claim with enough detail, he says. Such information could be there in company files, but the plaintiff has no way to get at it before the case is thrown out. The latest reversal for investors came late last month when a federal judge in Manhattan dismissed a case filed against Raymond James, a brokerage firm that underwrote and sold auction-rate securities and has refused to settle with regulators. In that case, a customer claimed that a broker at Raymond James had misled her about the safety of auction-rate securities, and argued that Raymond James, as an underwriter and as a firm that conducted auctions, was involved in a fraud to dump securities before the market for them collapsed. Judge Lewis A. Kaplan of Federal District Court said that was not enough. The broker, he said, worked for one Raymond James company. The underwriting was done by a different Raymond James company. “There is no evidence in the complaint,” the judge wrote, “from which the court can infer that the Raymond James entities had even the most basic understanding of the others’ business.” To a nonlawyer, all this sounds like the corporate veil being used to obscure reality, Mr. Norris says. If the plaintiff could prove that one Raymond James subsidiary lied about the securities while another one profited from selling them, that would sound like enough, Mr. Norris argues. Proving such a thing might be impossible; Raymond James argues there was no fraud, and that this case relies on “a classic fraud-by-hindsight theory”: since the market failed, there must have been fraud. But if there is no discovery of evidence allowed, we will never know whether such a claim could be proved. Judge Kaplan gave the plaintiff until Oct. 16 to file an amended complaint that can pass muster under the 1995 law. Jonathan K. Levine, a partner in Girard Gibbs, the San Francisco firm representing the Raymond James customer, says a new complaint will be filed. Whether or not investors ever get their money back, the auction-rate securities debacle is an example of a good product gone bad, according to Mr. Norris. This could not have happened in the auction-rate market as originally conceived. In the beginning, back in 1984, the first auction-rate securities were preferred shares issued by major companies whose credit was reasonably easy to evaluate. Virtually the only risk for investors was that the issuing company would be unable to meet its obligations, Mr. Norris notes. In that regard, it was similar to commercial paper. What made it different, he says, was that auction-rate securities offered companies a way to raise money at short-term interest rates, but to treat it on their balance sheets as long-term capital. There was to be an auction every seven weeks at which a holder could sell the paper at par. That auction would determine the interest rate over the next seven weeks. The rate presumably would rise or fall with market interest rates and with the creditworthiness of the company. But what if auctions failed? What if there were not enough buyers for the paper? Then the current holders were stuck with it until the next auction. But the issuer would have to pay a penalty interest rate that was well above the rate it would normally have to pay. Any issuer that could borrow money — that is, any issuer whose credit had not vanished — presumably would redeem the paper instead of paying that punitive rate for more than one or two auction cycles, Mr. Norris says. But as the market grew, things changed, he notes. The first deals had minimum investments of $500,000. By the end, the standard was $25,000. Differing types of auction-rate securities were issued, often by issuers whose credit was not as easy to evaluate, and auctions came as frequently as weekly. Most important, Mr. Norris says, those “penalty rates” were set by formulas that became less and less generous to investors. In some cases, involving paper backed by student loans, the penalty rate can fall to zero for a month or two. One allegation in the Raymond James suit is that underwriters reduced those rates to attract issuers, and investors did not understand what was happening. The early auction-rate issues required that prospectuses be given to all buyers, including those in subsequent auctions, but that provision was later dropped. Providing prospectuses might not have done much good anyway, Mr. Norris suggests. The documents were confusing when it came to explaining how penalty rates would be set, and sometimes did not even mention as a risk the possibility of an auction failure. By the summer of 2007, many people knew that auctions were succeeding only because underwriters were taking paper no one else wanted, Mr. Norris says. What we don’t know, he remarks, is how much paper ended up in Wall Street vaults, and how much was sold to corporate investors before the whole market collapsed in February 2008. The auction-rate securities that did have good penalty rates have been redeemed. But in some cases investors are stuck with tax-exempt securities that are perpetual and currently pay less than 1 percent a year. Those securities may never be redeemed. Ron Gallatin is a retired partner of Lehman Brothers and the man who invented auction-rate securities. He is critical of changes in the product, including the withering of penalty rates. “I cannot comprehend how any broker could have had any client bid at an auction by October 2007,” he said this week, pointing to the talk of auction problems that had spread around Wall Street and been reported. Actually, Mr. Norris says, Mr. Gallatin says he thinks he does comprehend what was going on: “The reason is that the salesmen did not understand it. They thought it was a cash equivalent that paid them a fee. And in most cases, firms did not do anything to educate them.” If there ever is a wide-ranging trial, we might get to see which issues of auction-rate securities were owned by Wall Street firms in the summer and fall of 2007, and how much they sold before the collapse, Mr. Norris says. We might, he suggests, learn if the firms understood risks they did not mention to customers. But that will not happen if judges continue to prevent such cases from proceeding even to the discovery process, Mr. Norris argues. Corporations that cheered the 1995 law, he says, may discover it keeps them from having a chance to recover their own losses. September 21, 2009 Thank God for Missouri's Secretary of State!!!!!! JP
Morgan returns $28M to Mo. investors JP Morgan Chase & Co. returned more than $28 million in frozen auction rate securities to Missouri investors, under a finalized consent order with Secretary of State Robin Carnahan. JP Morgan is the seventh major firm to sign an agreement with Carnahan’s office regarding auction rate securities, bringing the total amount returned to Missourians to more than $2 billion. The consent order signed Monday covers Missouri individual and small business clients and was completed by JP Morgan earlier this year. The Missouri Investor Education and Protection Fund, used for educational initiatives across the state, will also receive an $86,000 payment from the firm. In the coming months, the Securities Division in Carnahan’s office will finalize settlements and repurchases with several other firms. The division also has active investigations into the auction rate securities activities of several other brokers and expects to announce more formal actions before the end of the year. The $330
billion auction rate securities market collapsed in February 2008, leaving
investors unable to access the illiquid investments. September 18, 2009 Calling all Raymond James victims On September 17, 2009, a federal judge dismissed the complaint in a class action on behalf of investors who bought auction rate securities from Raymond James. The judge allowed the plaintiff to file an amended complaint. To read the judge's words, click here.
Now, to keep this class action going, the amended complaint will need to provide more detail about the specific knowledge and conduct of each of the Raymond James corporate entities over the auction rate securities scheme, including the roles that they played in that scheme. The relevant entities are:
Raymond
James Financial, Inc. (the parent company) If you have any information that might be helpful, or if you know of any present or former Raymond James brokers or traders that may be willing to provide information, please contact us as soon as possible.
Raymond James sold $800 million of auction rate securities that are still illiquid, and the regulators don’t appear to have made much progress. The CEO of Raymond James has 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.”
