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March 12, 2009

PIMCO to buy back $225 million of auction rate securities

DOW JONES NEWSWIRES

Five closed-end funds at Pacific Investment Management Co. will buy back another $225 million in auction-rate securities as the giant money manager looks to boost its minimum asset coverage in order to resume dividend payments.

The funds were forced to suspend their March and April dividend payments because of the falling value of the auction-rate preferred shares.

The buyback is reversal for Pimco, which had refused to redeem these securities for months after the auction-rate market froze up a year ago. But deteriorating markets and legal requirements are forcing Pimco to do so after all. Late last month, the funds announced plans to buy back about $342 million of the securities.

The purchases will push the company's asset coverage of the auction-rate preferreds back above the 200% level required for the funds to pay dividends.

The Pimco funds involved in the move are the Corporate Income (PCN), Corporate Opportunity (PTY), High Income (PHK), Floating Rate Income (PFL) and Floating Rate Strategy (PFN) funds. The buybacks begin March 30 for all the funds, except the Floating Rate Income fund, which launches April 1.

Pimco's closed-end funds, like dozens of others, have for years issued auction-rate preferreds to borrow money and add leverage to the funds. Such securities are long-term debt with lower, short-term rates that are set at periodic auctions.

When the auction-rate market froze, holders wanted their money back, so most closed-end fund shops started redeeming some securities or worked on plans to do so. But Pimco balked, pointing out that redeeming the preferreds would reduce leverage in its funds, which in turn would shrink income for closed-end fund shareholders. The firm's preference for its common shareholders incensed brokers and preferred holders.

-By Lauren Pollock, Dow Jones Newswires; 201-938-5964; lauren.pollock@dowjones.com

March 11, 2009

Oppenheimer has been the worst -- totally intransigent and unsympathetic -- according to ARPS holders who were sold their stuff by Oppenheimer. Now the company has a new wrinkle -- Get the U.S. Government to redeem the ARPS money. This gives chutzpah a whole new meaning. Read on.

Oppenheimer Plans Move to U.S.

New York Times Dealbook: As Washington considers putting a tighter leash on Wall Street, some have expressed concern that financial firms might flee in the face of new regulation.

But the opposite is happening with Oppenheimer Holdings, a Toronto-based securities firm that announced Wednesday it would seek shareholder approval to move to the United States. The company, which last year bought Canadian Imperial Bank of Commerce’s United States investment banking business, said that one reason for the shift is an attempt to gain access to the plethora of financial lifelines being thrown to United States-based firms.

Most of Oppenheimer’s business is in the United States, so being incorporated there as well would simplify the firm’s corporate structure. It would also provide tax benefits and could make its publicly traded stock more attractive to investors, the company said.

The possibility of getting bailout funds is also a factor.

In Wednesday’s news release, Oppenheimer said one of the principal reasons for moving was “potential eligibility to participate in U.S. government finance programs that are limited to entities organized in the United States.”

“It is a matter of corporate history that we found ourselves in Canada, but the confluence of a number of factors makes this an opportune time to make this change,” Albert G. Lowenthal, Oppenheimer’s chairman, said in the news release.

Like most big financial firms, Oppenheimer was battered by the banking crisis last year.

In a recent filing with the Securities and Exchange Commission, it called 2008 “the most difficult year in the company’s history.” (And Oppenheimer has a long history: Its roots date back to 1881, when William Fahnestock, whose father was a financial adviser to Abraham Lincoln, founded one of its predecessor companies, according to Oppenheimer’s Web site.)

Oppenheimer also faces the possibility of a large bill to redeem auction-rate securities that it sold to customers before the market for this paper dried up in early 2008.

While Oppenheimer says it believes it will not have to redeem the approximately $930 million in outstanding notes sold before the market freeze, it also indicates in regulatory filings that it has been in negotiations with United States state regulators on the matter — and the outcome is still unclear.

That’s where the move to the United States could come in. Oppenheimer said in its latest annual report that bailout programs for United States-based firms might provide it with the necessary liquidity to buy back those securities.

To take part in the programs, though, it might need to sell preferred stock or warrants to the United States government, the filing said.

Go to Oppenheimer Press Release via PRNewswire »
Go to Oppenheimer’s Latest Annual Report to the S.E.C. »

March 10, 2009

Do I have a Claim Against my Broker if I own Auction Rate Securities?

from a document by the law firm of Crosby & Higgins LLP

Obviously, this analysis will depend largely on the specific facts of your securities, but below is a checklist which sets forth some of the factors that may have a bearing on recovery against your Broker:

+ Did the Broker make any representations to you about the Auction Rate Securities?

+ Did the Broker disclose the risks associated with Auction Rate Securities?

+ Did the Broker provide a prospectus with respect to the Auction Rate Securities?

+ Did the Brokerage Firm list the Auction Rate Securities as “cash equivalents” on your monthly statements?

+ Did the Brokerage Firm fail to mark down the value of the Auction Rate Securities on your recent monthly account statements?

+ Do you have exigent circumstances requiring immediate access to cash that is now tied up in illiquid Auction Rate Securities?

Crosby & Higgins also have published a table on ARS Settlement Summaries. It summarizes where each of the issuing and brokerage firms stand.

March 9, 2009

Stifel to buy back all auction rate securities
St. Louis Business Journal - by Kelsey Volkmann

After first saying that it would buy back just some of the frozen auction rate securities that 1,200 of its retail investors hold, Stifel Financial Corp. said Monday it would repurchase all $180 million of them.

Stifel Financial Corp.’s subsidiary, Stifel Nicolaus & Co. Inc. said it would voluntarily buy back 100 percent of the auction rate securities starting in June and continuing over the next three years.

Stifel said it would first help smaller investors by offering to repurchase at par the greater of 10 percent or $25,000 of auction rate securities (ARS) in June this year, next year and in 2011. About 40 percent of investors will receive 100 percent liquidity by this June, the company said.

Stifel said it would have until June 2012 to complete buy-backs of the balance of any outstanding auction rate securities.

“Since the collapse of the ARS market, redemptions and restructurings have resulted in liquidity for many of our clients, reducing retail client holdings by more than 50 percent,” said Stifel Chairman and CEO Ronald Kruszewski, in a statement. “Unfortunately, some clients have had little or no relief. This plan ultimately will provide liquidity to 100 percent of our ARS retail clients.”

Missouri Secretary of State Robin Carnahan, who had blasted Stifel’s partial buy-back plan as inadequate, also dismissed the expanded repurchase offer Monday as "too little, too late."

“It worries me that Stifel made open-ended statements and no guarantees about getting clients full access to their money," she said in a statement. "Their clients deserve guaranteed repayments. I have heard from investors in Missouri and over a dozen other states who desperately need their savings, and in three years it will be too little, too late. Many other financial institutions have done the right thing and guaranteed to make their investors whole. Now, it’s time for Stifel to do the same.”

Kruszewski had originally said last month that Stifel shouldn’t have to repurchase all the auction rate securities because the company didn’t know that the market would collapse or all the risk involved.

“…Neither Stifel nor its clients had access to the information available to the major market participants regarding the impending collapse of the ARS market,” Kruszewski said Monday. “Had the major market participants disclosed to the entire marketplace the material facts known by them, Stifel would not have sold ARS to its clients. While several larger firms have announced more complete repurchase plans, Stifel’s lack of knowledge of the impending market collapse is the critical difference that serves the foundation of Stifel’s position.”

Other brokerages have also bought back auction rate securities from clients.

Commerce Brokerage Services Inc., an affiliate of Commerce Bank, bought back $545 million of auction rate securities from 140 investors last year.

In August, Carnahan reached a $9 billion agreement with Wachovia Securities that returned money to more than 40,000 investors.

While these companies never admitted wrongdoing, Carnahan’s office suggested that investors were misled about the risk involved in auction rate securities. The market collapsed in February 2008 when investors became alarmed at the prospects of corporate borrowers covering debt service on the securities, leaving investors unable to access $330 billion in investments nationwide.

St. Louis-based Stifel Financial Corp. (NYSE: SF) has about 3,300 employees in more than 200 offices in the U.S. and three in Europe.

March 2, 2009

These are the people who are meant to protect Floridians from fraud.

Note I said "meant." Floridians got taken bigtime by the ARPS fraud. Where are these people? The last we heard from them was August 15, 2008 -- more than six months ago.

Don Saxon of the Florida Office of Financial Regulation. He looks like a bulldog.

In their 8/15/2008 press release, the Florida Office of Financial Regulation took credit for something it did next-to zero work on:

TALLAHASSEE, FL – TALLAHASSEE, FL – Don Saxon, Commissioner of the Office of Financial Regulation, is please* to report that the North American Securities Administrators Association (NASAA), the New York Attorney General, and the Office of the Missouri Secretary of State announced today that a settlement has been reached with Wachovia Securities (Wachovia) relating to their sale of auction rate securities. The settlement will give Wachovia clients, including those in Florida, access to billions of dollars in funds that have been frozen in the auction rate securities (ARS) market.

Under the terms of the August 15th settlement, Wachovia will offer to repurchase, no later than November 28, 2008, all illiquid auction rate securities from all Wachovia individual investors, charities, not-for-profit companies and institutional clients who have account values and household assets of up to $10 million. All other investors will be able to redeem their auction rate securities no later than June 30, 2009.

Wachovia will also:

• Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed in February 2008;

• Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds, in which Wachovia will not contest its liability for the illiquidity of the auction rate securities and in which Wachovia will pay all forum fees;

• Reimburse all refinancing fees to municipal issuers who issued auction rate securities through Wachovia since August 1, 2007, and who refinanced those securities after the market failed; and

• Pay $ 50 million in civil penalties to the states.

As further details become available on the reimbursement process the Office will post additional information on its website at www.flofr.com .

The settlement concludes an investigation into allegations that Wachovia Corporation misled its clients by falsely assuring them that ARS securities were as safe and liquid as cash. The ARS markets froze in February this year, triggering complaints from investors who could not withdraw money from their accounts.

The Florida Office of Financial Regulation has been a participant in NASAA's special task force created to provide remedies for investors. The NASAA task force is continuing their investigations of other companies involved in selling ARS products to investors. Commissioner Don Saxon stated that “”the Office of Financial Regulation is very pleased with the continued success of the NASAA task force on auction rate securities and the impact this settlement will have on Florida investors.”

There are dozens of other broker dealers who fleeced Floridians out of millions of dollars. And Florida is not chasing them. Why not? Too much golf? Has the sun got to their brains?

P.S. Saxon was meant to retire last September but there's nothing on their miserable web site as to whether he did, or didn't and who his replacement might or might not be.

* That please should be pleased. What do these Floridians know about English? Clearly as much as they know about chasing fraud.

Wednesday, March 4

Carnahan to Stifel: Buy back all auction-rate securities
from the Kansas City Business Journal - by Kelsey Volkmann Contributing Writer

Missouri Secretary of State Robin Carnahan wants Stifel Nicolaus & Co. Inc. to buy back all the auction-rate securities its customers hold.

On Tuesday, Carnahan called on St. Louis-based Stifel Nicolaus, a unit of Stifel Financial Corp. (NYSE: SF), to buy back all of the illiquid securities that hundreds of investors hold. Auction-rate securities are investments for which the interest rate is reset regularly.

Stifel Financial said last month that it would spend $35 million to $40 million to buy back some of its customers’ auction-rate securities. On Friday, it said it may buy back more.

“Stifel’s offer is inadequate, and their vague statement suggesting they ‘may increase the amount’ has risked the credibility they have with their customers,” Carnahan said in Tuesday release. “I have heard from dozens of investors who desperately need to know when they will have access to their savings. After many other banks have done the right thing and made their investors whole, it’s time for Stifel to step up to the plate.”

Stifel said it would offer to repurchase the greater of 10 percent or $25,000 of auction-rate securities held by each retail client who bought them at Stifel before the auction-rate securities market collapse a year ago. About 1,200 retail client accounts hold auction-rate securities, and about 40 percent of these accounts hold $25,000 in auction-rate securities, so they will receive 100 percent liquidity. The remaining 60 percent will get between 10 percent and 50 percent.

Stifel has said it didn’t have as much knowledge as the larger firms of the impending market collapse so it shouldn’t have to buy back all the securities.

Commerce Brokerage Services Inc., an affiliate of Commerce Bank, owned by Kansas City-based Commerce Bancshares Inc. (Nasdaq: CBSH) said in August that it planned to buy $545 million of auction-rate securities from 140 investors .

In August, Carnahan reached a $9 billion agreement with Wachovia Securities that returned money to more than 40,000 investors.

Although these companies never admitted wrongdoing, Carnahan’s office suggested that investors were misled about the risk involved in auction-rate securities. The market collapsed in February 2008 when investors became alarmed at the prospect of corporate borrowers covering debt service on the securities, leaving investors unable to access $330 billion in investments nationwide.

Stifel Financial is led by Chairman and Chief Executive Ronald Kruszewski. The company has about 3,300 employees in more than 200 offices in the United States and three in Europe.

March 2, 2009

Top Congressional Economist Says ARS Shutdown Was "Scripted Failure"

House Financial Services Committee Continues Earlier Investigation
While Obama Economic Team Weighs New "Liquidity Facility" For Fraud Victims

By Phil Trupp

Washington, March l: "No question it was a scripted failure," according to a high-ranking congressional economist, referring to the February 2008 collapse of the auction-rate securities market. The source, interviewed on background to avoid compromising ongoing forensic examinations of the $336 billion securities fraud, said he has been contacted to "hundreds of people who were let down. Fiduciary responsibility was neglected in a lot of cases. It's a bloody mess."

The House Financial Services Committee, which held hearings last September on the ARS debacle, could hardly escape the "scripted" nature of events, the source revealed. Since hundreds of banks and broker-dealers refused to support the auctions "on cue" last February, members of the Committee have tentatively concluded that mass auction failures were orchestrated.

"There's no question" of broker-dealer collusion on a massive scale, the source added. "But at this stage of our investigation all we've got is anecdotal evidence."

However, one apparent clue of scripting is the flurry of broker-dealer insider trading of ARS paper just days prior to the market's collapse. Investigation by Massachsetts securities authorities of Oppenheimer executives Albert Lowenthal, Robert Lowenthal and Greg White has added to the scripted failure theory. Evidence also indicates wide scale insider trading at Merrill Lynch, among dozens of other broker-dealers.

"Plenty broker-dealers were preparing to pull their support of the market knowing that the auctions would collapse, " the source said. "Clearly the nature and magnitude of the coming auction failure was never conveyed to investors, he added.

The Committee last September heard detailed testimony from regulatory and financial industry representatives but did not issue a series of recommendations at the conclusion of the hearings.

"The bank bailout got in the way," the source explained. "We believe the SEC needs to come up with a ruling that allows those still stuck in the ARS market to get out," he said. Approximately $110 billion in auction-rate securities remain illiquid.

He said closed-end funds have been reluctant to redeem ARS "because it reduces profits to common shareholders. So it's necessary," he continued, "to create other kinds of securities to bring back leverage to replace ARS losses."

Barney Frank (D., MA), chairman of the House Committee, has suggested that the SEC "take whatever action it can" to create a new leverage mechanism for closed-end fund issuers. The congressional source backed Frank's position. "The whole system," he said, "was the villain." He is pressing for a restructuring of the Dutch auction mechanism--"what remains of it" in order to make remaining investors whole.

He indicated that President Obama's economic team is prepared to create what he described as a new "liquidity facility," a buyer of last resort headed by the Treasury Department and the Federal Reserve bank, to be funded with TARP money. "It (the proposed facility) may issue short-term bonds to generate the needed liquidity," the source explained.

He left little doubt that the committee will continue to investigate details of the ARS shutdown. At the same time, there is a general sense of anger and confusion evident among members of the Committee from both its democratic and republican members. The characteristically understated Rep. Spencer Bachus (R., AL) told a reporter after last September's hearings that the ARS market was "almost like a roach motel, a financial roach motel. They (investors) could get in but they couldn't get out. It was a nightmare for our cities and counties and our states."

He said the committee was "making real progress" and is beginning see the auction market resolve its outstanding liquidity problems. "I think that will have positive implications for the economy," Rep. Bachus said.

+++++++++++

The author is writing a book on the ARS scandal titled MONEY ON ICE: How Ordinary Investors Beat the Biggest Fraud In Wall Street History. If you wish to tell of your personal ARS nightmare, please e-mail Phil Trupp at PZBAR@COMCAST.NET or phone 202 686 1663.

February 22, 2009

Firms still face big ARS claims
Institutional investors, 'downstream' B-Ds begin to sue
By Dan Jamieson, InvestmentNews

Despite having settled regulatory actions involving auction rate securities, the big Wall Street firms aren't out of the woods yet.

Citigroup Inc., Merrill Lynch & Co. Inc. and UBS Financial Services Inc., all of New York, and St. Louis-based Wachovia Securities LLC are facing a number of individual lawsuits from institutional investors who still have huge sums locked up in the illiquid securities.

What's more, last month, the first so-called downstream brokerage firm case was filed, when Amegy Bank NA of Houston and its broker-dealer affiliate Amegy Investments Inc. filed an arbitration claim against Merrill Lynch.

Amegy claims it purchased more than $240 million of ARS from Merrill, which it said it then sold to its clients. Amegy's suit seeks rescission of the remaining $140 million that its clients still hold, plus unspecified damages.

In a statement, Merrill Lynch spokesman Mark Herr said the suit has no merit.

The downstream firms, as well as institutional and wealthier individual investors, weren't part of the ARS buyback agreements announced last year. Those settlements with regulators cover only retail investors at the major firms.

The underwriting firms "got regulators to believe [that the ARS mess was] a point-of-sale problem" rather than fraud by the underwriters, said an executive with a regional firm who asked not to be identified.

The market for ARS froze a year ago after all the major underwriters stopped supporting auctions for the securities.

More claims from downstream firms are coming, said Paul Yetter, a partner at Yetter Warden & Coleman LLP in Houston, which represents Amegy Bank.

He said he has more such cases but could not yet comment on those claims.

"It wouldn't surprise me if other [downstream firms] took action like this, especially if Amegy is able to get some traction ... and get money back for its clients," said Michael Decker, co-chief executive of the Regional Bond Dealers Association in Alexandria, Va.