This case
may be the only way for investors to recover their principal. Please
help if you can. September 16, 2009 "I'm
stuck in ARPs. What do I do now?" Frankly, I'm sick of hearing this question. Dear Folks Who are Stuck, I am NOT your wet nurse, your baby sitter or your unpaid slave. I put this web site up to help get myself out of $4 million plus of ARPs. I did. I got redeemed at 100%. I didn't lose a nickel. But many of you are sitting today stuck in ARPs, earning a miserable 30 to 50 basis points (i.e. less than 1% a year). You're sitting with your thumbs up your ass waiting for the Messiah or some other mythical creature to descend from the sky and save your sorry asses. I contemplated shutting this web site down when I got my money back. But Phil Trupp and others said, "Help these poor innocent souls who are stuck. Keep the site open a bit longer." So I did. Let me be clear. I pay money to keep this site alive. The pennies I earn on the advertising on the right or the Google ads on the left don't food on my family's table. And I don't see any of you readers -- with one exception -- sending me a Thank You bottle of wine. I'm not begging. Trust me. I'm simply commenting on the sorry state of America's apathetic investors. So before I do shut this time-waster web site down, I'll answer your question, "I'm stuck in ARPs. What do I do now?" You have two basic solutions: 1. Sell your ARPs on the secondary market. You'll lose 10% to 15% or so. But you'll get cash for the rest and you can get on with your miserable live. I say "miserable" because the vast bulk of you have done nothing to get your money back. I'm sure you've made the mandatory two or three phone calls to your broker, who, like Schwab, has fobbed you off with bullshit. But basically you've done nothing else. So go sell your ARPs. Lose some money and get on with your life. 2. Hire a lawyer. Figure $50,000. There are some good lawyers out there. They'll make a stink. That "stink" has a greater chance of getting your money back than what you're doing now -- nothing. If you're not prepared to blow the $50,000, don't even think of calling a lawyer. There is a third solution -- namely, do nothing. Be my guest. Do nothing. But don't bitch to me or any financial advisor you met through some nice friend. And, if you think this doesn't happen? Well, go figure what caused me to write this column today. A friend called a friend, who called a friend, who knew me and then promptly wasted 30 minutes of mine and his time discussing the idiocy and laziness of the man who has $2 million in Blackrock ARPs, is being paid 30 basis a year -- less than he can earn at the savings bank or his friendly money market fund -- and is too lazy (or too rich) to take care of his own money. September 3, 2009 Merrill
Lynch to cough up $8.5M to Florida over auction-rate securities Merrill
Lynch & Co. Inc. will pay Florida $8.5 million to settle claims
that the brokerage firm's financial advisers misled their clients about
auction-rate securities, according to a report in the Orlando Sentinel. In February 2008, the auction-rate market collapsed, and investors were left with illiquid holdings. Merrill's agreement with Florida is the state's portion of a $125 million settlement reached with the North American Securities Administrators Association Inc. last August to resolve a national investigation into the sales of such securities. September 2, 2009 Finra
settles with Northwestern, two others, on auction-rate securities The Financial
Industry Regulatory Authority said today it has settled with three more
firms over the failed sales of auction-rate securities. So far, FINRA has settled with 12 firms for total fines of $3.2 million. The settlements guarantee the return of $1.3 billion to investors, Finra said in a statement. The latest settlements are with Northwestern Mutual Investment Services LLC of Milwaukee, which was fined $200,000; City Securities Corp. of Indianapolis, which was fined $250,000; and Fifth Third Securities Inc. of Cincinnati, which was fined $150,000. The three firms agreed to buy back auction-rate securities that were part of failed auctions that had been frozen. The firms were accused of not properly disclosing the risk associated with the securities. September 1, 2009 Bill
banning mandatory arbitration picks up support A House bill that would ban mandatory arbitration has been gaining support from lawmakers. HR 1020, which now has 89 co-sponsors, revives past efforts to nullify pre-dispute mandatory arbitration agreements that apply to employment, consumer, franchise or civil rights disputes. While HR 1020 does not include language that specifically pertains to the securities industry, the related Senate bill (S 931) does. Additionally, draft legislation recently sent by the Department of the Treasury to Congress includes a provision that would give the Securities and Exchange Commission authority to prohibit or limit the use of mandatory-arbitration clauses in customer agreements. For more information on the congressional bills, visit thomas.loc.gov. To see the draft legislation, go to here. August 28, 2009 Nuveen,
Merrill and Citi slapped with suit over auction rate losses A
77-year-old retired securities attorney and his wife are taking Nuveen
Investments Inc., Merrill Lynch & Co. Inc., Citigroup and others
to court over $2 million in losses they claim to have suffered from
investing in auction rate securities. According to the suit, in August and September 2007, Mesirow bought 88 shares of auction rate preferred securities for the Kastels' accounts, paying $25,000 per share. Those shares were issued by three Nuveen North Carolina funds through Nuveen Investments LLC, the Chicago-based broker-dealer, at auctions that were held by Deutsche Bank. Merrill and Citigroup were also auction participants, according to the suit. Auction
rate securities, debt instruments whose interest rates were periodically
reset at auctions, had been widely marketed as safe and liquid investments. The Kastels say they are now stuck with 85 shares of Nuveen North Carolina ARPS, which pay “unconscionably inadequate” interest that “does not fairly compensate” the couple, according to the suit. They are suing for at least three times the amount withheld from them — about $6 million — from Mesirow, Nuveen and Nuveen North Carolina funds, and also want to be compensated for their emotional distress. Rather than take the case into arbitration, the couple has decided to sue, arguing in their complaint that the case would be too complex for arbitration. Nuances include the fact that Mesirow may have cross claims against other named defendants in the suit. Also, they allege theft by deception and obtaining property under false pretenses, which are violations of North Carolina's criminal laws and are not subject to arbitration. The defendants also violated securities laws in North Carolina and Illinois, according to the suit. Mesirow spokeswoman Julie Liedtke said that the firm does not comment on pending litigation. Nuveen spokeswoman Kristyna Sujata said the firm had no comment on the lawsuit. Calls to Citigroup, Merrill Lynch and Deutsche Bank were not immediately returned. For a copy of the Kastel suit, click here. -- Harry Newton August 26, 2009 Hedge
Funds Gamble on ARPs Here is this week's story by Larry Light of the Wall Street Journal:
Question:
Who typically buys auction rate securities? Q: Why? Q: How
does the hedge fund profit? Q: What
are the fees? Q: How
much ARPs have SecondMarket sold? Q; Who
should I call? Q: Harry,
do you recommend these people? August 25, 2009 Retired
Securities Attorney Sues Nuveen NEW YORK -- A retired securities attorney is suing Nuveen Investments and others in federal court over a $2 million investment in now-frozen auction-rate securities, contending that his case is too complex for arbitration. Howard Kastel, 77, and his wife, Joan, filed suit Friday in the U.S. District Court for the Middle District of North Carolina against Deutsche Bank AG (DB), Nuveen Investments Inc. (JNC), Merrill Lynch & Co. and others. It alleges the couple were victims of a "fraudulent scheme" in which markets for the securities were manipulated. Investor complaints are generally handled in arbitration, but Kastel, who has been an arbitrator for years and still does some arbitration work, said that as a complex fraud case, his complaint is inappropriate for arbitration. As a former securities attorney, Kastel said, he would also be an inappropriate plaintiff in a class-action lawsuit. The Kastels are seeking the return of more than $2 million, which was invested in auction-rate preferred securities issued by three Nuveen North Carolina Funds in August and September 2007, as well as damages and attorney's fees. They currently cannot redeem the shares, and the interest paid on them is "unconscionably inadequate and low," the lawsuit says. Kastel said Tuesday in an interview that he is disappointed that the Securities and Exchange Commission has not taken action against Nuveen, which sold auction-rate securities to retail investors. Nuveen Investments and Deutsche Bank had no comment on the lawsuit. A spokesman said the SEC declined to comment, but noted that it continues to monitor settlements it has made with six firms involving auction-rate securities. The suit also names Robert Bremner, chairman of the board of Nuveen North Carolina Funds; CitiGroup Global Markets; and Mesirow Financial Inc. of Delaware, which acted as Kastel's broker-dealer. Deutsche Bank acted as the auction agent in concert with Merrill Lynch and CitiGroup, according to Kastel. Merrill Lynch was one of the underwriters for the funds, and, as an underwriter, was an authorized broker-dealer to participate in the auctions, he said. CitiGroup Global Markets, the legal entity for Citigroup Inc.'s (C) broker-dealer, and Mesirow Financial declined to comment. In addition to a return of principal and damages, the lawsuit seeks a preliminary injunction that would prohibit Nuveen North Carolina Funds from paying fees to Nuveen, Mesirow and other defendants, from paying interest or dividends to the common shareholders and from using money held by the funds to purchase or make investments in new securities until the funds have redeemed the Kastel's auction-rate preferred shares and the auction-rate preferred shares held by other investors. Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction. Financial advisers promoted the securities as safe, liquid instruments, but the $330 billion market seized up in February 2008 as credit markets tightened and left investors stranded. Big banks that underwrote the offerings came under pressure from regulators and bought back auction-rate debt. However, many of the firms that resold the securities, but didn't do the underwriting, have fallen through the cracks in these buy-back deals. ---By
Daisy Maxey; Dow Jones Newswires; 212-416-2237; daisy.maxey@dowjones.com
Multi-Million Dollar Law Suit Alleges Washington, August 24--A multi-million dollar law suit was filed August 21 by a retired securities attorney and his wife alleging that Nuveen Investments and Deutsche Bank operated an "unlawful and unregistered" exchange involving auction rate securities "right under the noses of the SEC." Auction Rate Preferreds.org has learned that the suit cites allegedly unpublished statements by Nuveen, the largest issuer of closed end fund auction rate securities, stating that Nuveen considers ARS to be "perpetual" and that the company has no need to redeem the securities. The complaint alleges that the "fiction" of a Dutch Auction "was part of a sophisticated Ponzi scheme." The suit was filed in the U.S. District Court for the Middle District of North Carolina by Howard Kastel, 77, and his wife Joan on behalf Mr. Kastel's trust fund. In addition to Nuveen and Deutsche Bank, the Kastels have also named Merrill Lynch, Citigroup, and Chicago regional broker-dealer Mesirow Financial. Mr. Kastel's complaint alleges that statements were issued by a "top" SEC official that the ARS auctions were deliberately misrepresented and never "were real auctions." The complaint seeks a preliminary injunction barring Nuveen from making further dividend payments to common shareholders until Mr. Kastel's allegations are investigated and resolved. The complaint cites alleged meetings between Merrill Lynch and Nuveen in January 2008 "that anticipated the then-undisclosed Lehman Brothers February withdrawal of market support for Auction Rate Securities following an unreported Nuveen Fund auction failure in mid-January 2008." In addition, the suit references similar allegations now under investigation by the SEC Inspector General and pending a request for hearing before the agency. Mr. Kastel, who has been in touch with Auction Rate Preferreds.org for months while compiling data to back his complaint noted that Nuveen issued more than $11 billion tax exempt ARPs. "Less than 20 percent have been redeemed and Nuveen has no plan to redeem the remainder," Mr. Kastel said. It is understood that Mr. Kastel's trust fund is holding about $2 million in frozen auction rate paper. Like many investors, Mr. Kastel signed arbitration agreements with his broker-dealers. He is fearful that his status as a former securities attorney would prejudice an arbitration panel hearing his case. "They're not about to be even-handed with a pro, a retired securities attorney," he told a reporter. Mr. Kastel
has filed a separate complaint with the SEC alleging that the commission's
current director of enforcement's former association with Deutsche Bank
as its general counsel "should be investigated in light of the
fact that the SEC has not commenced enforcement against Nuveen for its
central role in the auction rate security liquidity mess." August 17, 2009 Cuomo
sues defiant Schwab over ARS sales New York
Attorney General Andrew Cuomo filed a lawsuit today against The Charles
Schwab Corp., claiming the brokerage firm misled customers about the
safety of auction rate securities — and the firm is digging in
for a fight. “The [attorney general’s] lawsuit casts blame for a bad situation in the wrong direction. Clients who purchased these products, and companies like Schwab that filled client orders, were misled by the major Wall Street underwriters who concealed the degree to which the auction rate securities market was so dependent on their support, Schwab spokeswoman Sarah Bulgatz wrote in an e-mail. “Up until the time the auction rate securities market collapsed, there was an uninterrupted 20-plus year period where there was no indication the market for these securities was at risk of collapse and that the underwriters would simply abandon them. We’re confident that we will prevail when we have the chance to expose the workings of this market completely rather than just through selective sound bites in the press,” she wrote. “We believe the NYAG ought to focus its efforts on the firms that underwrote these products, failed to disclose the key risks and then abandoned the products, rather than damaging the reputation and harming the shareholders of other companies that acted in good faith,” Ms. Bulgatz wrote. The battle became public a month ago when TD Ameritrade Holding Corp. of Omaha, Neb., agreed to buy back $456 million of auction rate securities from individual investors, charities and small-business clients. On the day of the TD Ameritrade settlement involving the Securities and Exchange Commission as well as state regulators in New York and Pennsylvania was reached, Mr. Cuomo's office accused Schwab of misleading investors about ARS and threatened prosecution. This morning, Schwab of San Francisco responded to reports that a lawsuit was imminent by posting a letter on its website from last month responding to the AG office's allegations. Representatives for Mr. Cuomo's office did not immediately respond to a request for comment. August 12, 2009 Wachovia