He estimated that $30 billion to $40 billion worth of ARS are still held by downstream firms.

The major firms are "leaving innocent [investors and downstream firms] with no other option" but to sue, Mr. Yetter said.

And that's what they're doing. Some of the claims filed so far:

• American Eagle Outfitters Inc., a Pittsburgh-based specialty retailer, this month filed a lawsuit in federal court seeking to force Citigroup to take back the $258 million worth of illiquid ARS the bank sold to it.

• Another suit against Citigroup, filed in federal court in November by Hutchinson (Minn.) Technology Inc., is pending in arbitration.

Hutchinson said it is stuck with $31 million of ARS it bought from Citigroup.

A separate claim against UBS by Hutchinson Technology for rescission of $70 million of ARS was settled in December, with UBS providing a no-net-cost $59.5 million line of credit.

• A federal lawsuit filed against UBS by Plug Power Inc. was settled in December, with UBS providing a no-net-cost line of $62.9 million, equal to the value of Plug Power's frozen ARS, according to an SEC filing by the Latham, N.Y.-based energy company. UBS also agreed to repurchase the securities at any time from June 30, 2010, to July 2, 2012.

• In December, Hanna Steel Corp., a Fairfield, Ala.-based tube manufacturer, sued Charlotte, N.C.-based Wachovia Corp. and its broker-dealer units in federal court seeking rescission of $12.9 million worth of ARS.

• TGS-NOPEC Geophysical Co. ASA of Asker, Norway, filed an arbitration in November against Merrill Lynch seeking the repurchase of $64.5 million in frozen ARS.

Citigroup spokeswoman Danielle Romero-Apsilos declined to comment.

UBS and Wachovia had not responded to questions by press time.

The fights among the heavyweight investors and Wall Street firms could get nasty.

Claimants of all stripes said the big underwriting firms knew by late 2007 that auction failures were imminent and were reducing their inventories, but never disclosed any impending problems to their clients.

Lawsuits by institutional clients cite many of the charges previously made by regulators.

But unlike many retail investors, some institutional clients say they had warning of ARS problems and specifically raised concerns late last year with their brokerage firms but got reassurance that all was well.

Several claim that their brokers violated written investment policy statements for cash reserves that prohibited investments in long-term securities or anything with limited liquidity.

Amegy Bank's claim says it "bought the securities from Merrill at the same informational disadvantage as Merrill's direct retail customers."

Mr. Herr begs to differ.

"Amegy began selling ARS it purchased from Merrill Lynch in 2004, and it is unfathomable that it would now claim that when it sold these products to its clients, it didn't know or understand what it was selling," the Merrill spokesman said in his statement. "It appears Amegy failed to do even the most routine due diligence."

Amegy's claim said it performed an exhaustive analysis of the credit quality of ARS in the summer and fall of 2007, "but no amount of research or analysis could have led Amegy to learn of Merrill's deceptive marketing and support of the ARS market."

Mr. Herr said Merrill Lynch did disclose its role in the auction process and informed purchasers that auctions could fail.

E-mail Dan Jamieson at djamieson@investmentnews.com.

February 20, 2009

Auction-Rate Bonds Claim Victims Year After Collapse (Update1)
By Michael McDonald

Feb. 20 (Bloomberg) -- Mike Stelzer expected to retire after selling his cattle ranch south of Bakersfield, California. Instead, the 73-year-old is raising Holsteins on leased land, unable to quit because a chunk of his $2 million nest egg is stuck in auction-rate securities paying next to nothing.

“I have lost all faith in bankers and Wall Street,” said Stelzer, who invested the proceeds from the sale of his ranch in the securities through San Francisco-based Wells Fargo & Co.

A year after collapsing, the one-time $330 billion market for debt with rates typically set every 7, 28 or 35 days is still claiming victims. Investors are stuck with as much as $176 billion of the securities even after regulators forced banks to buy back more than $50 billion of auction-rate debt that was marketed as safe, cash-like instruments.

The market’s meltdown, the result of the seizure in credit markets, initially left investors with bonds they couldn’t sell, though the securities paid interest at rates as high as 20 percent. Now, rates on securities auctioned every seven days pay an average 1.36 percent, according to an index from the Securities Industry and Financial Markets Association, after central banks slashed borrowing costs.

Investors are stuck because interest on auction-rate securities is lower than what issuers would have to pay on new borrowings, giving them little incentive to refinance.

Other options for investors are hoping that an auction succeeds or selling their securities at a loss on the secondary market. Of the 739 auctions reported the week ended yesterday, 82 percent failed, according to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access web site.

Stelzer, whose old ranch was in Corona, earns an annual interest rate of less than 1 percent on $675,000 in so-called auction-rate preferred securities issued by New York-based money manager BlackRock Inc. He sold $675,000 of his holdings in October at a loss of $103,000 and got all his money back on $650,000 of debt that was refinanced by the borrower.

Kathleen Golden, a Wells Fargo spokeswoman in San Francisco, said the company doesn’t comment on individual clients.

UBS AG and nine of the 10 other biggest underwriters of municipal auction-rate debt reached agreements with state and federal regulators last year to redeem at par the bonds they sold to individual investors and some institutions; Lehman Brothers Holdings Inc. declared bankruptcy before settling.

The last resolution occurred in October, when the Financial Industry Regulatory Authority said City National Securities of Beverly Hills, California, BNY Capital Markets LLC of New York and Harris Investor Services of Chicago would redeem $60 million of the debt.

Regulators, including officials in Massachusetts and Illinois, are now focused on banks and brokerages that resold the securities, said Denise Voigt Crawford, the Texas Securities Commissioner. Those companies didn’t underwrite the securities or run auctions, so proving they knew the market might fail may be more difficult, she said.

A resolution can’t come soon enough for Brad Dickson of Los Angeles, whose holdings of BlackRock Inc. and Van Kampen Investments Inc. securities purchased through Oppenheimer Holdings Inc. pay less than 1 percent.

“I’m getting paid virtually nothing,” Dickson said. “This is money that’s frozen, that basically has a zero return, and I’m stuck with it indefinitely.”

States, student-loan agencies and closed-end mutual funds sold auction-rate securities to raise money for 20 years or more. Yields on the bonds were reset at weekly or monthly auctions run by the underwriters, providing the borrowers with money-market rates.

The market unraveled in February 2008 as dealers who supported auctions for two decades with their own money suddenly pulled back to preserve capital amid the mortgage slump that led to $1.1 trillion of credit losses and writedowns at the world’s largest financial institutions.

Individual investors hold at least $20 billion of the debt, with companies and institutions owning the remainder, according to America’s Watchdog, a Washington-based adviser on securities litigation.

An arbitration panel ruled Feb. 13 that Zurich-based Credit Suisse Group AG must pay STMicroelectronics NV of Geneva more than $400 million to resolve claims that it misled the semiconductor maker into buying auction-rate securities.

“We respectfully disagree” with the award, Credit Suisse spokesman David Walker said. The bank is “reviewing our legal options.”

About $85.2 billion in municipal securities remain outstanding, down from $211 billion a year ago, according to data compiled by Bloomberg. About $33 billion in auction preferred shares remain, according to Thomas J. Herzfeld Advisors Inc. in Miami.

The $176 billion of auction-rate debt that issuers haven’t reclaimed includes $57.7 billion tied to student loans, corporations and mortgages, Bloomberg data show.

Yesterday, Moody’s Investors Service cut the credit ratings on $5 billion of Brazos Student Finance Corp. bonds backed by student loans because most are funded with auction-rate securities. The interest Brazos collects on loans financed by auction-rate securities failed to keep up with the cost of borrowing, Moody’s said in a statement.

“Most of the trusts are expected to generate slightly negative to zero gross excess spread,” Moody’s wrote in its report, and said it was “unlikely” that some subordinate bonds that lack collateral will “be paid off in full by the legal maturity.”

Brazos Student Finance Corp. is part of Waco, Texas-based Brazos Group Inc., the largest municipal borrower in the auction-rate market. The ratings on the bonds were cut to as low as Ba3, or three levels below investment grade.

Some banks say they can’t buy bonds they sold because of the dislocation in credit markets.

Thomas James, the chief executive officer of Raymond James Financial Inc., said in January that his company doesn’t have federal bailout money for such an effort. Clients of the St. Petersburg, Florida-based brokerage hold $1 billion of the debt.

The brokerage unit of St. Louis-based Stifel Financial Corp. said on Feb. 11 it intends to buy back an estimated $40 million of the $183 million held by its clients. Missouri Secretary of State Robin Carnahan, who is investigating the company, called the offer “inadequate.”

State regulators in Washington filed a complaint on Nov. 20 against Wells Fargo that said the company failed to disclose enough information to investors about the risk of failing auctions. The bank requested a hearing, which may occur in six months, said Michael Stevenson, the state’s securities director.

Golden declined to comment on the regulatory proceedings.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net

February 11, 2009

BlackRock Receives Lower Auction Fees
Break Is Offered When Shares Don't Sell
By Daisy Maxey, The Wall Street Journal

Some of BlackRock Inc.'s closed-end funds have negotiated lower auction fees on preferred shares that are put on the block but fail to sell.

The move could be copied by other companies that offer closed-end funds and are looking for ways to cut costs for common shareholders.

Auction-rate securities are financial products that have interest rates reset at periodic auctions on Wall Street. The market for such securities, which were issued by municipalities, student-loan and mutual-fund companies, and others to raise long-term funds at short-term rates, collapsed in February when Wall Street firms stopped supporting the $330 billion market.

The fees in question are collected by auction agents for administering the auctions and by broker-dealer firms for their efforts to make a market to sell preferred securities.

An annual report for BlackRock MuniVest Fund II notes that "in December 2008, commissions paid to broker-dealers on preferred shares that experience a failed auction were reduced to 0.15% on the aggregate principal amount. The fund will continue to pay commissions of 0.25% on the aggregate principal amount of all shares that successfully clear their auctions."

This reduction in fees, which will apply to all of BlackRock's closed-end funds that are leveraged with auction-rate preferred shares, pleases at least one investor. "It's a good step," said Cody Bartlett, managing director of investments at Karpus Investment Management, a registered investment adviser in Pittsford, N.Y. He added, however: "We would have liked to see them not pay a fee at all."

Karpus had spoken out against the fees last autumn, noting that closed-end-fund equity holders were saddled with the auction expense in addition to the higher rates they were paying on the failed closed-end preferred-auction-rate securities. The firm's president, George Karpus, complained about the fees last year in letters to the Securities and Exchange Commission and the office of New York state's attorney general, Andrew Cuomo.

A person close to the matter said BlackRock agreed to continue paying reduced fees so that the auctions could continue in their normal manner. The reduced payments permit auction agents to take sale orders from not only large broker-dealers, but smaller broker-dealers who may not have their own auction desks.

"Funds and boards have been asking why the full fees are being charged for auctions that are failing," said Cecilia Gondor, executive vice president at Thomas J. Herzfeld Advisors Inc., a Miami investment-advisory firm. "Auction agents argue that, aside from the contractual obligation which spells out the level of fees even in the event of auction failures, they are still performing services with regard to the ARPs,"

BlackRock's public disclosure on the renegotiated fees provides a starting point for other funds to negotiate with their auction agents, Ms. Gondor said. "Lower fees mean lower costs to maintain ARPs," she said. Three other closed-end issuers of auction-rate securities -- Eaton Vance Corp.; Nuveen Investments, which is owned by an investor group led by private-equity firm Madison Dearborn Partners Inc.; and Pimco, a unit of German insurer Allianz SE -- had no comment on whether they were seeking to reduce or eliminate the auction fees paid by their funds.

Mr. Bartlett of Karpus said the largest issue now is the refinancing of auction-rate preferred shares by replacing the shares with other securities or by taking the leverage off the table.

"Now that long-term rates are low, it's a pretty good time on the taxable side," Mr. Bartlett said. "On the municipal side, it's not that easy. Nuveen has been most aggressive with refinancing their munis, and they've done a pretty good job."

February 6, 2009

The Latest (update 1)
by Harry Newton

The ARS lockup continues for many individual investors and for many corporations. Over 10 firms have told regulators allegedly that they will be forced to file for bankruptcy if they don't get their "cash-equivalents" (their ARPS) to suddenly become cash.

Madoff stole $50 billion. I'm guessing at least $100 billion of ARPS are still out there not redeemed. This theft is twice as big as Madoff.

The good news is that the Attorneys-General of New York and Massachusetts are still on the case. And now -- finally -- the sleepy SEC seems to have worken up. But where is California's Gerry Brown?

Where is Texas' Greg Abbott?

Where is the AG of Florida, Bill McCollum?

I searched for Auction Rate Preferreds on the California AG's web site, the Texas AG's web site and Florida AG's web site on February 6, 2009 and found absolutely nothing on any of the three web sites. This is staggering! ARPS are a gigantic Wall Street fraud. These public "servants" do nothing. And we, the taxpayers, pay their salaries.

The bad news is that no one's going after the issuers of auction rate preferred securities -- companies like Blackrock, Nuveen MFS and PIMCO. To me they're guilty of peddling a fraud -- selling "cash-like" securities that weren't.

The bottom line is simple, dear folks. I have all my ARPS money back. If you don't, you need to get off your tushy and do something. I spent several hours updating this site tonight. I don't see any offers of help, nor many "Thank yous." I am pleased to report that one fine reader -- a real mensch -- sent me a bottle of fine wine for my efforts and as a thank you. I'm not begging. But I'm also not terribly interested in your misery -- especially if you done very little to get someone's attention. I am not your keeper.

Feburary 6, 2009

American Eagle Outfitters sues Citigroup for fraud

PITTSBURGH (AP) — American Eagle Outfitters Inc. sued Citigroup Global Markets Inc. and accused it of fraudulently inducing it to buy $258 million worth of auction rate securities that it now can sell only at a significant loss, if at all.

Citigroup represented the securities as safe and liquid and therefore compatible with the Pittsburgh-based clothing retailer's conservative investment policies, according to the suit. Instead, American Eagle claimed, Citigroup knew there was not enough demand for the securities to keep them liquid.

A Citigroup Inc. spokeswoman declined to comment Friday.

In the auction-rate securities market, investors buy and sell instruments that resemble corporate debt, except the interest rates are reset at regular auctions, some as often as once a week. A number of companies invested in the securities because they could treat their holdings almost like cash.

The market for auction rate securities collapsed last February, leaving tens of thousands of investors nationwide holding damaged securities that couldn't be readily sold for cash, according to securities regulators.

Citigroup represented itself as the auction rate securities "market leader" and said it would provide immediate liquidity by selling the securities to other investors, or buying them itself, according to the suit filed Wednesday in U.S. District Court in Pittsburgh by American Eagle Outfitters and its subsidiary, AEO Management Co.

"American Eagle reasonably and justifiably relied to its detriment upon Citi's material misrepresentations and omissions of material fact and fraudulent conduct," the suit said.

Citigroup hid from American Eagle that it had internal limits on how many of the Citigroup-brokered securities it would buy and that the market for Citigroup-brokered securities would collapse when it stopped buying them last February, according to the suit.

Richard Victoria, an attorney for American Eagle, said that despite the auction rate securities problem, the company's financial condition remains strong.

In December, New York-based Citigroup and UBS AG agreed to buy back a total of nearly $30 billion in auction rate securities under a settlement approved by the Securities and Exchange Commission. The banks neither admitted nor denied wrongdoing under the settlements.

American Eagle operates under the brands American Eagle Outfitters, aerie by American Eagle, Martin + Osa, and 77kids. It has more than 1,000 stores and about 30,000 employees in the United States and Canada.

February 5, 2009

SEC, Wachovia Reach $7B Deal Over ARS Crash
By Christine Caulfield

Law360, New York (February 05, 2009) -- The U.S. Securities and Exchange Commission has finalized a $7 billion settlement with Wachovia Securities LLC over the broker-dealer's involvement in the collapsed auction rate securities market, the agency announced Thursday.

Under the deal, St. Louis-headquartered Wachovia will provide liquidity to thousands of investors who bought auction rate securities before the bottom dropped out of the market in February 2008, the SEC said.

The settlement resolves all claims by the regulator that Wachovia misled investors about the risks of the securities that the firm marketed, sold and underwrote.

The deal is one of many “unprecedented settlements-in-principle” the commission has negotiated with a number of broker-dealers, SEC Enforcement Division chief Linda Chatman Thomsen said.

“The goal of the SEC in these matters was to return as much liquidity to investors as quickly as possible, while at the same time avoiding further disruption in the financial markets,” Thomsen said. “Today's final settlement with Wachovia represents substantial progress toward fulfilling that goal.”

Without admitting or denying the SEC's allegations, Wachovia has agreed to buy back ARS from all investors who bought the securities from the firm on or before Feb. 13, 2008.

The first phase of the buyback — in which Wachovia offered to buy ARS from individuals, nonprofit and religious organizations, and other customers with account values below $10 million — ended Nov. 28, with the broker purchasing more than $6.2 billion in eligible securities.

The second phase, which must begin no later than June 10 and end June 30, requires Wachovia to offer to repurchase remaining ARS held by all other investors.

Wachovia has also agreed to pay customers who sold their ARS below par between Feb. 13 and Nov. 10 the difference between the par value and the sale price, plus interest; to reimburse customers who took out loans from Wachovia after Feb. 13 because of concerns with ARS liquidity; and to offer to lend its customers the full par value of their ARS, pending the buyback.

The settlement, which remains subject to court approval, also implicates affiliate Wachovia Capital Markets LLC, which has agreed to provide identical relief to customers who bought ARS using their capital accounts.

The settlement was first hashed out between Wachovia and regulators in August. The deal was a global agreement with the SEC; Missouri Secretary of State Robin Carnahan, whose office led a multistate investigation into the collapsed ARS market; and New York Attorney General Andrew M. Cuomo.

The probe was launched after investors complained that ARS were marketed by Wachovia and other broker dealers as equivalent to money market securities. The $330 billion ARS market collapsed in February 2008, leaving investors unable to access their money.

Other banks, including Morgan Stanley, JPMorgan Chase & Co., Citigroup Inc. and UBS AG, have also reached settlements with the regulator.