to buy back $325M in auction rate securities it sold in Pennsylvania The securities division of Wachovia Corp. will be required to repurchase $324.6 million of auction rate securities it sold to investors in Pennsylvania, state regulators said Tuesday, as part of a nationwide settlement reached last year. Wachovia, now part of Wells Fargo (NYSE:WFC) will also pay a $2.52 million assessment to the state for its role in the auction rate securities market. The Pennsylvania Securities Commission said it approved the agreement following an investigation into Wachovia’s marketing and sales of auction rate securities to Pennsylvania residents. The settlement was part of a multi-state investigation by state regulators formed by the North American Securities Administrators Association. Under the deal, Wachovia will pay a $50 million penalty split among affected states and will buy back $8.5 billion in auction rate securities nationwide from investors who were left holding the investments when the market collapsed earlier this year. “The Pennsylvania Securities Commission found that Wachovia engaged in unethical or dishonest business practices and failed to supervise its agents for its sale of auction rate securities to investors,” Chairman Robert Lam said. Commissioner Steven Irwin said Wachovia “marketed and sold these securities as safe, liquid and cash-like investments when, in fact, they were long-term investments subject to a complex auction process that failed in early 2008, leading to illiquidity and lower interest rates for investors.” The commission estimated that more than 1,300 Pennsylvania retail investors held auction rate securities from Wachovia as of February 2008, shortly before the market collapse. “From the day these auctions failed in February 2008, the Pennsylvania Securities Commission has been seeking much-needed relief and liquidity for investors stuck with these securities,” Lam said. “I am pleased that Wachovia has agreed to repurchase their retail clients’ positions and I expect other firms that sold these securities in Pennsylvania to do the same.” Auction rate securities are investments that were considered almost as liquid as cash, often in the form of preferred shares or debt instruments like corporate municipal bonds. But when the auctions stopped being held last year, investors were stuck without a way to sell their holdings. Michlovic said that the securities commission is continuing its investigation of other firms. In July, it ordered TD Ameritrade to repurchase $26.5 million of auction rate securities, and Citigroup Global Markets was ordered to repurchase “hundreds of millions of dollars” of auction rate securities from an estimated 1,000 Pennsylvania investors and pay a $2.31 million assessment to the state. August 2, 2009 FAIR
GAME IT’S time again to revisit the auction-rate securities mess, a nightmare that began 18 months ago but that still hasn’t ended for some unfortunate investors. Recall that once upon a time, Wall Street promoted auction-rate securities as just as good as cash, a liquid investment you could unwind in a flash. But when the $330 billion auction-rate market froze in February 2008, investors were suddenly unable to sell their holdings. Money they had set aside in a “safe” place for college bills, retirement plans and down payments on homes was inaccessible. In hardship cases when they could sell, they took significant losses. The debacle hit individual investors especially hard. When state regulators investigated the circumstances surrounding auction-rate failures, they found that some of the firms selling the securities had turned their aggressive sales pitches on small investors even when astute institutional buyers had already seen trouble and stopped buying. Regulators have since forced many brokerage firms that underwrote or sold the securities to buy back their clients’ holdings. Eight large and small firms have already settled, or agreed to settle, auction-rate cases with the Securities and Exchange Commission. Still, there are holdouts refusing to make their clients whole by either redeeming their securities or paying to recoup investors’ losses. Raymond James Financial, one of the nation’s last independent investment banks and brokerage firms, is among the holdouts. Unlike larger Wall Street firms that both underwrote and sold auction-rate securities, Raymond James simply sold the shares and notes to its customers. Last week, it said its clients currently held some $800 million of illiquid auction-rate securities, down from $1 billion earlier this year. That decline is largely a result of redemptions by issuers of the securities, like closed-end funds and municipalities. Raymond James has shown no interest in redeeming customers’ holdings. “We are fully cooperating with the pending regulatory investigations that have been ongoing for over a year,” said Anthea Penrose, a Raymond James spokeswoman. “We have a very sound capital position and don’t expect the situation to change other than to reduce the outstanding ARS holdings. We continue to work with issuers to redeem their auction-rate securities and with clients to meet their needs for liquidity.” The problem for Raymond James is that redeeming the $800 million in auction-rate securities would be tough. That figure is equal to 4.4 percent of the company’s total assets and 42 percent of its shareholder equity, according to the March 31 quarterly filing. In that filing with regulators — its most recent — the company said that if it were to “consider resolving pending claims, inquiries or investigations by offering to repurchase all or some portion of these ARS from certain clients, it would have to have sufficient regulatory capital and cash or borrowing power to do so, and at present it does not have such capacity.” The filing added that if it had to buy back securities at 100 cents on the dollar, the potential loss “could adversely affect the results of operations.” And so Raymond James’s long-suffering clients remain frozen in auction-rate securities hell. They can be forgiven if they resent some outlays their firm willingly makes to others. Last year, for example, amid the market collapse, auction-rate mess and credit crisis, the company raised its dividend 10 percent. That’s nice for its shareholders, of course, but it is especially bountiful for Thomas James, its C.E.O. He owns 12.2 percent of its shares outstanding, according to its most recent proxy filing. Dividends on those shares generated roughly $6 million to Mr. James last year and will total another $6.5 million this year if the company continues to pay the current rate of 44 cents a share. These payments are in addition, of course, to Mr. James’s pay package, valued at $3.55 million last year. Give the Raymond James board at least some credit: Mr. James’s package last year was 13.5 percent less than the previous year’s, when earnings were 6.5 percent higher. Ms. Penrose, the company spokeswoman, said Mr. James was unavailable for comment. She said she couldn’t talk about whether Mr. James had considered setting aside some of his money as a goodwill gesture toward clients who suffered losses on auction-rate investments. Then there is the $6.3 million that the company will have spent during 2008 and 2009 for naming rights to the stadium where the Tampa Bay Buccaneers play. Known as the Ray Jay, it hosted the Super Bowl this year. As part of an effort to increase brand awareness, the company said, it entered into the naming rights contract in 1998. The contract runs until 2016, and its costs rise 4 percent a year. Nothing wrong with spending money to build a brand, of course. But shouldn’t treating your customers well come ahead of keeping your name on a stadium? In recent weeks, Raymond James’s auction-rate securities problem has come into focus again as securities regulators brought several new cases against other firms. On July 20, TD Ameritrade announced a settlement with the S.E.C., saying it would repurchase $465 million worth from its clients. Like Raymond James, TD Ameritrade only sold the securities; it did not underwrite them. Then, on July 21, Morgan Keegan, a regional brokerage firm owned by the Regions Financial Corporation, was sued by the S.E.C., accused of misleading clients about risks in $925 million in auction-rate securities it sold. The auction-rate securities debacle has been one of the most painful events for individual investors in the credit crisis. The fact that it is still unresolved at some firms gives credence to that age-old Wall Street question: But, where are the customers’ yachts? P.S. She forgot a bunch of others, e.g. Oppenheimer. -- ARPS editors. July 29, 2009 FINRA
Puts Brokers in ARS Hall of Shame; Washington,
July 28—When your auction-rate “cash” went into deep
freeze did you complain to your broker? Did you write a hot letter to
supervisors or upper management? Did you file complaints with FINRA
and the SEC? July
26, 2009 TD
Ameritrade's ARS settlement excludes RIAs TD Ameritrade
Holding Corp.'s agreement with regulators last week to buy back $456
million of auction rate securities from individual investors, charities
and small- business clients leaves registered investment advisers out
in the cold. That is because regulators focused on sales practice violations committed directly by TD Ameritrade brokers, who marketed the securities as liquid alternatives to money markets funds, with slightly higher yields, according to regulators. “At the end of the day, our view— and all the federal and state regulators agreed with us — was that it applies to the retail clients only, because there was no intermediary between us and them,” said Fred Tomczyk, president and chief executive of the Omaha, Neb.-based firm. “The regulators realize that the independent RIAs were themselves acting as fiduciaries, and we were acting as custodians.” TD Ameritrade's settlement is being closely monitored because it could be a precedent for future settlements as regulators press auction rate cases against other brokers, including some RIA custodians, whose clients are stuck with the flawed securities. When Boston-based Fidelity Investments last year agreed to repurchase some ARS, it similarly excluded clients of RIAs from the offer. Mr. Tomczyk conceded that the distinction might irritate RIAs who keep their customers' assets with TD Ameritrade and who conduct much of their trading through the firm. The advisers may be especially irked because the firm has been pushing hard in recent years to develop its institutional arm for RIAs as part of its plan to diversify from a largely commission-based revenue model. Advisers who purchased ARS for clients are in some ways in the same boat as TD Ameritrade and other “downstream” brokers who initially argued that they were so far removed from the underwriting of the securities and the operations of the auctions that they weren't responsible for failing to anticipate the market's collapse. That collapse left investors stuck with more than $300 billion of the long-term debt, which was sold with promises that it could be redeemed at weekly or, approximately, monthly intervals. “We totally understand those points, and in our hearts we agree with them,” Mr. Tomczyk said of aggrieved advisers. “But as an organization you have to stand back and do what's right for the organization.” TD Ameritrade,
which was not assessed fines or penalties by regulators, likely expects
that its settlement will make private class actions over its auction
rate sales moot, several lawyers said. The firm in April moved for dismissal
of a class complaint, but the court has not yet ruled, a company spokeswoman
said. A federal court dismissed a similar suit against Zurich, Switzerland-based
UBS AG, one of several big banks that underwrote and structured ARS,
after UBS repurchased ARS as part of a regulatory settlement. As of May 1, clients of TD Ameritrade held about $690 million of ARS, including $190 million placed by independent RIAs, the company said in a regulatory filing. In a conference call with investors last week, TD Ameritrade chief financial officer William Gerber estimated that the firm will repurchase between $400 million and $500 million of the securities, since some have already been redeemed by their issuers. He declined in an interview to discuss how much is still held by RIAs and their clients. The buyback, which TD Ameritrade expects to initiate next month for investors with $250,000 or less of the securities and by next June for larger holders, applies to “self-directed investors” as well as those who worked with the firm's brokers, the company said in a Q&A about the settlement on its website. But, according to the message, clients of independent RIAs “relied on those advisers to manage their assets and used TD Ameritrade only to custody their assets.” The firm said it will continue a program of extending loans to clients of RIAs with ARS who are in need of cash, though it didn't specify rates for the loans. Mr. Tomczyk said few clients of RIAs, or of the firm directly, have made use of the loan offer since it was made available last year. The settlement requires TD Ameritrade to reimburse borrowing costs that exceeded the amount clients earned in interest or dividends on the securities frozen in their accounts, and to cover losses eligible clients may have incurred by selling the securities on or before Feb. 13, 2008. Many advisers who use TD Ameritrade as their custodian said they understand the firm's position. Unless a fixed-income desk at their custodian actually recommended the security, they said, advisers must bear the responsibility for their clients' investments. “If TD had to bail out every bad investment, they'd be out of business,” agreed Ray Mignone, founder of an eponymous RIA in Little Neck, N.Y., which keeps about $170 million of client assets in custody with TD Ameritrade. Paul Baumbach, managing partner of Mallard Advisors LLC, keeps his Newark, Del.-based firm's approximately $110 million of client assets with TD but absolves the firm of all responsibility in the auction rate crisis. Mr. Baumbach has been trying to help a client sell his auction rate securities back to a large bank-owned brokerage that made the original sale. “The sin was committed there,” he said. In short, says Michael Hecht, an analyst of discount brokerage stocks at JMP Securities in New York, independent advisers are stuck. “The RIA is on the hook to do due diligence,” he said. “In this model, you can't turn around and say "make me whole.'” The same day that TD Ameritrade's settlement was unveiled, New York Attorney General Andrew Cuomo accused San Francisco-based Charles Schwab & Co. of misleading investors about the safety of ARS and gave the firm five days to resolve his investigation or face prosecution. The SEC and the Alabama Securities Commission last week sued Morgan Keegan & Co. of Memphis, Tenn., over the same issue, prompting the firm to say it was “surprised and disappointed” at the action. In a statement, Schwab denied responsibility. “Schwab brokers, while trained to levels beyond industry standards, could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee, or that were intentionally veiled by the underwriters,” the firm said. July 22, 2009 Julian
Tzolov, arrested last week in Spain and wanted by the FBI, back in America Julian Tzolov, who fled U.S. prosecution on securities-fraud charges,
has been taken from Spain to New York in the custody of the FBI to face
trial in Brooklyn federal court. Julian Tzolov, who fled U.S. prosecution on securities-fraud charges, has been taken from Spain to New York in the custody of the FBI to face trial in Brooklyn federal court. The U.S. prosecutors have wasted no time in preparing for the case to come to court swiftly and have asked the judge presiding over the case to delay jury selection, scheduled to begin today, until his arrival this afternoon. It has been well reported that Tzolov escaped house arrest in May and was declared a fugitive in June. He was apprehended last week near Malaga, Spain. Tzolov, 36, and his co-defendant, Eric Butler 37, ran Credit Suisse’s Corporate Cash Management Group, and are accused of falsely telling clients their financial products were backed by federally guaranteed student loans while they were actually linked to auction-rate securities. According to prosecutors the men face about 34 years in prison if convicted.