Citigroup was the first bank to take a deal, agreeing Aug. 7 to buy back $19.5 billion of the securities from customers and pay a $100 million fine. The following day, UBS agreed to buy back $18.6 billion in ARS and pay a $150 million civil penalty.

Morgan Stanley and JPMorgan also agreed to a deal to buy back a combined $7 billion in ARS.

The SEC said Thursday it would decided whether to seek a financial penalty against Wachovia “after Wachovia has completed its obligations under the settlement agreement.”

The commission's investigation into the ARS market is ongoing.

February 3, 2009

Auction-rate securities a year later:
still more questions than answers
by Stefan Maisnier, Medil Reports, Chicago
Medil Reports is written and produced by graduate journalism students at Northwestern University’s Medill school.

Houlihan Smith and Company Inc. Survey of third-quarter SEC filings by 161 public companies with ARS exposure.

It has been a year since the auction-rate securities (ARS) market froze, and while the assets have not become worthless, there remains no comprehensive solution to what is a gigantic liquidity problem.

Approximately 145,000 individual investors were hit, according to America’s Watchdog, a national advocacy group for consumer protection. An untold number of institutional entities were also left with large sums of suddenly illiquid assets, and equally victimized were the cities, states and other non-profit issuers that since the freeze have had to redeem much of their issued ARS at par and simultaneously lost a major market for their bonds.

Auction-rate securities are long-term variable rate bonds tied to short-term interest rates that are reset through auctions held at predetermined intervals, usually 7, 28 or 35 days.

In Illinois, two of the largest institutional players in the ARS market were Nuveen Investments LLC and the Illinois Student Assistance Commission.

When asked if the state had invested in or issued any ARS, Illinois Treasury spokesman Scott Burnham breathed a sigh of relief and said “thankfully, no.” Chicago was not in the market either, according to the City Treasurer’s Office.

All told though, $330 billion was tied up in ARS at the time the market seized last February due to a lack of buyers.

“With banks like Citi and Bank of America going down the tubes no one cares about auction-rate securities,” America’s Watchdog President M. Thomas Martin said. “Madoff is horrendous but that was $50 billion, this is $330 billion. We still think this is the worst case of fraud in U.S. history.”

Three types of ARS were issued: student loan, tax-exempt municipal and toxic/structured, according to Houlihan Smith & Company Inc. ARS specialist Karl D’Cunha.

The most damaging were the toxic ARS made up of credit default swaps, mortgage-backed securities and other dubious instruments which “never should have been an auction-rate security,” D’Cunha said.

There was no benefit to taking on the more risky investment of the toxic ARS, but “pretty creative guys” at investment banks decided to use ARS as a way to unload excess inventory of bad debt, according to D’Cunha.

The whole ARS market should have failed a lot sooner than February 2008, D’Cunha said, for the toxic ARS market froze the previous summer, but as trading in the market decreased it was being propped up by internal bank activity,

“ARS as it has been structured will never be issued again,” D’Cunha declared, stressing a need for transparency and a put that would guarantee a percentage of investor liquidity, but he added that even those safeguards might not garner enough activity in the market.

Individual or retail victims have been the most publicized since the market seized. New York State Attorney General Andrew Cuomo and Massachusetts Secretary of State William Galvin have led the negotiating effort to get banks to issue at-par redemptions to individuals unable to get money back out of auction-rate securities.

In light of the scrutiny, many banks, municipalities and other issuers have offered voluntary redemptions to avoid scrutiny or the possibility of punitive fines from the government. Several institutions have had to pay fines in connection with their involvement in the ARS market failure.

According to estimates from America’s Watchdog, somewhere between $60 billion and 65 billion of approximately $80 billion in retail investor money has been redeemed, thanks to the efforts of Cuomo, Galvin and other officials to negotiate settlements with brokers like UBS AG, Bank of America Corp. and Citigroup Inc.

It’s difficult to account for exactly how much is stuck in the ARS market, due to a lack of transparency, Martin said. “There’s no accurate numbers on this stuff.”

Institutional investors including banks, mutual funds and others have also been saddled with suddenly illiquid assets. There has been less disclosure from them as many are reticent to come forward, partly due to the fact they’re trying to figure out how to value the still-frozen assets.

According to a survey of 161 public companies following their reports for the quarter ended Sept. 30 by Houlihan Smith, there has been little consistency in how companies have dealt with their ARS investments.

The survey found that 20 percent of the companies marked ARS at par, 45 percent recorded a temporary write-down, 31 percent recorded other-than-temporary write-downs, and 4 percent recorded both temporary and other-than-temporary write-downs.

It is something that has to be analyzed case-by-case, said D’Cunha, largely dependent on what a company’s overall position is.

ARS issuers have also been hit hard by the collapse and now face dealing with buyers who want to get their money out of suddenly illiquid assets that were said to have been as liquid as cash.

Chicago-based Nuveen Investments LLC, a subsidiary of Madison Dearborn Partners, was a big issuer of what it called auction-rate preferred securities (ARPS) prior to the market collapse and has been working to redeem the securities in the months following.

According to Nuveen’s most current data, as of Jan. 29 a total of $5.3 billion in ARPS has been redeemed or defeased, but that’s only about 35 percent of the more than $11 billion in ARPS that Nuveen initially issued. Nuveen plans to redeem all ARPS as soon as possible, according to spokesperson Kristyna Sujata, but cannot estimate when full redemption may occur.

Nuveen has been sued by individual investors, but has not been subject to the same sort of scrutiny by the State of Illinois that investment firms in New York were.

“We were really surprised Illinois wasn’t all over this,” Martin said.

The Illinois Student Assistance Commission had $3.7 billion of its ARS outstanding at the height of its involvement in the market. The commission redeemed $2.8 billion in 2007 before the freeze as part of a portfolio reorganization after realizing that 70 percent of its portfolio was in non-Illinois paper, according to ISAC spokesman Paul Palian.

Currently ISAC has $884 million in outstanding ARS issued, and is continuing to pay on the bonds.

“We’re in a lucky position with our rates being around 2 percent right now,” Palian said. “It’s very affordable.”

The bigger concern for ISAC is the loss of a robust bond market, and having to find other sources of credit. In September ISAC issued $100 million in securities to non-traditional lenders including eight Illinois credit unions.

“As we look to expand and meet the borrowing needs left by the exit of many less committed lenders, we are logically turning to our own local financial institutions to partner with us in meeting the needs of Illinois students,” ISAC Executive Director Andrew Davis said in a statement.

Municipalities have been hit hard too, including treasuries in other states that weren’t as pragmatic, or as lucky, as Illinois in avoiding the ARS market.

California issued $500 million in ARS and following the collapse converted $400 million to commercial paper.

The state is trying to auction off the last $100 million of ARS still, and as recently as Jan. 28 had attempted a reset, in an auction brokered by JPMorgan Chase & Co., California treasury spokesman Tom Dresslar said. The auction failed.

California will revisit the issue of what to do with the $100 million of ARS when the state adopts a budget, Dresslar said.

With ARS having been marketed as liquid but now illiquid for a year, the only positive is that most municipal and student-loan ARS issuers are still paying on their obligations.

The concern is what happens if the payments stop, according to D’Cunha. “If more (issuers) were to default, this $300 billion would be written down to $100 billion faster than you could say A-R-S.”

January 4, 2009

Legal status and wimps

by Harry Newton

Billions of dollars of auction rate preferreds still have not been redeemed. (See next article) It is obvious that some issuers like PIMCO, hope that redemption and its legal and moral problems will simply fade, the publicity will die down, the attorney generals will find something else to do... and the poor ARPS owners will forget they own them, or reconcile themselves to owning them for the rest of their lives, and longer.

I had a phone call today from an owner of PIMCO ARPS. He asked me what he should do, since PIMCO was stonewalling him. I asked him what he had done? The answer in two words, "Very little." I asked had he gone after the broker personally who had sold him the ARPS. He said, "NO." I asked why not? He said the guy had some "medical problems." I suggested that he'd better go after him before the "medical problems" become terminal.

In short, for those of you who've exhausted every avenue, know that the one remaining is to go after your brokerpersonally. Nothing motivates a broker faster than the possibility of a client besmirching his reputation by asserting fraud.

But -- wait -- there is "good" news. The price of many muni bonds has fallen as investors have become leery of their safety. This has messed up the mandated asset backing of ARPS. Here's a recent article posted on BestCashCow.com which explains all.

Pimco Municipal Income Fund Delays Dividend; In Irony Auction Rate Preferred Shares to Blame

Article Submitted by: Sam Cass

As we close 2008, one of the biggest stories of the year, the auction rate security meltdown, comes full circle. Pimco, a company roundly criticized for not redeeming investor money locked in illiquid auction rate securities, has now delayed the divided payments from these funds because it continued to hold auction rate security cash, against the wishes of many investors. Talk about irony. Investors have now been screwed on both sides of the investment. But there might be a silver lining for long suffering auction rate security holders.

While Bloomberg reported on the delayed dividends it didn't discuss the auction rate security side to it::

"Proceeds from the Pimco Municipal Income Fund and the Pimco New York Municipal Income Fund II were due today and on Feb. 2, Newport Beach, California-based Pimco said in a statement.

“The funds intend to resume paying and declaring dividends as soon as possible,” the company said. Pimco said continuing problems in the capital market caused the values of the funds’ portfolios to decline and led to the decision.

Auction-rate preferred shares, with which the funds borrowed money to boost returns, must be backed by underlying assets worth at least 200 percent, the company said. When that threshold was missed, dividends couldn’t be paid.

The funds may redeem some of the auction-rate shares so dividends may resume, Pimco said. Shares in the funds are sold to investors and are exchange traded."

For those that haven't followed this whole saga, this is how the double-screwing works:

Investors put money into Pimco auction rate security funds. Auction rate securities at one time were short term bond funds whose values were reset periodically via a Dutch auction. For the bond issuer they presented an opportunity to raise cash at lower rates, since the money was more liquid than a typical 20 or 30 year bond. For the holder, they were a way of generating a safe, liquid, and insured return that was generally higher than a CD or money market account.

Early this year as the credit crisis picked up steam, the auctions for auction rate securities began to fail and investors were often unable to cash out their money. Investors in municipal auction rate securities were often able to get out because their bonds held provisions significantly increasing the interest rate in the event of a failed auction. If you owned an auction rate security from a municipality, a hospital, a university, etc. and you couldn't redeem it at auction, the rate you would receive would spike considerably. At that point, the issuing entity had an incentive to redeem the bond since they didn't want to pay such an exorbitant amount of interest.

But investment companies like Pimco issued auction rate preferred shares to help leverage their close ended bond funds. Funds like Pimco Municipal Income Fund and the Pimco New York Municipal Income Fund II. These auction rate preferred shares did not have the same reset provisions as the municipal auction rate securities. In most cases, they reset to slightly above the Fed Funds rate or some other benchmark. The investment companies had no incentive to cash out their customers and make them liquid and as a result many have been trapped in these investments since last February. It's important to note that the funds have not lost principle or interest but investors who thought they were investing in a cash equivalent, liquid investment have not been able to withdraw their money. Pimco in particular has been singled out for not cashing out investors.

Now, it turns out that the auction rate security money that Pimco has kept against many investors wishes has forced it to suspend paying dividends. The credit crisis drove down the value of the assets in Pimco funds. The covenants around the auction rate preferreds require that they be backed by at least 2x the amount of underlying assets. Because the assets have shrunk in value, Pimco has to suspend dividends to rebuilt its assets and keep it at this ratio.

So, auction rate security holders can't get their money out, and bondholders can't get their dividends. Screwed on both ends.

The only bright side to this is that the drop in asset values may finally force Pimco to redeem some of its auction rate preferred shareholders to lower the assets needed to maintain the 2x ration. In order to start paying dividends again, the company told Bloomberg it will begin to cash them out.

Auction Rate Securities: $200 billion unfrozen, $135 billion to go

by Peter Cohan

Although it's still a far bigger scam than Bernie Madoff's $50 billion Ponzi scheme, it has gotten a relatively tiny amount of attention. I don't know why but I suspect it's because the victims of the $330 billion Auction Rate Securities (ARS) swindle -- in which money invested in supposedly cash-like investments in government bonds whose rates reset in weekly auctions -- are not bold-faced names like Kevin Bacon and Steven Spielberg.

Nevertheless, when the ARS scandal broke in February 2008, those investors found that their supposedly safe savings were frozen when the auctions to reset those rates stopped happening. My original post now has 7,343 comments from people who have been trying to get their money back. The good news is that some $200 billion worth of those securities have been unfrozen thanks to Massachusetts and New York officials, Bill Galvin and Andrew Cuomo, respectively, who fought on investors' behalf.

Nevertheless, there remain about $135 billion worth of these ARS that remain frozen. There are many individuals whose funds remain frozen with limited prospects of recovery. And there are companies and non-profits whose funds are still frozen as well. These include Vicor (NASDAQ: VICR) with $38 million of its funds tied up until 2010 at the earliest; Tufts Health Care has $30 million, which has half its cash tied up and no prospects for recovering it; and Five Star Quality Care (AMEX: FVE), with $75 million tied up in ARS and just just $39 million in cash.

Regulators and issuers must thaw out the $135 billion in frozen ARSs to relieve the victims of the endless stress of not getting their cash. Unfortunately, once this matter is settled, those victims are highly unlikely ever to regain their trust in the financial services industry.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Friday December 19, 2008

Lack of SEC oversight and enforcement at the center of too many messes

From BusinessWeek's Aaron Pressman

Once again, the Securities and Exchange Commission is apologizing for failing to do its job. This time it’s the agency admitting that it had credible allegations of wrongdoing at Bernie Madoff’s firm starting in the 1990s and continuing for years and years that were never properly investigated. Now, $50 billion of alleged losses later, it’s way too late for apologies.

If you stop and think about it, the SEC failed to do its job at almost every level of the current mess we’re in. Who allowed Wall Street firms to increase their leverage to 30 and 40 times their capital and endanger the entire financial system? Why, the SEC. And who was supposed to be regulating the rating agencies and policing them for conflicts of interest as they signed off on trillions of dollars of toxic mortgage-backed securities? Again, the SEC. When it turned out that Wall Street had rigged the entire $300 billion auction rate securities market, who was then regulator that investigated but did virtually nothing until after it was too late? Right again, the SEC. And when Bear Stearns was running a couple of over-leveraged, mislabeled, highly-risky hedge funds, which regulator’s inspector general said it had failed to act in time? Yep, the SEC. Finally, which agency had an inside view of the risk management procedures at all the big firms but never asked any tough questions? Right again, SEC.

It’s true — there are plenty of other actors here who screwed up, including but not limited to banking regulators, Congress, various White House crews, nefarious mortgage brokers and on and on. But the SEC was in a position to stop almost all of the bad stuff that’s happened and failed to stop any of it.

Perhaps the whole mess is best summed up by this simple Twitter message from publisher Rex Hammock: Headline you won’t see: ‘SEC Chairman admits his staff was too busy busting Martha Stewart to investigate Madoff’

Thursday December 18, 2008

I'm back.
by Harry Newton

I have all my $4.5 million back but many of you don't. The good news is that there is ongoing effort by some attorney-generals. And more and more ARPS are being redeemed. But the action has become a little desultory. Auction Rate Securities have dropped off the media's radar screen.

So the question is what now?

It may be time for legal action.

I need your input. Email me where you stand.

I also need to do a little more mulling.

And the irony of all this? ARPS have been my best investment in 2008. Bar none. The best. Thank you Todd and Rick.

Sunday November 2, 2008

My Personal nightmare is over, but yours may not be (update 1)
by Harry Newton

I am 100% out, at par. I no longer own any ARPS. They were all Nuveens. Nuveen got me out of some. Deutsche Bank got me out me of the rest. Thank you Andrew Cuomo, New York Attorney-General.

Not everyone else is out. I figure about $100 billion of the original $360 billion that was locked in ARPS are still locked, with some people facing a pretty bleak future. For those people I offer this advice:

1. You need to find each other and band together. Contact FINRA. (See story below.)

2. You need to do massive Attorney-General lobbying to get them involved.

3. You need to threaten to individually sue the broker / financial advisor who sold your your ARPS.

4. If you haven't the stomach for all this, you can try selling your ARPS on the secondary market. You won't get 100% of your money back. But it may be preferable to the ongoing aggravation and sleepless nights.

Here are some general investing lessons I have learned:

1. Never trust no one. Or, don't trust anyone. That includes brokers and financial advisers. Do your own due diligence. If you smell anything, stay out. Remember the old adage, "When in doubt, stay out."

2. Don't chase yield. Cash may not pay anything -- but it certainly does preserve your capital. Most people got into ARPS because they were chasing yield and their brokers were chasing a small commission.

3. We do occasionally get something for our taxes. Attorney-General Andrew Cuomo of New York and Massachusetts Secretary of State William Galvin did sterling work for us. I wish some of the other AGs took their jobs more seriously, e.g. California.

4. Wall Street's advertising says it cares about its clients long-term. The advertising and the sales pitches are unmitigated horseshit. What Wall Street cares about is making a commission or a fee and then going onto the next thing. Wall Street has no interest in insuring that what it sold you works out for you -- long-term or short-term. Wall Street is a product machine -- pure and simple. It makes things to sell to you. Some times they work. Some times they don't -- e.g. auction rate preferreds securities. They don't care. End of this story.

5. You are your own worst enemy. It's an old aphorism that has never been so true. As I wrote this site, I met people who put their entire life savings into ARPS, thus violating the fundamental rule of diversification, etc. Today the world is moving so fast -- look at the last few months -- that you can't predict. So to put all or most of your money into one thing -- no matter how persuasive the arguments -- is not the wisest idea. In fact, it's plain stupid.

There is no free lunch.

October 23

FINRA Announces Agreements in Principle with Three Additional Firms to Settle Auction Rate Securities Violations
Agreements Include Offers to Repurchase Over $60 Million of ARS Holdings at Par

Last update: 12:30 p.m. EDT Oct. 23, 2008
WASHINGTON, Oct 23, 2008 (BUSINESS WIRE) -- The Financial Industry Regulatory Authority (FINRA) announced today that it has reached agreements in principle with City National Securities (CNS) of Beverly Hills, CA, BNY Mellon Capital Markets, LLC of New York and Harris Investor Services, Inc. of Chicago, to settle charges relating to the sale of Auction Rate Securities (ARS). Each of the principle agreements is subject to being formalized in an approved settlement document called a Letter of Acceptance, Waiver and Consent (AWC).