July 22, 2009 (an earlier story) Tzolov,
Ex-Credit Suisse Broker, Said to Be Arrested in Spain July 15 (Bloomberg) -- Julian Tzolov, the former Credit Suisse Group AG broker who fled prosecution in May, was arrested in Spain on charges of securities fraud and bail jumping after an international manhunt. Assistant U.S. Attorney Daniel Spector disclosed the arrest today in a letter to a federal judge in Brooklyn, New York, where Tzolov faces charges of fraudulently selling subprime mortgages linked to auction-rate securities. Tzolov, 36, was taken into custody without incident today in Marbella, located in Spain’s Costa del Sol region on the Mediterranean Sea, by the Spanish National Police’s fugitive unit, two persons with knowledge of the case said. “The government writes to inform the court that the defendant (and fugitive) Julian Tzolov has been apprehended,” Spector wrote. Tzolov, a Bulgarian national, was declared a fugitive in June after disappearing while under house arrest in May and initially telling the court through his lawyer that he intended to plead guilty and avoid a trial. “Julian made a huge mistake when he fled,” said Tzolov’s lawyer, Benjamin Brafman. “All he has succeeded in doing is further complicate his legal position.” The arrest came as U.S. prosecutors in Manhattan filed new wire-fraud charges against Tzolov and Eric Butler, 37, a former Credit Suisse broker. Butler is scheduled to go to trial in federal court in Brooklyn next week. Butler and Tzolov were charged together in an indictment unsealed originally last September by prosecutors in the office of Brooklyn U.S. Attorney Benton Campbell. That case accused the two of falsely telling clients their products were backed by federally guaranteed student loans. They were accused yesterday in a separate 14-count indictment in federal court in Manhattan of operating a wire- fraud scheme to sell auction-rate securities. Manhattan and Brooklyn are separate judicial districts. “It appears that the government has brought an identical case in a different district to try to give themselves two chances to win a case that they should have not brought once,” Paul Weinstein, a lawyer for Butler, said today in an interview of the latest federal charges. Federal prosecutors in Brooklyn today also announced the unsealing of additional charges against Tzolov for failing to appear at his trial and for visa fraud after making false statements on his permanent-resident card. Tzolov faces as long as 15 years in prison if convicted of failing to appear in court, said Robert Nardoza, a spokesman for Campbell. U.S. District Judge Jack B. Weinstein, who is presiding over the case and isn’t related to Butler’s lawyer, declined government requests to delay Butler’s June 20 trial because of Tzolov’s disappearance. Judge Weinstein asked the government in a hearing two days ago if Tzolov was still missing. “If you pick him up before Monday, drag him here,” he said. “I want him here on trial.” Tzolov was free on $3 million bond and was subject to home confinement at his Manhattan apartment with electronic monitoring. He left his residence May 9 without permission from court officials and prosecutors, the government said at the time. The U.S. has an extradition treaty with Spain that recognizes securities-fraud crimes such as those leveled against Tzolov, said a person who has knowledge of the case. After Tzolov was declared a fugitive in June, prosecutors moved to seize $3 million worth of property belonging to two men who had signed Tzolov’s bond, Dimitre Ivanov and Kamen Kiriakov. The government seized Tzolov’s ninth-floor apartment at 225 Fifth Ave. in Manhattan, Ivanov’s 18th-floor apartment at 325 Fifth Ave. in Manhattan and Kiriakov’s residence in North Miami Beach, Florida. Both men identified themselves on court papers as Tzolov’s friends. Paul Weinstein said he and Tzolov’s lawyer, Brafman, objected to some charges being filed in Brooklyn because the alleged crimes occurred in Manhattan. Until September 2007, Tzolov and Butler ran Credit Suisse’s Corporate Cash Management Group, a division that helped clients manage excess corporate cash holdings, prosecutors said. Beginning in November 2004, the two approached companies that had banking relationships with Credit Suisse and pitched the benefits of investing cash in “low risk” auction-rate securities backed by student loans from the Federal Family Education Loan Program, according to the government. Without telling customers, the defendants used client funds to purchase higher-yield mortgage-backed collateralized debt obligations, according to the Brooklyn indictment. The men face as long as 33 years and 9 months in prison if convicted, prosecutors have said. Each could be fined as much as $5 million, Nardoza said. The Brooklyn case is U.S. v. Tzolov, 08-cr-370, U.S. District Court, Eastern District of New York (Brooklyn). To contact the reporter on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net. July 22, 2009 Regions’
Morgan Keegan Sued Over Auction-Rate Bonds (Update1) July 21 (Bloomberg) -- Regions Financial Corp.’s Morgan Keegan brokerage unit was sued by U.S. regulators on claims it stranded clients with $1.2 billion in auction-rate securities when the market for the instruments collapsed last year. The U.S. Securities and Exchange Commission wants Morgan Keegan to pay unspecified fines and buy back instruments sold to customers before March 20, 2008, according to a complaint filed today at federal court in Atlanta. The SEC also asked that the Memphis, Tennessee-based firm forfeit proceeds from underwriting and distributing the securities and managing auctions. Morgan Keegan earned $4.3 million from underwriting, brokerage and distribution fees from June 2007 to February 2008, the SEC said. More than a dozen firms including Citigroup Inc., UBS AG, and Goldman Sachs Group Inc. agreed to repurchase more than $50 billion in auction-rate debt to settle claims they improperly touted the securities as safe, cash-like investments. Banks managing frequent auctions abandoned the $330 billion market in February 2008, leaving thousands of investors unable to sell. “From late 2007 through February 2008 Morgan Keegan continued to push its brokers to sell ARS and downplayed the emerging liquidity risks,” the SEC wrote in its complaint. Morgan Keegan spokeswoman Kathy Ridley didn’t immediately respond to messages seeking comment. TD Ameritrade Inc. yesterday resolved U.S. and state claims it misrepresented auction-rate securities, agreeing to return to investors what New York Attorney General Andrew Cuomo said amounts to $456 million. Charles Schwab & Co. said it will fight a settlement demand Cuomo issued along with a threat to sue. To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net; Laurence Viele Davidson in Atlanta at lviele@bloomberg.net. July 21, 2009 TD
Ameritrade to Return Money TD Ameritrade Inc. agreed to buy back $456 million of auction-rate securities from about 4,000 clients as part of a settlement with New York Attorney General Andrew Cuomo, the Securities and Exchange Commission and Pennsylvania securities regulators. The online brokerage firm intends to return the money to customers, including individuals, charities, nonprofit entities and businesses, by March 2010 but could need until June 30 to complete the buybacks. TD Ameritrade said it will buy back the debt from clients with accounts of under $250,000 within 75 days. Auction-rate securities, short-term debt instruments whose prices reset in periodic auctions, caused billions of dollars in losses for investors after the $330 billion market collapsed in early 2008. "It's the best news I've had since the account was frozen 18 months ago," said Steve Lutz, a marketing executive from Wenatchee, Wash., who purchased more than $100,000 of auction-rate securities -- nearly one-third of his total investments for retirement -- through TD Ameritrade in January of 2008. Over the past year, regulators have reached settlement agreements with several Wall Street firms and brokerage houses, which have agreed to buy back more than $60 billion of the securities from investors. TD Ameritrade was among the few firms that hadn't settled. Thousands of investors bought auction-rate securities believing they were as safe and liquid as cash, but they wound up unable to sell them when Wall Street firms stopped supporting the market. "Given our financial strength and the ongoing illiquidity in the auction-rate securities market, initiating a buyback program of this nature is the right thing to do for our clients," said President and Chief Executive Fred Tomczyk. TD Ameritrade will repurchase securities bought before Feb. 13, 2008, that are still held by customers and will also reimburse eligible investors who sold their securities at a discount after the market failed. TD Ameritrade consented to a special arbitration process to resolve claims of damages experienced by eligible investors as a result of being unable to access their funds. The settlement comes as the New York attorney general warned discount brokerage firm Charles Schwab & Co. that it plans to sue the company for civil fraud if it doesn't reach an agreement in a few days to buy back the securities from clients. "It is disturbing that Charles Schwab, who had been holding itself out as an industry expert, has stonewalled its customers," Mr. Cuomo said on Monday. "Today's notice should send a signal that if Charles Schwab will not stand by its customers, this office will." Schwab has said Mr. Cuomo's allegations are without merit and its brokers "could not be expected to foresee and disclose market risks that even regulators and market experts didn't foresee." Write to Liz Rappaport at liz.rappaport@wsj.com July 20, 2009 CUOMO ANNOUNCES $456 MILLION SETTLEMENT WITH DOWNSTREAM BROKER TD AMERITRADE IN ONGOING INVESTIGATION OF AUCTION-RATE SECURITIES TD Ameritrade Joins Largest Consumer Recovery in History - Now Totaling Over $61 Billion Cuomo Also Announces Imminent Legal Action Against Charles Schwab & Co. for Deceptively Selling Auction-Rate Securities as Safe, Short-Term Investments NEW YORK, NY (July 20, 2009) - Attorney General Andrew M. Cuomo today announced a settlement with TD Ameritrade, Inc. (“TD Ameritrade”), under which the company has agreed to return $456 million to investors across New York State and the nation holding illiquid auction-rate securities. Attorney General Cuomo also announced imminent legal action against Charles Schwab & Co. (“Schwab”) for deceptively selling auction-rate securities as safe, liquid, short-term investments that were similar to money market instruments. These are Attorney General Cuomo’s latest steps in his ongoing effort to restore liquidity to investors caught in the collapse of the auction-rate securities market. “I commend TD Ameritrade for working with regulators to restore investor confidence, and for joining what has become the single largest consumer recovery in history,”said Attorney General Cuomo. “But given a record replete with misrepresentations, it is disturbing that Charles Schwab, who had been holding itself out as an industry expert, has stonewalled its customers. Today’s notice should send a signal that if Charles Schwab will not stand by its customers, this Office will.” With the $456 million settlement today, TD Ameritrade joins eleven underwriting securities firms and another downstream broker, Fidelity Investments, in resolving allegations that they misrepresented auction-rate securities as liquid, short-term investments and agreeing to provide liquidity to their customers. As a result of these settlements and settlements with other regulators, over 20 firms have recognized widespread problems in the sale of auction-rate securities and agreed to buy-back billions of these illiquid securities from investors. To date, regulatory settlements called for over $61 billion in investor buy-backs, representing the largest return on behalf of investors ever. Under Cuomo’s settlement, TD Ameritrade has agreed to purchase illiquid auction-rate securities from individuals, charities, non-profits and small businesses and institutions purchased from TD Ameritrade before February 13, 2008 (collectively “retail investors”). TD Ameritrade will purchase such illiquid auction-rate securities from retail investors with accounts of $250,000 or less within seventy-five (75) days; by March, 2010, for all other eligible TD Ameritrade customers. TD Ameritrade will also: Fully reimburse
all eligible investors who sold their auction-rate securities at a discount
after the market failed; and Cuomo also announced today that his Office intends to file fraud charges against Charles Schwab based on their unlawful and deceptive misrepresentation of auction-rate securities. An imminent action letter sent Friday to the company allows Schwab five business days to resolve the Attorney General’s investigation or show the Attorney General why action should not be taken. The Attorney General’s legal actions seek to stop Schwab’s illegal practices, and obtain injunctive relief, restitution, damages, civil penalties, costs, and other relief. Attorney General Cuomo’s ongoing investigation into the collapse of the auction-rate securities market revealed that Schwab brokers consistently misrepresented auction-rate securities as safe, liquid, short-term investments suitable for cash management purposes or as good investments in which to temporarily “park” cash. Such misrepresentation was the result of Schwab’s failure to train or otherwise ensure that its brokers had a basic understanding of auction-rate securities before they sold millions of dollars of these securities to Schwab’s customers. Audio recordings obtained during the investigation confirm that Schwab brokers repeatedly misled investors about the risks of investing in auction-rate securities. One Schwab broker described preferred auction-rate securities to a customer as a “short-term institutional holding instrument” that was particularly suitable for managing the customer’s cash balances: “If you need to have that access to them at any time, that’s a good place for those to be. You know if you think you might need to get into that money, that’s probably as good a place if not better than anywhere to leave them.” The Attorney General thanked the North American Securities Administrators Association (NASAA) and its multi-state ARS Task Force, who joined the Attorney General in announcing the agreements, for their efforts in achieving today’s settlement. He also thanked specifically the Pennsylvania Securities Division for its assistance. In addition, the Attorney General thanked the Securities and Exchange Commission and its enforcement staff for their cooperation in the ongoing auction-rate securities investigation. Assistant Attorneys General Peter Dean, Pamela Mahon and Armen Morian conducted the investigation under the supervision of David A. Markowitz, Chief of the Investor Protection Bureau, and Eric Corngold, Executive Deputy Attorney General for Economic Justice. A copy of
the five-day letter to Schwab and the agreement with TD Ameritrade is
available at the Attorney General's website:
www.oag.state.ny.us/media_center/media_center.html. Cuomo’s