Last month, FINRA announced similar agreements in principle with five firms. Investigations continue at a number of additional firms.

In the actions announced today, CNS, BNY Mellon and Harris have agreed to offer to repurchase at par ARS that were purchased by individual investors and some institutions between May 31, 2006, and Feb. 28, 2008. A total of more than $60 million of ARS are eligible for repurchase. The firms have also agreed to make whole individual investors who sold ARS below par after Feb. 28, 2008. CNS will pay a fine of $315,000, while BNY Mellon will pay a fine of $250,000 and Harris is being fined $150,000.

The firms also agreed to the appointment of an independent, non-industry arbitrator to resolve investor claims for any consequential damages -- that is, damages they may have suffered from their inability to access funds invested in ARS. "In all of our Auction Rate Securities investigations and settlements, FINRA's primary goal continues to be the restoration of investors' access to the millions of dollars they invested in ARS," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement.

In addition to individual investors, those eligible for ARS repurchase and/or payments for ARS sold below par include non-profit charitable organizations and religious corporations or entities. Trusts, corporate trusts, corporations, pension plans, educational institutions, incorporated non-profit organizations, limited liability companies, limited partnerships, non-public companies, partnerships, personal holding companies and unincorporated associations that made individual ARS purchases and whose account value did not exceed $10 million will also be eligible.

Each firm has agreed to provide notice to its eligible customers promptly. Repurchases must begin no later than 30 days after the settlement is approved and must be completed no later than 60 days after settlement approval. Beginning six months after settlement approval, each firm has also agreed to make its best efforts to provide liquidity to all other investors who purchased during the same time period but who were not eligible for the initial repurchase. Those best efforts may include offers to repurchase ARS and/or offers of low- or no-interest loans.

FINRA's investigation has found evidence that each firm sold ARS using advertising, marketing materials or other internal communications with its sales force that were not fair and balanced and therefore did not provide a sound basis for investors to evaluate the benefits and risks of purchasing ARS. FINRA's investigation also found evidence that each firm failed to establish and maintain a supervisory system reasonably designed to achieve compliance with the securities laws and FINRA rules with respect to the marketing and sale of ARS.

In the forthcoming formal settlement documents, the firms will neither admit nor deny the charges, but will consent to the entry of FINRA's findings.

Earlier this year, FINRA released guidance for investors caught in the auction failures in the Investor Alert Auction Rate Securities: What Happens When Auctions Fail.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2007, members of the public used this service to conduct 6.7 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheckor by calling (800) 289-9999.

FINRA is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business -- from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.

Friday October 24

Auction-Rate Victims 'Fit to Be Tied' as Accords Ebb (Update1)

By Michael McDonald and Darrell Preston

Oct. 24 (Bloomberg) -- Settlements between regulators and banks over the improper sale of auction-rate securities have slowed to a trickle, raising concern among investors holding $135 billion of the debt that they will be left out.

Ed Dowling, a 53-year-old clothing manufacturer from Huntington, New York, bought $2.6 million of the securities from Oppenheimer & Co. on the belief that the investments were as safe as money-market funds and easy to buy and sell.

He's been stuck with most of the debt since the $330 billion auction-rate market collapsed in February, sparking a series of regulatory probes into how brokerages marketed the long-term securities. State and federal regulators including New York state

Attorney General Andrew Cuomo vowed to pursue dozens of brokerages in August after they forced eight Wall Street banks, including Citigroup Inc. and UBS AG, to agree to buy back about $45 billion of auction-rate securities. Since the initial flurry, 12 mostly smaller firms have agreed to redeem $8 billion in debt. "It's great that they got money back for those investors," said Dowling, who was planning to use the money to build a new house in Huntington, on Long Island.

"A large portion of the problem hasn't been resolved, the portion I'm involved with." States, student-loan agencies and closed-end mutual funds sold the securities, locking in short-term rates on obligations due in 20 years or more. The long-term bonds had interest rates set at weekly or monthly auctions run by New York-based Citigroup, UBS in Zurich and the other large underwriters.

Municipal auction-rate securities yielded three-quarters of a percentage point less, on average, than long-term, fixed-rate bonds in 2007, according to industry indexes. The yields were a quarter of a percentage point or more above conventional money- market funds, indexes show.

The market unraveled in February. Dealers who supported auctions for two decades with their own money suddenly pulled back to preserve capital amid the mortgage slump that led to $662 billion of credit losses and writedowns worldwide. That left investors unable to sell securities that were pitched as cash equivalents and borrowers paying penalty interest rates as high as 20 percent after auctions failed to find enough buyers.

To escape the high rates, borrowers refinanced or offered to buy back at least $142 billion of the securities, according to data compiled by Bloomberg News. Regulators forced brokerages to agree to redeem another $53 billion, leaving individuals and institutional investors stuck with about $135 billion.

Corporations owned $41 billion of auction-rate debt at the end of September, according to a survey by Chicago-based Treasury Strategies Inc. These large institutional investors were excluded from the buybacks required in the settlements.

Getting large Wall Street underwriters to buy back securities was easier because they managed the auctions and created the products, said Massachusetts Secretary of State William Galvin, who led probes into UBS and Merrill Lynch & Co. of New York.

Investigations into brokerages that essentially resold the bonds will take longer, he said. "It's obvious that we haven't had anything to announce recently," Galvin said. "It's a more complicated fact pattern. It's more complicated, but it's not impossible."

New York's Cuomo, who announced almost all the settlements with the large Wall Street banks over three weeks in August, said at the time his office had subpoenaed about 25 firms, including Oppenheimer's parent, Toronto-based Oppenheimer Holdings Inc., TD Ameritrade Holding Corp. and Charles Schwab Corp. "We're working our way down the list," he said on Aug. 15.

TD Ameritrade, based in Omaha, Nebraska, continues "to cooperate with regulators and other industry officials regarding their inquiries related to this issue," spokeswoman Kim Hillyer said. Greg Gable, a spokesman for Charles Schwab in San Francisco, declined to comment.

Cuomo also said in August he was investigating individuals at the firms that sold the securities. Alex Detrick, a spokesman for the New York state regulator, declined to comment on the status of the probes.

In the two months since the first auction-rate settlements, Cuomo has opened investigations into financial markets amid the global credit crisis that led to the collapse of Lehman Brothers Holdings Inc. on Sept. 15. He's probing short-selling of financial-company shares, the market for credit-default swaps and spending at New York-based insurer American International Group Inc., which received an $85 billion federal bailout.

Short sellers attempt to profit by selling borrowed securities and repurchasing them later at a lower price and returning them to the holder.

Massachusetts still has people committed to auction-rate probes, Galvin said. Rex Staples, the general counsel of the North American Securities Administrators Association in Washington, said states are still coordinating investigations, an effort that began earlier this year.

"We still have a task force constituted, and there are still ongoing investigations," Staples said.

The effort to force regional brokerages to buy back securities stalled because firms are under pressure to preserve capital after Lehman's fall prompted a meltdown in credit markets, said Mike Nicholas, co-chief executive of the Regional Bond Dealers Association in Alexandria, Virginia.

The group estimates regional dealers resold $60 billion of the debt. Interest on some of Dowling's holdings soared as high as 12.5 percent two weeks ago, as average yields on municipal auction-rate debt surpassed the records reached when the market imploded in February. For him, that's cold comfort.

"Listen, it's my money, it was sold to me as liquid cash," said Dowling, who has $2 million of the securities left after $600,000 was refinanced. "What it's paying is totally irrelevant." Brian Maddox, an outside spokesman for Oppenheimer with Financial Dynamics in New York, said the firm continues "to explore all options available" for its customers.

Greg McNelley, a 56-year-old investor from San Juan Capistrano, California, remains stuck with $350,000 of student-loan auction-rate securities he bought from San Francisco-based Wells Fargo & Co., which hasn't agreed to buy back auction-rate securities.

"I am just fit to be tied," said McNelley, who retired from his job at a health-maintenance organization. "I was counting on this money to supplement my income." Wells Fargo is working "closely with our clients to address their liquidity needs" by offering holders loans, spokeswoman Kathleen Golden said.

The Financial Industry Regulatory Authority announced yesterday that a Bank of New York Mellon Corp. unit and two brokerages in California and Illinois will buy back more than $60 million of the securities. Finra, a self-regulatory agency based in Washington, revealed settlements with five firms on Sept. 18 and opened more than 50 additional investigations, and ``more are expected."

The regulator has questioned more than 200 companies and conducted sweeps of firms distributing the bonds, it said. Nancy Condon, a spokeswoman, declined to elaborate.

The U.S. Securities and Exchange Commission participated in the settlements with the large underwriters. "Distributing dealers that were not part of underwriting or managing the auctions didn't know any more about the market than the investors," said Nicholas of the Regional Bond Dealers Association.

Thursday October 23

FINRA Announces Agreements in Principle with Three Additional Firms to Settle Auction Rate Securities Violations
Agreements Include Offers to Repurchase Over $60 Million of ARS Holdings at Par

WASHINGTON, Oct 23, 2008 (BUSINESS WIRE) -- The Financial Industry Regulatory Authority (FINRA) announced today that it has reached agreements in principle with City National Securities (CNS) of Beverly Hills, CA, BNY Mellon Capital Markets, LLC of New York and Harris Investor Services, Inc. of Chicago, to settle charges relating to the sale of Auction Rate Securities (ARS). Each of the principle agreements is subject to being formalized in an approved settlement document called a Letter of Acceptance, Waiver and Consent (AWC).

Last month, FINRA announced similar agreements in principle with five firms. Investigations continue at a number of additional firms.

In the actions announced today, CNS, BNY Mellon and Harris have agreed to offer to repurchase at par ARS that were purchased by individual investors and some institutions between May 31, 2006, and Feb. 28, 2008. A total of more than $60 million of ARS are eligible for repurchase. The firms have also agreed to make whole individual investors who sold ARS below par after Feb. 28, 2008. CNS will pay a fine of $315,000, while BNY Mellon will pay a fine of $250,000 and Harris is being fined $150,000.

The firms also agreed to the appointment of an independent, non-industry arbitrator to resolve investor claims for any consequential damages -- that is, damages they may have suffered from their inability to access funds invested in ARS. "In all of our Auction Rate Securities investigations and settlements, FINRA's primary goal continues to be the restoration of investors' access to the millions of dollars they invested in ARS," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement.

In addition to individual investors, those eligible for ARS repurchase and/or payments for ARS sold below par include non-profit charitable organizations and religious corporations or entities. Trusts, corporate trusts, corporations, pension plans, educational institutions, incorporated non-profit organizations, limited liability companies, limited partnerships, non-public companies, partnerships, personal holding companies and unincorporated associations that made individual ARS purchases and whose account value did not exceed $10 million will also be eligible.

Each firm has agreed to provide notice to its eligible customers promptly. Repurchases must begin no later than 30 days after the settlement is approved and must be completed no later than 60 days after settlement approval. Beginning six months after settlement approval, each firm has also agreed to make its best efforts to provide liquidity to all other investors who purchased during the same time period but who were not eligible for the initial repurchase. Those best efforts may include offers to repurchase ARS and/or offers of low- or no-interest loans.

FINRA's investigation has found evidence that each firm sold ARS using advertising, marketing materials or other internal communications with its sales force that were not fair and balanced and therefore did not provide a sound basis for investors to evaluate the benefits and risks of purchasing ARS. FINRA's investigation also found evidence that each firm failed to establish and maintain a supervisory system reasonably designed to achieve compliance with the securities laws and FINRA rules with respect to the marketing and sale of ARS.

In the forthcoming formal settlement documents, the firms will neither admit nor deny the charges, but will consent to the entry of FINRA's findings.

Earlier this year, FINRA released guidance for investors caught in the auction failures in the Investor Alert Auction Rate Securities: What Happens When Auctions Fail.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2007, members of the public used this service to conduct 6.7 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.

FINRA is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business -- from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.

For more information, please visit our Web site at www.finra.org.

SOURCE: Financial Industry Regulatory Authority (FINRA)

++++++++

Friday, October 17, 2008

A Short Update (update 3)
by Harry Newton

I'm still around.

More and more issuers are announcing buy-backs. This is good news. According to Andrew Cuomo's office, Bank of America will return over $4.5 billion and the Royal Bank of Canada will return over $850 million. There has been a total of about $51 billion to be returned in combined settlements to date, according to Cuomo's office.

More good news is that the financial crisis has caused many non-taxable auction rate preferreds to pay much higher interest rates. My Nuveens have hit 11+%. They reset every day, however.

If you haven't been redeemed at 100% at par, please send me an email with your particulars, including what you've done to make a noise.

Andrew Cuomo's office continues to do great work. If you have issues, contact his office.

You might want to read the Tutorial on Martin Act.

If you're not being redeemed and you're getting completely stonewalled, the only "solution" is to sue your individual advisor personally.

Meanwhile UBS is offering its ARPS owners a complex deal. From reader, Michael A. Rogawski:

Subject: UBS Rights Offering

Have you seen the rights offering from UBS? They are providing rights that allow you to sell your ARS to them for par until 1/4/2011. However, if you take the rights, they then have a call and can take them from you at any time (for par). This means that you lose out on the nice fat yield. I am happy sitting tight for the moment as long as they backstop me on the downside.

I think that they will force my hand because if I don't take the rights, I may get stuck permanently with my tax-free ARS as it isn't clear that a market will develop. Of course, with the current yields they are paying, the ARS may actually be worth a premium.

I worry that the underlying bond fund is getting cheaper every day and so there could be some credit risk.

Michael,
I haven't read the huge UBS document. From what I gather, it's long and complex. My feelings are simple: Don't be a yield hog. Pigs get slaughtered. Take the cash. Stick it somewhere safe (e.g. treasuries and solid muni bonds) and live in peace. One day the stockmarket may even look interesting. Buffett thinks it's already interesting.

I also write a daily column, InSearchOfThePerfectInvestment.com. You are all welcome to visit.

September 25, 2008

The Devil is in the details
by Harry Newton

Many brokerage firms have announced deals to redeem the ARPS they foisted on their hapless customers. Many of these "deals" are not finalized. The headlines look great. But a lot of ARPS holders are being screwed. You need to check where your deal sits and scream (to the appropriate regulator) if you smell your case may fall through the cracks.

Here are some of the ways you may never see all your money:

+ Partial redemptions. They say they're redeeming all the ARPS they sold. But somehow they're not redeeming ARPS they sold to companies. Or maybe they're not giving you all your money. Maybe they have a cutoff of a million dollars?

+ Timing. Some brokerage firms are stretching their redemptions out over years and years. God forbid, you should die in the meantime. Who'll pay Uncle Sam your death tax?

+ Various custody issues. UBS sold you your ARPS, but you moved your account to Merrill Lynch. Who will give you your money back? Anyone?

+ You sold at a loss – e.g. on the secondary market. Who -- if anybody is going to make up your loss? Some will. Some won't. Nothing is clear.

Here's my latest thinking. For many of you with "issues" now might be just the perfect time to sell your ARPS on the secondary market. Interest rates are up. Most ARPS are safe and paying reliably and well. Take the loss. Save yourself further aggravation. Some of this stuff could drag on for years. Get on with your life. Read Daisy's excellent article:

Nonprofit Left Out In Auction-Rate Deal
By Daisy Maxey, DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The American Council on Science and Health, a nonprofit education consortium, says it's been left out in the cold in UBS Financial Services Inc.'s settlement with regulators on sales of auction-rate securities.

UBS Financial Services, a division of UBS AG (UBS), won't buy back the now illiquid $250,000 in auction-rate shares the council bought through a UBS advisor because they weren't custodied with UBS when the market froze, said Jeff Stier, associate director at the council, which seeks to foster education on issues ranging from food and nutrition to chemicals and the environment. And Fidelity Investments, at which the shares were custodied when the market froze, said it won't buy the securities because it didn't sell them in the first place, he said.

"That's where we fall through the cracks," said Stier. "The attorney general is dealing with this on a one-on-one basis with different firms and putting together a patchwork of agreements. There are different agreements with different terms with different banks, so there are gaps - and we're falling through the gaps."

UBS declined to comment on the council's situation specifically, but said, "Our settlement in principle was announced on Aug. 8, and we continue working toward implementation."

Other investors are likely to fall through the cracks of the high-profile agreements the Securities and Exchange Commission and state regulators have reached with sellers of auction-rate securities. The auctions at which the securities were sold locked up in February when the banks that supported them for years stopped buying due to credit concerns, leaving many investors stranded in illiquid holdings.

"The devil is in the details," said Harry Newton, a retired publisher who had $4.5 million invested in auction-rate shares when the market froze and still has $3.2 million in the securities.

Newton, whose Web site at www.auctionratepreferreds.org has become a hub of information on the ARS crisis, said he's been inundated by emails from investors who are concerned they won't be covered by settlements because they moved their accounts from one custodian to another or because they sold at a loss on the secondary market.

While many of the agreements that have been made with regulators will ensure that investors who sold at a loss on a secondary market are made whole, many ignore the custody issue. The SEC said it is aware of the issue with those whose accounts have changed custody, and is discussing it with UBS.

Some are also suggesting that the escalating financial crisis may jeopardize some of the settlements or voluntary buyback agreements.

In testimony before the House Committee on Financial Services earlier this month, Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said, "Over the last few months, a number of firms and banks have offered to buy back auction-rate securities at par value from customers including retail investors, charities and small- to mid-sized businesses. Many firms are facing capital limitations as a result of the continuing credit crunch. They have limited funding available to buy back outstanding auction-rate securities."

Barry Silbert, chief executive of SecondMarket Inc., formerly Restricted Stock Partners, which makes a secondary market for illiquid assets, said sales of auction-rate securities from retail customers fell off when settlements began to be announced. However, since Labor Day, his company has seen an increase in the number of institutional sellers, and over the past week, it has been fielding more calls from retail investors, he said.

That's partly because these sellers are realizing that the buybacks won't come as quickly as they had hoped, and partly because some realize they'll be made whole by the settlements eventually even if they do sell now on the secondary market, Silbert said. The economy is also a factor, he said. As a result of what's occurring in the capital markets and elsewhere, "in a number of cases, people need cash, so we're seeing more motivated sellers on the institutional side as well," he said.

As for the American Council on Science and Health, the New York-based education consortium, which has a budget of about $2 million, bought about $500,000 of different types of auction-rate securities several years ago through an advisor at UBS, Stier said. The shares were touted as liquid money-market alternatives that would be a good place to park the organization's six-month operating expenses, he said.

"We were never informed of the risk of this novel vehicle," Stier said.

Two years ago, the council, dissatisfied with its overall relationship with UBS, hired an independent advisor who custodied the brokerage account at Fidelity Investments. When that advisor informed the council of liquidity problems brewing in the ARS market early this year, it sold about half its shares. However, the remaining $250,000 - in shares of a student loan auction-rate bond, Iowa Student Loan Liquidity Corp. - remains stranded.

Stier and others at the nonprofit consortium were elated when they learned in August that UBS Securities LLC and UBS Financial Services had reached a settlement with the SEC, the North American Securities Administrators Association, New York Attorney General Andrew Cuomo and others to repurchase billions in auction-rate securities.

But their hopes were dashed when they were told that UBS had no plans to buy their shares because the securities had been custodied with Fidelity when the market locked up, Stier said. "That came as quite a shock."

The UBS settlement with regulators includes "reimbursements to all clients for losses incurred from sales of auction-rate securities holdings between Feb. 13 and Aug. 8, 2008."

The council's advisor then spoke with Fidelity, but was told that since Fidelity didn't sell the securities, it wouldn't buy them, Stier said. "Frankly, I don't blame Fidelity," he said.

Fidelity agreed earlier this month to buy at par illiquid auction-rate securities held by retail customers who purchased through Fidelity prior to Feb. 13, 2008. "The buyback offer does not extend to customers who bought the securities through other firms or advisors," a spokesman for Fidelity said.

Brian McNiff, a spokesman for Massachusetts Commonwealth Secretary William Galvin, said that, in all cases, his office worked to make the best deals it could to get "the most money back for the most people."

"When people call with these situations, we try to do the best we can for them," said McNiff. These settlements have different features, he said, "but until they were made, nobody was getting anything."

The office of Connecticut Attorney General Richard Blumenthal is aware that there are a variety of gaps in the agreements that have been reached thus far that need to be filled, a spokesman said.

"We're very familiar with the problem of auction-rate securities that were transferred to an investment advisor ... and, therefore, seem to be outside the agreement reached with UBS and others, and we're working on it," the spokesman said. The office is talking with other attorneys general and other state regulators, he said.

New York Attorney General Andrew Cuomo's office had no comment on the matter.

(Daisy Maxey is a Getting Personal columnist who writes about personal finance; she covers topics including hedge funds, annuities, closed-end funds and new trends in mutual funds. She can be reached at 201-938-4048 or by email at daisy.maxey@dowjones.com.)

September 22, 2008

Salle Krawcheck is an honest woman.
But she just got shafted by Citi.

From Fortune:

Sallie Krawcheck is leaving Citigroup. The exit of Krawcheck, chairman and CEO of the bank’s global wealth management unit, stems from disagreements with Citi CEO Vikram Pandit and a decision, made by him last week, to shrink her responsibilities inside the company.

Sources close to Krawcheck and Citi say that the tension revolves mainly around the amount of money that Citi owes clients who invested in hedge funds and auction-rate securities that turned out to be toxic investments.

Krawcheck argued in favor of Citi’s responsibility to pay clients back, in effect, for defective investments distributed by her brokers and bankers. Citi’s multi-billion-dollar auction-rate securities settlement, announced in August, caused a rift in her relationship with Pandit, who according to one source preferred to take a tougher line with clients.

The settlement requires Citi to return to individual investors, small businesses and charities all $7.5 billion that they invested in auction-rate securities via Citi.

Comerica must refund $1.46 billion in securities

By KATHERINE YUNG • Detroit FREE PRESS • September 18, 2008

Michigan Attorney General Mike Cox announced this morning a $1.5-billion settlement with Comerica Bank over the sale of auction rate securities, the largest such agreement in the country by a seller of these investments.

Under the settlement, Comerica agreed to buy $1.46 billion worth of the securities back from more than 1,500 investors so they won’t lose any money. It will also pay the state a $10,000 civil penalty, the maximum under Michigan law, and provide $100,000 to the Michigan Investor Protection Trust Fund.

The bank, which last year moved its headquarters from Detroit to Dallas, has also agreed to pay a $750,000 fine to the Financial Industry Regulatory Authority.

The sale of auction rate securities has come under government scrutiny because investors were promised that these investments were just like cash. Instead, they haven’t been able to sell these securities because the market for them collapsed.

“The representations ended up not being truthful,” Cox said. “They couldn’t get their money out. It was frozen.”

Of the $1.46 billion in auction rate securities sold by Comerica Securities, nearly $1 billion were held by Michigan residents. Buyers of the securities ranged from retirees and nonprofit organizations to institutional investors.

Cox said his office hasn’t seen anything that would lead to criminal charges against Comerica, but “if something odd pops up, we will look at it.”

Comerica joins a growing list of other banks, such as Merrill Lynch and Goldman Sachs, that have agreed to buy back auction rate securities after pressure from state attorney generals. Comerica’s buyback runs through Dec. 19.

As a result of the settlement, Comerica said it expects to take a $75 million, or 50 cents per share, after-tax charge to its third-quarter earnings, which will be announced Oct. 17.

September 19, 2008

Congress' Financial Services Committee Holds Hearing On Auction Rate Securities Market Troubles

from N.A.S.F.A.

Broker-dealer firms that underwrote, marketed and sold auction-rate securities (ARS) misled investors by not disclosing the increasing risks associated with ARS and their reduced ability to support auctions, according to the testimony of Linda Thomsen, the director of the Securities and Exchange Commission's Division of Enforcement.

Thomsen testified Thursday at the House Financial Services Committee's hearing on problems and potential resolutions to the auction-rate securities market, which froze up in mid-February when investors stopped buying ARS - effectively drying up all the liquidity in the market. ARS had grown into a $330 billion market by early 2008. Until the ARS market froze in mid-February, auction failures were extremely rare and the market was highly liquid.

The current lack of liquidity in the ARS market and the Asset Backed Securities market combined with recent subsidy cuts has forced more than 130 Federal Family Education Loan Program (FFELP) loan providers to suspend or terminate a portion or all of their services. The freezing of the ARS market has hit nonprofit lenders especially hard because of their reliance on ARS to raise capital.

In her testimony before the committee, Tara E. Payne, vice president of Corporate Communications at the New Hampshire Higher Education Loan Corporation (NHHELCO), explained that thousands of students were forced to find a new, likely more expensive, student loan provider because funds NHHECLO would have used to make loans are frozen in the ARS market.

Payne testified that NHHELCO's once solid financial base had been significantly compromised by UBS Securities, LLC, NHHELCO's "long-standing, trusted" financial advisor and broker-dealer since 1997.

UBS actively encouraged NHHELCO to extend its commitment to student loan bonds, even when UBS knew that the market for these bonds was on the verge of collapse, according to Payne. UBS advised NHHELCO to reset the maximum rate on NHHELCO's taxable bonds to 17% to 18% to ensure liquidity and prevent auctions from failing.

"We know now that this was a 'scheme' to make the securities more attractive to investors and to keep NHHELCO in the Student Loan Auction Rate Securities market," Payne said.

Additionally, UBS would bid for bonds that went unsold to prevent auctions they ran from failing, but it was actively considering withdrawing its own holdings in the market. At the same time, it was advising NHHELCO to stay in the market. On February 13, 2008, UBS stopped supporting the ARS market and it collapsed, leaving NHHELCO and investors with billions of dollars frozen.

"UBS never disclosed to NHHELCO that the ARS market was at risk of freezing ... or that UBS was preparing to ends its support of the market," Payne said.

On August 14, 2008, the New Hampshire Bureau of Securities Regulation announced that is was taking action against UBS Securities, LLC for fraud and failing in its fiduciary and moral duty to NHHELCO. .

Fortunately, NHHELCO was able to raise $94 million from community lenders in order to continue making loans. Congress then passed the Ensuring Continued Access to Student Loans Act, which allows the Department of Education to provide liquidity to the market and enabled NHHELCO to continue making loans.

Payne and others testifying before the committee agreed that it is unlikely that the ARS market will recover in the near future, if ever. Payne urged lawmakers to extend ECASLA to ensure students and families will be able to finance higher education.

"In New Hampshire we know that 82 percent of borrowers in repayment believe that the opportunity to go to college would not have been possible without access to student loans," Payne said. "The credit crisis has threatened many families' ability to get a second mortgage or for students to qualify for private education loans without parents as co-signers. As a result, some low- and middle-income families may be running out of college funding options. We understand that some are turning to borrowing from 401k plans and putting tuition on credit cards."

James Preston, president and CEO of the Pennsylvania Higher Education Assistance Agency (PHEAA) also advocated for an extension of ECASLA, but noted that it was only a temporary fix and a longer-term solution is needed.

"Unless Congress and the Administration address the underlying causes of the current liquidity difficulties, there will continue to be instability in the student loan marketplace and participants will continue to cease supporting student loans," Preston said.

Preston and other nonprofit loan providers have been championing a plan to have the Treasury replicate its efforts to rescue Fannie Mae and Freddie Mac for student loan providers. Under this plan, the Treasury would stand in place of the global markets which are unable to supply sufficient capital to student lenders.

NHHELCO's experience is not unique.

Broker-dealer firms that underwrote, marketed and sold ARS used their sales forces, marketing materials, and account statements to misrepresent to their customers that ARS were safe, highly liquid investments that were equivalent to cash or money market funds, according to Thomsen.

"These firms failed to disclose the increasing risks associated with ARS, including their reduced ability to support the auctions," she said. "By engaging in this conduct, those firms violated the Federal securities laws, including the broker-dealer antifraud provisions."

Federal and state law enforcement and securities regulatory officials have helped tens of thousands of investors get billions of dollars of liquidity restored to them. Before the hearing, the Financial Industry Regulatory Authority announced it reached agreements with SunTrust Banks Inc. (STI), Comerica Inc. (CMA), Washington Mutual Inc. (WM) and First Southwest Co. to settle queries about how they marketed and sold auction-rate securities. Finra said the companies have agreed to repurchase auction-rate securities bought by individual investors, charities and small businesses with $10 million or less in their accounts between May 31, 2006, and Feb. 28, 2008. The companies didn't admit or deny wrongdoing.

The ARS market encountered significant problems during early 2008 for several reasons, according to Thomsen.

One factor was the significant increase in the size of the ARS market, which had grown to $330 billion by the time of the freeze. This larger market required the firms to find more and more customers to bid in the auctions.

An additional reason for the market seizure is the rating agencies' downgrades of the monoline insurers (e.g., Ambac Financial Group Inc, and MBIA Inc.), which provided insurance for many ARS to ensure that holders would receive repayment of their principal if the issuer defaulted. These downgrades resulted in the loss of customers willing to invest in ARS.

Another factor that contributed to the freeze is the sub-prime mortgage and credit crisis that unfolded throughout the second half of 2007, which limited the firms' ability to support the auctions with their own capital. In fact, firms stopped supporting the auctions in mid-February 2008, and the entire market froze in a matter of days. The securities became illiquid, leaving tens of thousands of customers unable to sell their ARS holdings.

A complete list of witnesses who testified, their testimony and a review of the problems and potential resolutions is available online.

September 18, 2008

Deutsche Bank does right by its clients.
Issues clarifying statement.

For the entire DB statement, click here.

September 17, 2008

Auction-Rate Securities Suit Against UBS Can Proceed
By AMIR EFRATI, Wall Street Journal

A lawsuit filed by an institutional investor that claims UBS AG lied about the safety of auction-rate securities it sold can move forward, a federal judge ruled on Wednesday.

Gary L. Sharpe, a U.S. district court judge in Albany, N.Y., denied UBS's motion to dismiss the case filed in June by Latham, N.Y.-based energy company Plug Power Inc.

A UBS spokesman said in a statement: "We are disappointed that this case wasn't dismissed today and we intend to vigorously defend ourselves in this action." He added that UBS has offered clients the ability to borrow up to 100% against their auction-rate holdings.

The case is being widely watched by institutional investors holding billions of dollars worth of auction-rate securities they can't easily sell. Such civil cases are the hope of institutional investors, who unlike small businesses and individuals were not the beneficiaries of agreements by numerous financial institutions to buy back many of the securities they sold. The agreements were part of settled fraud allegations brought by state securities regulators.

The auction-rate market, once as large as $330 billion, froze in February amid the credit crunch, as buyers for the securities disappeared. Auction-rate securities let issuers borrow for the long term, but at lower, short-term interest rates. The interest rates reset at periodic auctions, thus the name.

The case is proceeding despite a settlement between UBS and the New York attorney general's office and other regulators, in which the firm agreed to buy back $19 billion of securities from its clients. In the UBS settlement, securities held by institutional clients are expected to be bought back by 2010, but "we need the funds before 2010, and they're not providing us a [guarantee] that they will be able to pay us in 2010," says Greg Carpinello, a lawyer at Boies, Schiller & Flexner LLP, which is representing the plaintiff.

The UBS case is unusual because most of the legal action against financial firms by auction-rate investors has occurred through arbitration claims rather than complaints filed in court.

In its suit, Plug Power claims UBS assured Plug Power's chief financial officer that auction-rate securities backed by student loans were safe and liquid, despite spikes in their interest rates that suggested otherwise. The company had bought $62.9 million in auction-rate securities backed by pools of student loans starting in 2005, and the securities made up nearly half of its total investment portfolio, according to the complaint.

September 15, 2008

Fidelity does the right thing,
and steps up the plate.
Major kudos to Fidelity
by Harry Newton

Fidelity Investments has agreed to buy back $300 million in auction-rate securities after reaching agreements with New York and Massachusetts regulators. Fidelity is the first retail brokerage (i.e. non-issuer) to reach a settlement to redeem all the auction rate securities its brokers sold.

This is huge. Fidelity has done the right thing by its customers. If you're a Fidelity customer, you have to move quickly. Read this Fidelity letter.

Now it's time for every other brokerage firm to stand up and act as honorably as Fidelity.

September 13, 2008

Congressional ARPS Hearing begins this Thursday

Washington, D.C. The House Financial Services Committee chaired by Barney Frank (D-MA), will hold a hearing to review problems and potential resolutions to the auction rate securities market. Specifically, the hearing will examine the continuing crisis in the markets for auction rate bonds and auction rate preferred securities.

It starts: Thursday, September 18, 2008, 10:00 a.m., Room 2128, Rayburn House Office Building Full Committee. To see a webcast of the hearing, Click here.

Frank, Ranking Member Spencer Bachus and Capital Markets Subcommittee Chairman Paul E. Kanjorski announced the hearing on July 31. You can read their entire press release on their reasons for the hearing by clicking here.

September 12, 2008

Harry has not disappeared

I have not disappeared or been hit by a bus. I have had a little under half of my ARPS redeemed. So I still have a major stake (nearly $3 million) in following this business. I am following developments by the hour. There hasn't frankly been much to report. And few of you have emailed me with new stuff -- stories, complaints, bitches, questions, updated information. etc. So email me: .

September 4, 2008

Two Brokers Accused of Securities Fraud
By JENNY ANDERSON, New York Times

The broker said the securities were as safe as cash. After all, he claimed, the outfit that issued them, Glacier Education Loan, bought student loans guaranteed by the federal government.

The problem: there is no such thing as Glacier Education Loan.

Authorities say the broker, Eric Butler, sold customers some of the most toxic investments of the subprime age — collateralized debt obligations — in what federal prosecutors characterize as a $1 billion bait-and-switch.

On Wednesday, Mr. Butler and a former colleague, Julian Tzolov, were indicted on securities fraud and other charges, believed to be the first criminal charges stemming from the auction-rate securities debacle.

In a statement, the United States attorney’s office in Brooklyn said the pair, who formerly worked at Credit Suisse Securities, sold corporate clients securities backed by C.D.O.’s, subprime mortgages and mobile-home contracts but told the investors they were buying investments linked to safe student loans. The scheme was designed to reap high commissions, the authorities say.

If convicted, the men could face up to 65 years in prison. The Securities and Exchange Commission also filed civil charges against the two on Wednesday.

Paul T. Weinstein, a lawyer for Mr. Butler, said his client be- lieved in the triple-A securities he had sold to customers. “He believed he was doing the best for his clients, and they agreed, until the entire auction-rate securities market failed, which had nothing to do with him,” he said.

Mr. Tzolov has fled the country, people briefed on the case say, and is believed to be in Bulgaria. His lawyer, Kenneth M. Breen, declined to comment.

Auction-rate securities have proved to be a costly mistake for many investors and increasingly for the Wall Street banks that marketed them. The securities are preferred shares or debt instruments with interest rates that reset regularly, usually every week, in auctions overseen by the brokerages that originally sold them. They worked fairly well until this year, when the auctions began to fail in the credit crisis, sticking investors with securities they could not sell.

Regulators have been examining how brokers sold such securities and whether they fully disclosed the potential risks to buyers. Major Wall Street banks have agreed to buy back roughly $50 billion of the worrisome investments in an attempt to contain the legal fallout.

But complaints filed in connection with the Credit Suisse case, and a related action against the Swiss bank by ST Microelectronics, a semiconductor company, paint a classic picture of greed and glory on Wall Street.

At Credit Suisse, Mr. Butler, 36, and Mr. Tzolov, 35, helped corporate clients invest cash in safe, short-term investments like money market instruments. As is standard on Wall Street, the riskier the investment, the higher the brokerage commission.

Mr. Butler and Mr. Tzolov pitched clients auction-rate securities backed by “student loan issues, whose underlying loans are guaranteed by the U.S. Department of Education,” according to the S.E.C. complaint.

But while the two did buy some student loan securities as they had promised, they also bought far more dangerous investments without telling customers. Between February 2005 and August 2007, they purchased more than $1 billion of other types of auction-rate securities on behalf of clients who had not authorized them to do so.