auction-rate securities investigation is continuing. July 20, 2009 SEC Charges TD Ameritrade For Auction Rate Securities Sales Practices - Settlement Enables ARS Customers To Receive All Of Their Money Back he Securities and Exchange Commission today announced settled charges against TD Ameritrade, Inc. for making inaccurate statements when selling auction rate securities (ARS) to customers. The settlement reached with the online brokerage will provide its customers the opportunity to sell back to TD Ameritrade any ARS that they bought prior to the collapse of ARS market in February 2008. According to the SEC's administrative order, TD Ameritrade's registered representatives told customers that ARS were an alternative to certificates of deposit and money market accounts, when in fact ARS were very different types of investments. Among other things, TD Ameritrade representatives did not tell customers about the complexity and risks of ARS, including their dependence on successful auctions for liquidity. The SEC previously announced finalized ARS settlements with Citigroup and UBS, Wachovia, Bank of America, RBC Capital Markets, and Deutsche Bank. The SEC's Division of Enforcement previously announced a settlement in principle with Merrill Lynch. "TD Ameritrade is the latest in a series of landmark ARS settlements that bring unprecedented relief to tens of thousands of investors," said Robert Khuzami, Director of the SEC's Division of Enforcement. "ARS customers of numerous firms can get back all of the money they invested in auction rate securities as more than $50 billion in liquidity is being made available to them through these historic settlements." TD Ameritrade's ARS customers include individual investors, small businesses, small non-profit organizations, charities and religious organizations. "TD Ameritrade improperly marketed ARS to retail customers as short-term investments without telling them about the special risks of the ARS market," said Donald M. Hoerl, Regional Director of the SEC's Denver Regional Office. "This settlement provides hundreds of millions of dollars to thousands of TD Ameritrade customers who hold ARS that are now illiquid." The SEC's order finds that TD Ameritrade willfully violated Section 17(a)(2) of the Securities Act of 1933. The Commission censured TD Ameritrade, ordered it to cease and desist from future violations, and reserved the right to seek a financial penalty against the firm. Without admitting or denying the SEC's allegations, TD Ameritrade consented to the SEC's order and agreed to: The Commission wishes to alert investors that, in most instances, they will receive correspondence from TD Ameritrade and must advise TD Ameritrade that they elect to participate in the settlement. If they do not do so, they could lose their rights to sell their ARS to TD Ameritrade. Investors should review the full text of the SEC's order, which includes the terms of the settlement. The SEC appreciates the assistance and cooperation of the New York Attorney General's Office, the Pennsylvania Securities Commission, and the North American Securities Administrators Association. Additional Materials: Administrative Proceeding Release No. 33-9053 The above story came from a site called MondoVisione. Click here. July 20, 2009 Today's
Outrage: Schwab's ARS Victimhood Charles Schwab is claiming to be the victim in the collapse of the market for auction-rate securities, the now-maligned variable-rate debt instruments that were once considered as safe as cash. Victimhood
is basically Schwab's defense against charges by New York Attorney General
Andrew Cuomo that the brokerage over hyped the ARS products to its clients
and failed to warn them about the pending collapse of the market that
would make the securities nearly impossible to unload. Can any single company be blamed for the collapse of the ARS market, invented by Lehman Brothers, enhanced by Goldman Sachs and eventually joined by Citigroup, JPMorgan Chase, Morgan Stanley and others? Can you blame the sales person when the product is faulty? I guess it depends on the sales pitch, which is what this case is about. Cuomo is claiming that Schwab brokers didn't understand what they were selling. I don't know exactly what Schwab clients were told or whether the phrase "safe as cash" was ever uttered by a Schwab broker. Even if they did say such things, they weren't alone. That was industry parlance back in the day. Auction-rate securities are typically derived from corporate and municipal debt, so it's easy to understand why they were considered safe bets. They are also expensive to buy, often denominated at a minimum of $25,000 and sold to institutional investors and the wealthy. You'd hope that anyone throwing that kind of money around would do a little of their own due diligence. Schwab is
playing it smart and isn't building its defense by pointing the finger
at its clients, who should have known better themselves (that's my opinion,
Schwab can't afford to say it). Cuomo thinks Schwab needs to essentially issue refunds and buy back all the auction-rate securities it sold. No doubt Schwab is in the cross hairs because it is the largest U.S. online brokerage. New York attorneys general have a long and storied history of making an example of companies like Schwab. It's a political right of passage. It will be interesting to see whether Schwab caves in and agrees to a settlement or whether the brokerage decides to defend its honor and try to prove Cuomo wrong. Whether
anyone wants to say it or not, this case boils down to how much individual
responsibility an investor should bear for the choices they make with
their money.
Schwab
refusing to pay off clients in 'auction-rate' issues Instead of the carrot-and-stick approach, New York Atty. Gen. Andrew Cuomo on Monday used two sticks in his campaign to force Charles Schwab Corp. to pay off clients in those notorious auction-rate preferred securities. For stick No. 1, Cuomo threatened Schwab with a lawsuit if the discount brokerage fails to agree to buy back the offending securities. For stick No. 2 , Cuomo resorted to peer pressure: He announced that Schwab rival TD Ameritrade Inc. settled a similar case and will repurchase $456 million of the securities. The Securities and Exchange Commission also announced a settlement with TD Ameritrade, which won’t pay any fines as part of the deals. So far, Schwab isn’t budging. It issued a long statement defending itself and chastising Cuomo for deciding to "try cases in the press." Auction-rate securities, popular with many individual investors before the credit markets collapsed in 2008, were essentially long-term debt instruments masquerading as short-term securities. They were pitched by brokers to yield-hungry small investors as safe and easily redeemable -- which they were, until demand for all such engineered securities dried up. That left investors stranded in about $330 billion of auction-rate issues, unable to sell (although still earning interest). Cuomo, the SEC and other securities regulators have since negotiated buy-back settlements with 20 brokerages and other financial firms that were selling auction-rate preferred debt, including Goldman Sachs, Merrill Lynch and Deutsche Bank. To compel settlements, regulators have asserted that the brokerages misrepresented the safety of the securities. In a letter to Schwab warning of a lawsuit, Cuomo excerpted from interviews his office did with Schwab brokers as part of his probe and from audio recordings of Schwab sales pitches. One broker allegedly told a client that getting into the securities "is the tough part. Getting out of it is easy as just selling." In its rebuttal, Schwab said that its brokers, "While trained to levels beyond industry standards, could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee." Schwab asserts that the big brokerages that created the securities should have been forced to buy them back from all investors who purchased them, including investors who bought the issues from third parties such as Schwab. But Cuomo’s settlement with TD Ameritrade, following a settlement last year with Fidelity Investments’ brokerage unit, stands to put more pressure on Schwab. TD Ameritrade CEO Fred Tomczyk said the buyback was "the right thing to do for our clients." A person familiar with Schwab’s exposure said its clients still own about $100 million of auction-rate securities, much less than what TD Ameritrade will repurchase. That begs the question: Is it really worth a game of hardball with Cuomo -- and a potential fat fine -- or better to just settle up and move on? Return to top. For previous Auction Rate Preferred material -- click here.
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