To cover up their scheme, the complaints allege, the two brokers often changed the descriptions of the securities in e-mail messages with customers, replacing terms like “C.D.O.” with words like “student” or “education.” They sent customers 50 e-mail messages that falsely described the securities, according to the S.E.C. complaint. Sometimes they instructed sales assistants to omit the terms “C.D.O.” or “mortgage,” the S.E.C. says.

For example, on June 19, 2006, Mr. Tzolov purchased for a Swiss client $23.5 million of auction-rate securities backed by C.D.O.’s issued by an investment vehicle called South Coast Funding V Ltd. In an e-mail message to the client, Mr. Tzolov described the investment as “South Coast St. Loan,” the S.E.C. complaint says.

The scheme began to unravel in August 2007, authorities say, when the credit markets seized up. The market for auction-rate securities backed by subprime mortgages collapsed, and the brokers were unable to liquidate their clients’ investments.

In one instance, the two brokers misled a client, claiming there was an administrative error in filing a trade ticket, when in fact the auction for the client’s securities had failed. They then persuaded the customer to invest $25 million more in securities backed by student loans. Instead, they invested that money in riskier securities. That client is waiting to recover $132.5 million.

David Walker, a spokesman for Credit Suisse, said on Wednesday that Mr. Butler and Mr. Tzolov resigned in September 2007, after the bank discovered the scheme and suspended the two men. “Credit Suisse immediately informed our regulators, and we have continued to assist the authorities,” he said.

But ST Microelectronics, one of the bank’s clients, disputes Credit Suisse’s version of events. In a separate case, the company claims that Credit Suisse Securities engaged in a “bold and sophisticated scheme to defraud ST.” The company suggests that Credit Suisse was aware that its brokers were moving clients’ money into risky auction-rate securities as part of a scheme to get those securities off the bank’s own books and earn higher fees for its services.

Mr. Walker, the Credit Suisse spokesman, said: “We do not comment on meritless lawsuits.”

Septermber 4

UPDATE: Bank Of America 'Ready' To Settle Auction-Rate Probe

September 4, 2008: 7:39 PM EST

By Chad Bray Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- Bank of America Corp. (BAC) said Thursday that it is " ready and willing" to enter into a settlement with regulators to buy back auction-rate securities from its customers.

In a statement, Shirley Norton, a Bank of America spokeswoman, said the bank has been in discussions for nearly a month with regulators in New York, Massachusetts and other states and the U.S. Securities and Exchange Commission in hopes of reaching an agreement to provide "liquidity relief" to its customers who hold the complex securities.

The Charlotte, N.C., banking giant said it wants to reach an agreement "that follows the same basic terms of previously announced settlements" with other banks to buy back auction-rate securities from retail clients and small businesses.

"We understood that we had reached such an agreement in principle nearly two weeks ago," Norton said. "We hope that all of the parties will work towards completing a settlement for the benefit of investors who have been affected by unprecedented market disruptions."

New York Attorney General Andrew Cuomo sent subpoenas on Wednesday and Thursday to eight Bank of America executives, according to a person familiar with the investigation.

Norton declined to comment Thursday on whether the bank had received the subpoenas.

Cuomo's office indicated last month it was stepping up its probe of sales of the complex securities by Bank of America and two other banks that ultimately settled with his office and other state regulators.

In its Thursday editions, the Boston Globe reported that Massachusetts Secretary of State William F. Galvin said talks with Bank of America on buying back auction-rate securities from its clients had stalled and his office might sue the company.

Last week, Bank of America agreed to buy back $43 million of the securities from government agencies in Massachusetts, state regulators said.

Norton declined to comment Thursday on what might be holding up an agreement with regulators or how much in auction-rate securities the bank might buy back from customers.

In recent weeks, regulators have reached settlements with Citigroup Inc. (C), UBS AG (UBS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), Wachovia Corp. ( WB), Merrill Lynch & Co. (MER), Deutsche Bank AG (DB) and Goldman Sachs Group ( GS) who will buy back more than $50 billion worth of the securities.

Auction-rate securities are debt instruments whose interest rates are reset periodically at daily, weekly or monthly auctions. Several auctions failed in February, driving up interest rates for auction-rate securities issuers, while leaving investors locked into investments that had been promoted to them as safe and liquid.

Cuomo has previously said his office is investigating a number of banks and hopes to reach similar resolutions with them. Last month, Cuomo said his office is looking at about 25 firms.

The attorney general has said his office is investigating individuals at banks about their actions in marketing the securities and the settlements announced so far don't preclude his office or other regulators from taking actions against those individuals.

-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com

September 4

Eight From Bank of America Subpoenaed in NY Auction-Rate Probe
By Karen Freifeld

Sept. 4 (Bloomberg) -- Eight Bank of America Corp. executives were subpoenaed by New York Attorney General Andrew Cuomo, adding pressure on the bank to settle a probe of auction- rate securities, said a person familiar with negotiations.

Cuomo's office sent the subpoenas yesterday and today, the person said. Bank of America also must settle with Massachusetts or face legal action, Secretary of State William Galvin said yesterday.

UBS AG, Citigroup Inc., Morgan Stanley, JPMorgan Chase & Co., Wachovia Corp., Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank AG all settled claims in the last month that they fraudulently marketed the long-term securities as cash equivalents. The $330 billion market collapsed in February, leaving thousands of investors unable to sell auction-rate securities.

"We don't comment on whether we receive subpoenas or not,'' Bank of America spokeswoman Shirley Norton said today. She has said the bank is cooperating with regulators and doesn't comment on communications with them.

Reuters reported earlier today that Cuomo was issuing subpoenas to "several'' Bank of America executives as part of his probe of auction-rate securities.

Galvin, leading a 12-state task force in the Bank of America investigation, said yesterday his office has been unable to complete a settlement after negotiating with the Charlotte, North Carolina-based bank. Cuomo has said he, too, seeks an agreement with the bank, one of the largest underwriters of auction-rate securities.

The eight banks that settled agreed to buy back a total of at least $44 billion of the securities from individuals, nonprofits and small businesses and help their institutional clients find markets for the debt. They also agreed to pay fines totaling more than $520 million to state and federal regulators.

To contact the reporter on this story: Karen Freifeld in New York state Supreme Court at 1590 or kfreifeld@bloomberg.net.

September 4

Auction-Rate bailouts bypass some investors
Smaller Firms Aren't Settling With Clients Who Bought Now-Moribund Securities
By SHEFALI ANAND and JENNIFER LEVITZ, Wall Street Journal

Large Wall Street firms have announced plans to buy back billions of auction-rate securities from aggrieved investors. Yet hundreds of thousands of individuals who bought these same products from midsize and online brokerage firms are still in the lurch.

Among them is Michael Davis, of Fort Lauderdale, Fla. He invested $400,000 in auction-rate securities after a representative from online brokerage TD Ameritrade Inc. called him in 2003, suggesting he move his money from a money-market account to safe but slightly higher-yielding "seven-day paper."

But since February this year, the market for auction-rate securities has been frozen, a casualty of turmoil in the credit markets. Mr. Davis hasn't been able to sell his securities. The experience, he says, has "really shaken me up -- the fact that this could happen to someone like me who is so conservative."

Mr. Davis's problem is that he didn't buy his auction-rate securities from any of the big Wall Street underwriters of the market. Under regulatory pressure, UBS AG, Citigroup Inc., Merrill Lynch & Co. and other companies that both sold and underwrote these securities have agreed to buy back around $70 billion of them. However, their agreements don't include buying back securities underwritten by them but sold by smaller brokers.

These smaller brokers, who were primarily "resellers," haven't yet announced any plans to buy back the securities they sold. They include Oppenheimer & Co., Fidelity Investments, Stifel, Nicolaus & Co., Northern Trust Corp. and H&R Block Financial Advisors Inc., a unit of tax firm H&R Block Inc. These companies are keeping mum or saying they didn't underwrite or sponsor these securities, and thus the onus to buy them back doesn't fall on them. They also say they were unaware of the problems in the auction-rate market that surfaced last year. In all, tens of billions of dollars in auction-rate securities were sold by these firms, often to individual investors.

Mr. Davis has joined a lawsuit seeking class-action status against TD Ameritrade, filed in federal court in the Southern District of New York, and alleging that investors were misled into believing auction-rate securities were safe, liquid investments. A spokeswoman for TD Ameritrade says the company is cooperating with regulators but wouldn't discuss the cases of specific customers.

Auction-rate securities are a type of long-term debt in which interest rates reset every seven to 35 days. They are typically issued by municipalities and student-loan agencies, and until the market froze, they were widely peddled to the public as safe investments.

Regulators are already making noises about persuading the resellers to settle with investors. Last week, Massachusetts Secretary of State William F. Galvin urged Fidelity to buy back all the auction-rate securities it sold. Michigan Attorney General Mike Cox says he hopes to work with Detroit-based bank Comerica Inc. to find a way to "make investors whole, short of litigation." A Comerica spokesman says the firm doesn't discuss communications with regulators. Fidelity's representatives say that a vast majority of its customers are self-directed investors who make their own investing decisions, and that the firm didn't actively market auction-rate securities.

Investors dispute that. Judith Regan, the well-known book publisher, says she has $1 million still tied up in auction-rate securities, and she blames Fidelity, her broker. "I'd never heard about auction-rate securities; they actively marketed that to me," says Ms. Regan, 55. She has been railing about the securities on her Sirius Satellite Radio show in recent weeks.

Ms. Regan says she first opened an account with Fidelity in the late 1990s, and initially kept a lot of her cash in money-market funds. "I have a gypsy mentality. I want to get up and go, and with money, I like liquidity," she says. But she adds that her broker persisted that she invest in auction-rate securities, calling them "as good as cash."

Over the last few years, Ms. Regan says, she put a little more than $9 million of her cash into these securities. Suddenly, earlier this year, she couldn't access any of it. Ms. Regan says she had planned to buy a house in Los Angeles earlier this year, but didn't go through with it partly because of the uncertainty around the stuck cash. "At the time, we didn't know if we'd ever get it," she says.

Since then, around $8 million of her securities has been redeemed by issuers. "It's really not about hardship," she says of her situation. "I'm more indignant about the deceit." She adds that she's still potentially facing a loss on the remaining $1 million.

(Ms. Regan, the former publisher of ReganBooks, was formerly employed by News Corp., which owns The Wall Street Journal. She subsequently filed a wrongful-termination lawsuit against News Corp., which has since been settled.)

Fidelity spokeswoman Anne Crowley declined to comment on Ms. Regan's case. In general, however, she says, "there is no financial incentive for a Fidelity representative to have mentioned this product over another security."

For some small-business owners, the morass caused a cash squeeze. Doug May, the 44-year-old owner of a small printing company in Port Byron, Ill., says he has $300,000 stuck in auction-rate securities bought through his longtime bank, Wells Fargo & Co.

Mr. May, who is part of an auction-rate-securities lawsuit seeking class-action status against Wells Fargo in federal court in the Northern District of California, says his banker at Wells Fargo had encouraged him to invest in the securities instead of paying off a loan. "He told me it would be kind of silly to pay off my loan, when I could make just as much interest and have the liquidity every 35 days," he says.

When the auctions failed this year, "they took away my liquidity and basically jeopardized the jobs of 20 people," he says. To help with cash flow, Mr. May says, he has taken out a loan from a credit union.

Kathleen Golden, a spokeswoman for Wells Fargo, says the company "acted in the best interests of its clients when its financial consultants recommended auction-rate securities based on what we believed at the time to be a deep and liquid market." She says it is "cooperating with regulators" and working "to resolve the liquidity issues for our clients."

Investors say that the midsize brokers should own up for having sold these securities without explaining all the risks.

"They really should be responsible for what they sold," says Ed Dowling, 53, who runs a clothing manufacturer in New York. Mr. Dowling says he's stuck with more than $2 million in auction-rate securities he bought on the advice of a broker at Oppenheimer. Oppenheimer spokesman Brian Maddox says the company takes "all client concerns seriously" and is "in the process of reviewing options available to help us with this very difficult situation."

Write to Shefali Anand at shefali.anand@wsj.com and Jennifer Levitz at jennifer.levitz@wsj.com

September 3

Two types of ARPS holders -- update 3
by Harry Newton

There are two types of ARPS holders:

1. Those of us who have been promised our money back by the issuer and/or the brokerage firm.

2. Those of us who haven't been told anything about having our auction rate securities redeemed by either our issuer or our brokerage firm.

For the first ARPS holder, your game is a waiting one. If you need your money, you can borrow against your holdings. Just be careful about the terms of the loan. You do not want to be obligated to repay your loan before your ARPS are redeemed for cash.

For ARPS holder who has heard nothing, you have to assume you will not hear anything unless you do something. And it's not something small. You have to figure that getting your money back is your full-time job from now until you get your money back.

Repeat after me: The squeaky wheel gets the most attention. Here are some keys to becoming the squeakiest wheel around:

1. Do you know which state Attorney-General is investigating the brokerage firm which pushed the ARPS on you?
2. Have you been in touch with that Attorney-General and given him your full story with copies of emails, letters, conversations, etc.
3. Were your ARPS sold to you out of your brokerage firm's inventory? (This makes a huge difference.)
4. Is your old broker still with your old firm? What will he / she tell you in confidence? Has your broker moved to another firm? What will he tell you in confidence outside the office, away from the phones and the emails?
5. What pressure is your financial adviser putting on the issuers?
6. How much money does your brokerage firm have in their "stand ready" fund? Is it sufficient to pay you out?
7. What did their Compliance Officer tell you?
8. How many of their fibs, misstatements and outright lies have you documented?
9 . Are you ready to appear before Barney Frank's committee, which starts hearings on September 18? Have you been in touch with Congressman Frank?
10. How much have you bugged your state regulators? Have you contacted them several times. By phone, by letter, etc.
11. Have you written more than 25 letters?
12. Have you employed a lawyer with knowledge of securities law?
13. Have you threatened to sue your broker personally and /or taken him to FINRA and held him / her personally liable? (See below.)
14. How much marketing material do you have from your brokerage firm or issuer which is clearly incriminatory? (Email me a PDF.)

Remember several things: You were told these things were cash equivalents. They weren't. That's a lie. It's your money. No one is going to give it back to you because you happen to be a nice guy, retired, or have a serious hard-luck story. It's your job to get your money back.

While you're at it, send me your story. Let me publish your story. Stop with this anonymous stuff. Stop whining. You need to get proactive NOW.

August 27

Answers Needed
by Harry Newton

Now we have some "settlements," there are questions to ask your broker:

1. "I'd like to continue holding my ARPS, but be redeemed out of them when I need the money. Will this be possible? Or will I be redeemed on your timetable?"

2. If I sold the ARPS you sold me at a loss -- say through RTN -- will you make my loss whole?

3. If I suffered pain, anguish and opportunity loss, will I get compensation?

Now you'd think that as the writer of the leading blog on ARPS, I'd be able to get answers to questions as simple as these. But I can't. No one in management will basically talk to me.

This is not because I don't wash (I do) or am ugly (we could argue that one) it's because we're dealing with frightened investment banking managers who find the easiest course of action is to listen to their attorneys instead of their clients.

I do, however, get unsolicited calls from brokers who tell me one of two things:

1. Their firm is a piece of shit and they're leaving it, ASAP, or not leaving it, but will continue "to do the best they can for their clients."

2. Their firm has had a bad rap in the press and on this blog. And I ought to be nice to it.

In both cases they won't let me quote them or mention them by name. And they usually feed me information I can't substantiate.

One called me today and said he was staying with his present firm, despite its inadequacies. He summed his situation up: "You're going to dance with the devil - no matter which firm you work with."

I felt sorry for him.

August 27

Favorite email exchange

Reader: Why isn't Morgan Stanley listed on your Hall of Shame?

Harry: Give me three reasons it should be and I'll add it.

Reader:
1. I am legally bound not to reveal any details.
2. I am legally bound not to reveal any details.
3. I am legally bound not to reveal any details.

August 22

Deutsche Bank, Merrill and Goldman Settle

Update 3:- Three more firms -- Deutsche Bank, Merrill Lynch and Goldman Sachs settled with AG Cuomo today. They'll each pay a fine and redeem all their clients' ARPS. For now:

The stupid part of all this is that these firms are all now paying huge fines when they should have been there for their clients in the beginning. They should not have waited until their arms got well and truly twisted by Cuomo and their reputations made to look like mud.

I remember saying to several firms months ago, "Redeem your clients' money. Look like heroes. Look like you truly care about your clients."

Instead they delayed and delayed, fought the AGs, and waited until they all looked like untrustworthy idiots. God knows much client goodwill these firms have lost. God knows how many clients they will lose when their poor suffering clients get cashed out.

In contrast, HSBC shines. I hope HSBC wins itself lots of new customers, which it really deserves. See the column on the right.

There's a recent CNBC interview with Andrew Cuomo. You can watch the video here. Here's the news, as reported by Reuters today:

Firms settle auction-rate probes;
but more to come

NEW YORK (Reuters) - Three of Wall Street's top investment banks agreed to pay millions of dollars in fines and buy back billions of dollars in frozen, illiquid securities after U.S. regulators reached settlements over the way the firms sold auction-rate securities.

Despite the settlements, the industrywide investigation into auction-rate securities looks far from over as regulators said that, starting next week, they will review about 40 firms' practices, sources familiar with the investigation said.

In Thursday's settlement, New York Attorney General Andrew Cuomo said Merrill Lynch & Co Inc, Deutsche Bank AG and Goldman Sachs Group Inc have agreed to the settlement.

The banks agreed to pay the fines and buy back securities from investors who were left holding the notes earlier this year when the auction rate market collapsed.

As part of Cuomo's settlement, Merrill will pay a fine of $125 million and buy back between $10 billion and $12 billion in securities from investors. Goldman Sachs will pay a $22.5 million fine and buy back about $1.5 billion in auction rate notes, while Deutsche Bank will pay a $15 million penalty and buy back about $1 billion of notes.

"After meeting personally today with Attorney General Cuomo and NASAA President (Karen) Tyler, I am pleased to report that we have reached an amicable resolution and global settlement of this matter," Merrill Chief Executive John Thain said in a statement.

Cuomo said Merrill's penalty and the terms of the settlement took into account evidence of conflicted research at the bank.

"Part of our theory on the case dealt with Merrill's research," he said.

Cuomo said Merrill's settlement is separate from an agreement the firm made earlier with Massachusetts' top securities regulator, William Galvin.

The Securities and Exchange Commission said late on Thursday it expects to make an announcement "very shortly" on the terms of the proposed settlement with Merrill.

While the New York settlement represents the biggest money payouts to date, more investigations will be starting soon.

Attorneys and investigators will be undertaking the on-site review for the 40 firms during the weeks of August 25 and September 8 to target firms with large amounts of auction rate securities in accounts.

The probe to enforce the rules of the Financial Industry Regulatory Authority -- the group formed following the merger of the regulatory arms of the National Association of Securities Dealers and the New York Stock Exchange -- comes as authorities nationwide are pressing the big investment banks into settlements.

Regulators say brokerages misled investors into believing that auction-rate debt, which has rates that reset in periodic auctions, was safe and the equivalent of cash.

Much of the $330 billion market has been frozen since February when brokerages abandoned their traditional role as buyers of last resort.

A letter to the firms from FINRA and obtained by Reuters said the investigators were asking firms to provide electronic lists of auction rate securities issues, auction failures and identify employees on their auction rate securities desks.

"If applicable, identify all individuals who were involved in determining when the firm would place supporting bids or placed such bids," the letter sent to the firms said.

It also asks "whether the firm participated in surveying investor interest and providing 'price talk' guidance to customers."

For Merrill Lynch's part, the New York settlement was the second major deal they reached this week.

On Wednesday, Merrill agreed to buy back about $12 billion of the securities to settle its claims with the Commonwealth of Massachusetts.

On Thursday, Galvin said that Fidelity Investments had replied to him after he urged it earlier in the week to buy back frozen auction-rate securities the company had sold.

Galvin told Reuters that Fidelity dropped off a letter at his Beacon Hill office on Wednesday.

Fidelity left open the door to possibly helping on the auction-rate securities matter, Galvin said on Thursday.

Fidelity, which is privately held, has long said it neither issues nor aggressively markets these securities and that it expects underwriters who issued the securities to stand behind them.

"We do not comment on communications with regulators," Fidelity spokesman Vincent Loporchio said.

(Reporting by Dan Wilchins, Elinor Comlay and Grant McCool in New York and Svea Herbst-Bayliss in Boston; Writing by Patrick Fitzgibbons; Editing by Andre Grenon))

August 20

Finally someone listened;
Where are the brokers? Where are their firms?
What are they doing, if anything?
by Harry Newton

OK. Let me reiterate for the thousandth time. Our best strategy is to put pressure on our brokers -- the ones who sold us our auction rate securities. We must tell the issuers that they, the brokers, will never, ever sell the issuers' securities again if they don't get us our money back ASAP.

I've been pushing this approach for months. But most brokers are too scared of their brokerage firm management to take an independent stance. And their brokerage firm's management is too scared of its own shadow to come out publicly and say, "Get our clients their money back or we don't deal with you ever again."

But finally a bunch of Merrill Lynch brokers have had the guts to come out publicly and do the right thing. I applaud them. I wish more would.

If you're a gutsy broker and agree with me, send me a copy of your emails to the issuers. I'll publish them on this column. That will add even more pressure, since a lot of people reading this column -- more than I ever imagined.

If you're an owner of ARPS, call your broker tomorrow and ask him why he's not doing what the Merrill Lynch brokers are doing. See the next story. My email address is

August 20

Merrill Brokers Press Pimco, BlackRock to Buy Auction-Rate Debt
By Bradley Keoun and Christopher Condon

Aug. 20 (Bloomberg) -- Merrill Lynch & Co. brokers are pressing fund managers Pacific Investment Management Co. and BlackRock Inc. to buy back auction-rate securities, aiming to speed up client bailouts in the frozen market.

More than 300 brokers have e-mailed Pimco saying its executives may "no longer be welcome in our offices'' unless they redeem the securities, according to Erick Ellsweig, a Merrill financial adviser in North Carolina who spearheaded the e-mail campaign. Will Fuller, head of distribution for Merrill's U.S. brokerage arm, wrote to BlackRock on Aug. 15 saying its failure to offer redemptions in the past two months has created "dissatisfaction in our financial advisers and clients.''

Merrill's brokers, who make up the biggest U.S. financial advisory network, say they're trying to help clients stuck with more than $10 billion of securities in the $200 billion auction-rate market. Pimco, which manages the world's biggest bond fund, and BlackRock, the largest publicly traded U.S. fund manger, used the market to finance their closed-end mutual funds, and Merrill brokers sold the investments to its customers.

"The brokers at Merrill are very upset about the lack of access to capital for their clients, and they have been rattling the cage,'' said Geoffrey Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island.

The auction-rate market seized up in February with $330 billion in securities when the credit crisis prompted Wall Street firms to stop supporting the periodic auctions in which the securities were bought and sold. New York Attorney General Andrew Cuomo has accused Merrill and other brokers of improperly peddling them as investments that were as liquid as cash. Merrill has said it's cooperating with government probes.

Five banks, including Citigroup Inc. and UBS AG, have reached settlements with Cuomo and other regulators, agreeing to pay $360 million in fines and repurchase about $35 billion of auction-rate securities. Merrill, the third-biggest U.S. securities firm, has offered to buy back $10 billion starting in January, a proposal Cuomo said was inadequate.

Purchases of auction-rate securities by BlackRock and Pimco would benefit Merrill by reducing the amount of the investments it may have to repurchase.

"The only thing we care about is getting our clients redeemed as quickly as possible,'' Ellsweig, who has worked at Merrill since 2001, said in an Aug. 16 e-mail in response to a request for comment by Bloomberg News. Bloomberg obtained copies of the correspondence between Merrill, BlackRock and Pimco, which was confirmed by officials of the companies.

"This was a grassroots effort reflecting the opinion of a group of financial advisers,'' Merrill spokesman Mark Herr said in an e-mailed statement. "The firm continues to work with all interested parties at resolving the liquidity challenge caused by the unprecedented freezing of the auction-rate securities market.''

Merrill, based in New York, has a "long track record of working with Pimco and BlackRock,'' he said.

The flare-up with New York-based BlackRock is notable because Merrill owns 49 percent of the firm and is the largest distributor of its funds. BlackRock has a "leadership position within our company,'' Fuller wrote in the e-mail to BlackRock President Robert Kapito, so it faces higher expectations from Merrill's brokers.

"We continue to work constructively with all major market participants to address the unprecedented issues in the auction-rate market,'' said BlackRock spokesman Brian Beades in an e- mailed statement.

Closed-end funds, which trade on exchanges, sold auction-rate securities to finance asset purchases and increase returns for common shareholders. The funds had $64 billion outstanding when the market froze, according to research firm Thomas J. Herzfeld Advisors Inc. in Miami.

Fund managers including Nuveen Investments Inc., Eaton Vance Corp. and BlackRock have redeemed or scheduled the redemption of $24.1 billion of auction-rate preferred shares, according to Herzfeld, which specializes in closed-end funds.

Following the Cuomo announcements, some funds dropped plans to assist in the buybacks. On Aug. 14, three funds managed by Hartford, Connecticut-based Phoenix Cos. announced they were suspending efforts to obtain bank credit lines to finance auction-rate redemptions.

Daniel Sontag, who oversees Merrill's U.S. retail division, wrote in a memo last week that the firm's buyback offer doesn't let closed-end funds off the hook. "We fully expect'' fund managers to "work with us even more actively,'' he wrote.

Nuveen, which had $15.4 billion of the securities outstanding as of February, has announced redemptions of $5.53 billion, or 36 percent, according to Herzfeld. Eaton Vance's buybacks total $3.8 billion, or 76 percent. BlackRock's repurchases stand at $2.5 billion, or 25 percent. BlackRock hasn't announced any redemptions since June 2, Merrill's Fuller wrote in the memo to Kapito.

"We fear that our financial advisers view BlackRock as conspicuous by its absence,'' Fuller wrote.

Munich-based Allianz SE, which owns Pimco, hasn't redeemed any of its $5.3 billion of outstanding auction-rate securities, according to Herzfeld.

Pimco, based in Newport Beach, California, is the home of manager Bill Gross's $130 billion Total Return Fund, the world's biggest bond fund. On Pimco's Web site in February, Gross called the unraveling auction-rate market Wall Street's latest twist on "Old Maid'' -- a card game in which players try to avoid getting stuck with a lone queen.

"That really annoyed me,'' Ellsweig, 41, who's based in Greensboro, North Carolina, said in the Aug. 16 e-mail to Bloomberg.

On Aug. 7, Ellsweig sent an e-mail to Tammie Arnold, co- head of Pimco's product management group, stating that "Pimco is the only major partner that has not had one single redemption of their auction market-preferred securities.''

Ellsweig asked fellow Merrill brokers to send similarly worded e-mails to Pimco, and at least 300 did, he said.

In an Aug. 8 letter to Ellsweig, Arnold wrote that "the best we can do is to report that we will continue to work very hard to find a solution.''

Any redemption has to avoid imposing "unfair costs'' on holders of common shares in the closed-end funds, she wrote. In an e-mailed statement to Bloomberg, Pimco said it is "looking at solutions that are consistent with our fiduciary duty.''

BlackRock has applied for permission from the U.S. Securities and Exchange Commission to replace its auction-rate preferreds with a new type of financing, Liquidity Enhanced Adjustable Rate Securities, or Lears, Kapito wrote last week in a letter last week to an advisory council of Merrill financial advisers.

Kapito, 50, wrote that the firm hopes to announce "our proposed solution and any additional redemptions within the next 30 to 90 days.''

"Contrary to your suggestion that BlackRock has allowed the liquidity problem to `age,' BlackRock has been actively pursuing potential solutions,'' Kapito wrote.

The credit crunch remains in full swing, and it hasn't been easy to find banks willing to provide backup financing for the Lears, Kapito wrote.

"The normal sources of liquidity, including broker-dealers such as Merrill Lynch, Morgan Stanley and Lehman Brothers, are not available to us as they are dealing with their own well-publicized liquidity issues,'' Kapito wrote.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net.

August 15

"My broker's firm belongs in your hall of ARPS shame.
Should I move my account?"
by Harry Newton

Every day I get a zillion emails and calls about moving their account from the firm that sold them the mess to another "clean" one. The short answer is NO. The long answer is all the brokers and all the brokerage firms are all the same. (I used "all" three times deliberately.) They're all unresponsive. None will return your emails or your voice mails.

They don't care about you. They never have. Face the facts If they were competent, they wouldn't need you. They'd be rich and living on their own Carribean island. The fact that 99% are poorer than you must tell you something. Dah!

The lawyers are now well and in truly in charge. They've told everyone to "Shut up. You've done enough damage already. Don't say anything until we have something concrete to say. Until then, Shut Up. You want to pay more fines? You want to be forced into using your money for ARPS redemptions when the money could be better used for employees bonuses and legal fees?"

If you do move your account, you could lose some of your redemption rights. I'm not saying you will. But... were talking complex plea bargains here between the Attorneys-Generals and some very large firms.

You can bet a whole bunch of auction rate securities holders are going to be seriously screwed. Don't cloud your case up by getting cute. I can categorically tell you, the grass is NOT greener on the other side.

In short, stick with the disaster you know. Down below I outlined one sure-fire way of getting their attention.

August 15

State Names UBS
In Auction Complaint
By JENNIFER LEVITZ, the Wall Street Journal
August 15, 2008; Page C2

New Hampshire securities regulators accused a division of UBS AG of urging a nonprofit student lender to continue issuing auction-rate securities even though the Swiss bank knew the market for them was on the verge of collapse.

Auction-rate bonds are a kind of long-term debt used by many student lenders to raise money for loans. Since the collapse of the auction-rate market in February, a number of lenders, including the New Hampshire Higher Education Loan Corp., have had to suspend many college loans.

In an administrative complaint that was filed Thursday with the state Bureau of Securities Regulation, New Hampshire regulators alleged that as UBS saw investor demand for auction-rate securities drying up last fall, it sought to unload its own inventory and developed a fraudulent scheme to reduce its own position. The Swiss bank denies this.

To entice more investors, New Hampshire regulators and student-loan officials said UBS advised the lender to temporarily increase the monthly interest it pays -- in some cases to nearly 18% from about 3.4%.

The New Hampshire loan corporation estimates it paid an extra $25.5 million in interest, contributing to a liquidity crisis that has forced the nonprofit to suspend loans for 6,500 students. "We thought UBS was looking out for our own interest," said Stephen Weyl, the attorney for the loan corporation. "It's our understanding that UBS in fact had a separate agenda, undisclosed to us, of reducing its market exposure."

In a statement, UBS said "we will vigorously defend ourselves against this complaint as we believe we worked in the best interests of our investor and issuer clients."

The complaint highlights another alleged victim of the auction-rate crisis: issuers of the securities. Last week, following complaints by state and federal regulators over their auction-rate-securities sales practices, UBS, Citigroup Inc. and Merrill Lynch & Co. agreed to buy back a combined $36 billion in the investments.

But those buybacks offer relief to institutional and investor clients, not issuers such as student lenders, who pay the investment banks millions in annual fees for broker-dealer services and guidance on how to structure and market debt offerings.

"This complaint attempts to link a single client interaction with overall market conditions which affected all student loan issuers," UBS said.

While not part of the New Hampshire complaint, student-loan officials in Vermont and Illinois said in interviews Thursday that UBS had also persuaded them to raise interest rates temporarily as a way to bring in more buyers. Vermont and Illinois regulators haven't filed any related complaints.

The New Hampshire student lender said it still is paying UBS $2.5 million a year in broker fees. The Vermont lender said it is paying $3 million annually for investment-banking fees related to auction-rate securities. "It's hard to overstate our unhappiness with this," said Mike Stuart, chief financial officer at the Vermont Student Assistance Corp.

Mr. Stuart said other investment banks, including Citigroup, also encouraged his agency to raise interest rates. "They were all trying to increase demand," he said. "It made sense to us at the time."

Citigroup didn't directly address that claim but said in a statement it has "worked diligently with issuers, investors, and regulatory authority authorities to obtain liquidity for holders of illiquid ARS."

Auction-rate securities are designed to have short-term features. Their interest rates reset at weekly or monthly auctions run by financial firms.

The auctions depend, however, on there being enough buyers bidding on the products. During the fallout from the credit crunch, these buyers dwindled. When the $330 billion market for auction-rate securities failed in February, customers couldn't sell the investments, which plunged in value.

As auctions began to falter, UBS's own inventory of auction-rate securities began to pile up, according to New Hampshire's complaint. "Clearly, student loans are the problem pushing us over inventory limits," Ross Jackman, a UBS official wrote to colleagues Sept. 5 in an email the complaint included.

August 14

Goldman Balks at Helping Rich Clients
Recover From 'Auction Rate' Securities
By LIZ RAPPAPORT, Wall Street Journal
August 14, 2008; Page C1

For once, Wall Street isn't bending over backward for its richest clients.

That is causing new controversy for investment banks, which have already committed to reimburse mom-and-pop investors, charities, and small businesses for more than $40 billion in illiquid "auction rate" securities. Wealthy clients, institutions and corporations have been largely left out of those pacts.

The quandary is acute for Goldman Sachs Group Inc., which caters only to the wealthy. While a string of large Wall Street brokers announces daily settlements in the billions, Goldman has been mum about its plans, so far refusing to buy back clients' auction-rate paper.

Goldman was a key player in the auction-rate markets, as the No. 5 underwriter of the securities by dollar amount between 2003 and 2007. The firm is regarded as a key contributor to halting the market in February, after it pulled out of auctions supporting the securities. Goldman's well-heeled clients also bought up auction-rate paper, which today has virtually no buyers save for red-faced issuers looking to make good with their customers.

Carl Everett, an adviser to venture-capital firm Accel Partners and a former Dell Inc. and Intel Corp. executive, has been a Goldman private-client group client for several years, and has been satisfied with the firm's service until now. Mr. Everett has investments in auction-rate securities that became illiquid with the rest of the market in February, some of which have been marked down to below their face value.

"The firm has been working with clients to address their liquidity needs," said Goldman spokeswoman Andrea Raphael. Regulators say Goldman could come to the negotiating table in coming weeks. Goldman says it is cooperating fully with regulators.

But as recently as Friday, Goldman Sachs told Mr. Everett that it will not buy back his auction-rate securities, Mr. Everett said.

"That's disappointing to me -- my expectation is for the Goldman Sachs brand," said Mr. Everett. "My expectation for that is they would honor their position and statement of these securities as cash and cash equivalents."

That has been the recent posture of many Wall Street firms and banks, including Merrill Lynch & Co., Citigroup Inc. and UBS AG, which after months of legal wrangling, agreed to settle most customer claims. New York Attorney General Andrew Cuomo, however, was keyed on the claims of small investors. That left the wealthy, institutions, and corporate buyers of the auction-rates out in the cold.

"Regardless of the settlements, the reality is the investment banks owe equal fiduciary obligations to both retail and institutional investors," Ron Geffner, a partner Sadis & Goldberg LLP, and former enforcement attorney with the Securities and Exchange Commission.

Auction-rate securities are a type of short-term debt that gained popularity because they offered investors slightly higher yields than money-market funds or other fixed-income investments. They also allowed issuers, including municipalities, student-loan organizations, corporations and charities to borrow for the long term, but at lower, short-term interest rates.

The rates reset in weekly or monthly auctions conducted by Wall Street firms. What swelled to a $330 billion market stopped functioning in February when Wall Street firms stopped supporting it with their own bids.

"The image of firms being dragged to the table is destabilizing," said Arthur Levitt, adviser to Carlyle Group and a former SEC chairman. "Very few issues have shaken public confidence in the integrity of our markets as much as this."

August 12

Nuveeen Conference Call
Wednesday, August 13. 10:30 AM EST.
A replay of the call is through August 20, 2008 on the web. Or listen to the replay by phone -- (800) 642-1687 or (706) 645-9291, conference ID number 59334221.

August 12

This is a heck of a lot of legal bills for Wachovia. You'd think they'd want to settle with their customers and save the money. Who are they in the business of pleasing -- their lawyers or their customers? Is Wachovia the prime sponsor of the 2008 Lawyers' Full Employment Act? -- Harry Newton

Wachovia adds $500M to legal reserves, boosts 2Q loss
Charlotte Business Journal

Wachovia Corp. has recorded an additional $500 million in legal reserves related to settlement discussions over the sale of auction-rate securities.

According to a company filing with the Securities and Exchange Commission, that increase has boosted the Charlotte-based company’s second-quarter loss to shareholders to nearly $9.1 billion, or $4.31 per share.

On July 22, Wachovia had reported a loss of nearly $8.9 billion, or $4.20 per share, for the period.

Wachovia says it is discussing potential settlements with various state regulators and the SEC related to investigations into the underwriting, sale and subsequent auction of auction-rate securities. The bank says it recorded a $500 million pre-tax increase to legal reserves in the second quarter, based on the probability of such settlement. That brought Wachovia’s total increase in legal reserves to $1.2 billion during the quarter.

On Monday, New York Attorney General Andrew Cuomo expanded his office’s investigation into the sale of auction-rate securities to include Wachovia, JPMorgan Chase & Co. and Morgan Stanley.

Last week, Cuomo’s office secured agreements with UBS AG and Citigroup Inc. that will return more than $20 billion to investors.

Auction-rate securities are debt investments issued by municipalities, student-loan agencies, closed-end funds and others, with interest rates that are reset at weekly or monthly auctions run by the investment firms.

The $330 billion market collapsed in February when investors became alarmed at the prospects of corporate borrowers covering debt service on the securities.

In a letter to Wachovia, Cuomo’s office said it would like to “enter into immediate talks about resolving the investigation, as that would be in the best interests of both consumers nationwide, as well as Wachovia customers.” The letter said any resolution would have to address the same concerns as those in last week’s settlement.

In related developments, Wachovia Securities has been in discussion with Missouri Secretary of State Robin Carnahan to reach an agreement that would address the auction-rate securities held by Wachovia customers.

Last month, the Missouri secretary of state’s securities division conducted a special inspection at Wachovia Securities’ headquarters in St. Louis concerning its handling of auction-rate securities.

Meanwhile, crosstown rival Bank of America Corp. and its subsidiaries have received subpoenas and requests for information from state and federal governmental agencies on auction-rate securities.

BofA faces several class-action lawsuits contending the bank misled investors about the nature of the securities and their market.

August 12

ARPS Scandal: Banks Must Rebuild Investors' Trust
By SmartMoney's James B. Stewart, the only reporter who actually owns ARPS.

NOW THAT NEW YORK Attorney General Andrew Cuomo and other regulators have put a gun to their heads, the big Wall Street firms are finally coming clean about the collapse of the auction rate securities market.

The truth is even uglier than I suspected, and I've been beating the drum over this issue for months.

Auction rate securities were sold by nearly all the big firms as a slightly higher-yielding, but safe, alternative to money-market funds. They proved anything but when the auction markets froze in February, stranding thousands of investors with more than $300 billion in illiquid holdings. As readers of this column know, I was among the victims. I've since heard from hundreds of others, many of whom suffered hardships when the cash they counted on to pay taxes, to finance home purchases and college educations, and to meet payrolls proved inaccessible. Wall Street's reaction, as I've reported, was to offer to loan investors their own money — using our other assets as collateral and charging us market rates. It was insult on top of injury.

It's not like we were clamoring to buy these securities for the modest interest rate premium they offered. Like the other victims I've heard from, I got a call out of the blue urging me to take advantage of an offer that was being extended to valuable clients.

My pleas to Wall Street firms to simply do the right thing and reimburse their clients (see my May 2008 magazine column) went unheeded. Representatives of firms I spoke to either refused to comment or said their balance sheets, already under strain from the credit crisis and their own lending practices, couldn't support such a move. They also maintained that they, too, were victims of an unforeseeable crisis.

Now we know that none of this was true for at least some of the biggest firms. Thanks to a wave of subpoenas, lawsuits or threatened lawsuits, and the prospect of public disclosure, three of the biggest sellers of auction rate securities agreed last week to reimburse the clients they purported to value so highly. Citigroup led the pack by reaching an agreement with Cuomo and the Securities and Exchange Commission last week to stave off a lawsuit. Merrill Lynch also under investigation, announced that it would reimburse clients. And UBS settled a pending lawsuit by agreeing to reimburse clients and pay a $150 million fine. Those firms said they will buy back a total of nearly $40 billion in the securities, a sum that, while large, can indeed be absorbed by their balance sheets.

What's really shocking are the allegations and evidence that UBS and Citigroup executives knew that the auction rate market was about to collapse even as they pressed their brokers to push the product on unsuspecting clients. Put more bluntly, the evidence suggests they weren't the victims of unforeseen events — they perpetrated them.

The New York Attorney General's complaint (available here) against UBS is a withering portrayal of what Cuomo calls a "multibillion-dollar consumer and securities fraud." At UBS, top bank executives unloaded over $21 million of their own personal holdings of auction rate securities as they realized the market was in trouble, the complaint alleges. In December 2007, UBS's trading desk manager sent an email to the global head of municipal securities saying "The auction product does not work." Other emails referred to the auction rate securities as a "huge albatross" for the firm and a "scary and delicate" situation. Yet the firm kept peddling them to clients. Within "hours" of learning of trouble in the auctions, one UBS executive instructed his personal broker that "I want to get out of arcs [auction rate certificates]," and sold off all $250,000 of his holdings. Over 50,000 UBS customers ended up owning more than $37 billion of the illiquid securities, according to the complaint. Cuomo characterized UBS's actions as a "flagrant breach of trust."

Katrina Byrne, a spokeswoman for UBS, responded: "We categorically reject any claim that the firm engaged in any widespread campaign to move auction rate securities inventory from our own books into private client accounts." As for the emails, she said, "We were disappointed the New York Attorney General released details on certain transactions when we conducted our own internal investigation with the assistance of external counsel. We found no evidence of unlawful conduct by any employees." She added that "there may have been cases of poor judgment," and said UBS is evaluating what, if any, disciplinary actions might be appropriate.

While an embarrassing email trail chronicles UBS's moves, other firms may be just as culpable. "UBS is not alone in this scheme," Cuomo maintained. Evidence apparently shows that Citigroup executives, too, were aware of the impending crisis, but didn't tell its customers buying the securities.

In response to the settlement, Citigroup issued a statement saying "Our most important focus continues to be on helping our clients," and added that it would neither confirm nor deny that its officials knew about troubles with the auctions even as it continued to sell the securities as cash equivalents.

Merrill Lynch won't comment on whether it continued to sell auction rate securities after its officials knew the market was in trouble, but an official there told me that he hasn't heard any such allegations. Merrill remains under investigation, and although Cuomo said he welcomes its offer to reimburse clients, the terms fall short of the Citigroup and UBS standards. This week Cuomo said his probe had also been extended to include Morgan Stanley, J.P. Morgan and Wachovia and there's no indication it will stop there. Late Monday, Morgan Stanley announced it would buy back $4.5 billion in ARPS — a move that Cuomo calls "too little, too late."

In this generally dismal picture, at least one firm, HSBC, deserves credit for acting more proactively to protect its clients. The firm said that because of "the high value we place on our customer relationships," it offered to buy back its clients' auction rate securities on June 20 and completed the purchases by the end of July. HSBC said some customers didn't participate, and the firm is "continuing to address the needs of the few remaining customers." HSBC hasn't disclosed the total amount involved.

Now that the logjam has been broken, investors at firms that haven't agreed to reimburse them need to keep the pressure on, especially now. Competitive pressure and the prospect of investors moving their accounts, if not continued threats by regulators, should force them to follow suit.

Of course I'm glad that I and thousands of other unwitting investors appear likely to get back our money, albeit not for months. But that's not going to restore the trust that's been destroyed. We need to know the unvarnished truth. We need to know who is taking responsibility. We need to know there has been accountability. And we need to know how we can be sure it won't happen again.

Also See:
Stewart: The Troubles of Auction Rate Preferred Shares
Stewart: More Assets Frozen at Big Banks
Get Better Yield Without ARPS-Like Risk

August 11 -- breaking news

Morgan Stanley says it will buy back
$4.5 billion

SAN FRANCISCO (MarketWatch) -- Morgan Stanley said late Monday it plans to buy back about $4.5 billion in auction-rate securities. Earlier in the day, Morgan Stanley, J.P. Morgan Chase & Co. and Wachovia Corp. were alerted by New York Attorney General Andrew Cuomo that he would probe the firms' role in the $330 billion auction-rate securities market, which collapsed in February. Morgan Stanley said it will buy back the securities "held by all individuals, all charities and those small to medium-sized businesses with accounts of $10 million or less" at par value if they were purchased before Feb. 13. The offer is open until Nov. 30.

August 12

Our collective pressure is working.
But don't ease up yet -- update 5
by Harry Newton

The Wall Street Journal calls the ARPS freeze-up "one of the messiest Wall Street scandals in years." And it is. The deceit (also called lying) and blatant dishonesty is mindblowing. We learn that one part of the brokerage firms knew the auctions were collapsing and our securities were about to freeze. But that part deliberately didn't tell the other part -- the brokers who dealt with you and me and sold us our auction rate securities. And that part also encouraged the brokers with straight-out lies and huge commissions to sell us auction rate securities.

Fortunately some regulators -- Galvin of Massachusetts and Cuomo of New York -- have chased the culprits, found them guilty and are now in the process of working out the plea bargains.

This is where we need your help. You need to argue your case. For example, did you move your account from UBS after your ARPS froze? You should be part of the UBS plea bargain. Do you want your money back now, not in 2010, or next January, 2009? Are you not a "retail investor," but rather did you buy your ARPS for a family trust or for an IRA (or for a 401(k) plan for a sole proprietor with no employees). Are you eligible for repurchase under the Citibank settlement? Are there other "quirks" which the regulators need to write into the plea bargain deals they writing?

I don't know what other concerns you have. But the plea bargain deals are being written as you read my words. If you have special concerns, call, email, write and FedEx the regulators. O.K.? Do it now.

As to the other lessons from all this:

1. Don't trust your local broker, unless he's done his homework. Most don't have the time. They rely on their firm's specialist "desk" back at headquarters in New York (or wherever). A quick one minute phone call is the sum total of all their "research." Accept it: No broker has the time to research the crap he's selling you.

2. Don't ever buy a structured product, i.e. one Wall Street manufactured with the express intent of peddling it to investors at huge commissions.

3. Don't chase yield. The higher the yield, the riskier the security. I could write a whole book on "yield hogs." Suffice, in the old days "junk" securities paid maybe 14%-17% -- way above treasuries. That yield gap signaled the securities were "junk." But auction rate securities were maybe half of one per cent higher than other short-term places to put your money. That didn't signal they were "junk." But they were. Yield margins have gotten more complex.

4. Don't confuse security and marketability. Let me explain. Our brokers told us that our ARPS were backed by triple A rated muni bonds. They harped on this. But they didn't talk about "marketability." They mumbled about regular auctions. But those auctions were for the purpose of determining next week's yield. At least that was the rubbish I was fed. I was never told that if the auctions fail, I might never be able to sell my securities.

5. If something happens, bitch loudly. What has worked for some: Threaten to sue your individual advisor personally, especially if you develop some causes of action specifically against your advisor -- letting them know that plenty of lawyers are willing to take the case on a contingency basis, including damages. Individual brokers do not want their names showing up anywhere as being sued for cause.

6. If something happens, go public and do your own research. I spend a lot of time (for which I don't get paid) updating this site. I know there are thousands of you reading this site. I know there are thousands of you still frozen in these things and still facing intransigent brokerage firms. I also know that many of you have uncovered stuff. And I know some of you have bludgeoned monies out of brokerage firms. Frankly, it would be nice if you allowed me to publish some of your stories.

Read the articles below. I've highlighted some of the more juicy parts, including the commissions paid to brokerage firms/brokers on selling you and I our auction rate securities.

Oh yes. Some brokerage firms (like Wachovia and Oppenheimer) haven't been sued by regulators, but should.

And none of the independents issuers have been chased by the regulators, but should. Some -- like Nuveen and Eaton Vance -- are cashing their ARPS holders out, though the process is slow and painful (to you and me ARPS holders).

In short, just because we've had some nice victories -- UBS, Merrill and Citigroup -- doesn't mean an end to your emails, phone calls, letters and FedEx letters. Keep them flowing. My goal is 100% of our monies back at par.

Send me emails telling me of your bad experiences with brokerage firms or issuers. This web site is being read by a lot people.

August 9, Front page Wall Street Journal

UBS to Pay $19 Billion
As Auction Mess
Hits Wall Street
By LIZ RAPPAPORT and RANDALL SMITH

A once-obscure corner of the bond market is triggering one of the messiest Wall Street scandals in years -- and potentially the largest mass bailout of American individual investors ever.

On Friday, facing allegations of wrongdoing over its sales of so-called auction-rate securities, UBS AG agreed to buy back from investors nearly $19 billion of the investments as part of a settlement with federal and a group of state regulators. It will start buying from individuals and charities in October and from institutional clients in mid-2010.

UBS was the third major firm this week to vow to buy back the securities, which allegedly were improperly sold as higher-rate equivalents for super-safe money-market funds.

UBS, Merrill Lynch & Co. and Citigroup Inc. have committed to taking back a total of more than $36 billion of the instruments. Other financial firms are expected to follow suit.

Auction-rate securities are a kind of debt that soared in popularity in recent years. They let issuers such as municipalities and student-loan organizations borrow for the long term, but at lower, short-term interest rates. The rates reset at periodic auctions, hence the name. Wall Street sold more than $330 billion of these securities to more than 100,000 individuals and other investors.

State regulators from Massachusetts and New York have sued Merrill Lynch and UBS for civil fraud, with the UBS case now settled. Regulators from several states have also shown up on Wachovia Corp.'s doorstep demanding documents; the bank says it is cooperating. A New York state official has accused Citigroup of destroying documents, a charge Citi has denied. Federal prosecutors are preparing to file criminal charges against two former Credit Suisse Group brokers who allegedly lied to investors about auction-rate securities.

It's rare that Wall Street firms make good on client losses, and the size of the auction-rate payments is unprecedented. But a review of several recent regulatory cases reveals the legal pressure facing Wall Street, and shows that some authorities believe the auction-rate market, which was created in the mid-1980s, got out of control.

Regulators say that financial firms, at various times, secretly propped up failed auctions; misled investors on the safety of the securities; pressed brokers and research analysts to sell the very securities executives were trying to unload; and resisted client demands for relief.

'No Real Control'

"It was kind of like a Moroccan bazaar," William Galvin, secretary of the Commonwealth of Massachusetts, said in describing the way Wall Street sold auction-rate securities. "There was no real control, no warranty, no worry about backing up what you said."

Wall Street executives say the auction market functioned smoothly for more than 20 years, and only buckled this year under the stress of a credit crunch that limited their ability to provide support. As a Merrill official put it Friday, its brokers believed such securities were "good investments" for clients seeking higher short-term returns in exchange for some risk the assets couldn't quickly be resold.

The auction-rate scandal has hit tens of thousands of American investors, such as Ken Pugh, a 60-year old retiree in Fort Lauderdale, Fla., who formerly supervised the delivery-truck operations for the Sun Sentinel newspaper.

Mr. Pugh has $350,000, or his entire life's retirement savings, in auction-rate securities in an account at Bank of America, $300,000 of which are backed by student loans; his statement puts a zero in the column for the value of the $350,000. The zero, said a person familiar with the firm, is meant to be read as "not available." Bank of America footnotes statements to notify clients that the securities they hold are not worthless but are illiquid and not easily valued.

"I'm not a financial wizard, that's all I know," says Mr. Pugh. "I took their word for it, and like a dope, this is where I am." Mr. Pugh says he was told the securities were "28-day CDs."

He has gone back to work at an environmental services company for extra cash to live on until he "gets some restitution," he says. "All the stuff my wife and I planned on doing, we can't."

Mr. Pugh has filed an arbitration claim against Bank of America. Bank of America says it "does not comment on client relationships."

Regulators and prosecutors have alleged several kinds of abuses in the auction-rate market, detailed in regulatory cases and investigations. One allegation is that brokers secretly propped up failed auctions.

Interest rates were supposed to be reset by weekly or monthly auctions, at which investors could cash out if they wanted to. Until the market collapsed in February, investors got the impression there was heavy demand for the securities because the auctions went off without a hitch. They weren't told how often Wall Street dealers stepped in to support the auctions with their own bids.

UBS submitted such bids in all of its auctions, according to Massachusetts regulators, who said the Swiss firm acted to prevent auction failures in no less than 69% of its 57,436 auctions between January 2006 and February 2008.

In an email to UBS executives last Dec. 15, David Shulman, who ran UBS's auction-rate desk, questioned whether the firm should continue to submit bids to support auctions.

In the email, Mr. Shulman acknowledged that investors expected UBS to make sure the auctions ran smoothly, even as he and others behind the scenes contemplated halting their bids entirely. "Retail clients have -- I am confident been told that these are 'demand' notes...and will be redeemed at par on demand," Mr. Shulman wrote. While there is no formal obligation to cash out clients at par, he added, "the moral obligation runs very deep."

UBS said it didn't intentionally hide the risks of auction-rate securities, and sold them "appropriately" to individuals for 20 years. UBS said it supported auctions "longer than any other major firm," and its inventory doubled while the number of issues in individuals' accounts declined.

A lawyer for Mr. Shulman said his emails were "taken largely out of context" and that Mr. Shulman was attempting "to be part of the solution, and was not part of the problem."

At Merrill, Massachusetts regulators allege, market-supporting bids by the firm "conceal[ed] the true level of investor demand and created a false impression that there were deep pools of liquidity in the auction market." Merrill says few auctions failed before 2008 and that it disclosed that risk and the possible withdrawal of its support bids to investors.

Another allegation by regulators is that some brokers misled investors on the safety of the securities.

Customers often were told that the securities, which had higher interest rates than rock-solid certificates of deposit, were just as safe and easily sold. They weren't told that the auctions could fail and leave them without the ability to sell.

'Other Cash'

Merrill categorized auction-rate securities as "other cash" on its brokerage statements. Its marketing materials noted that 92% of issues had a top triple-A rating. But, according to Massachusetts investigators, clients say they weren't told the auctions might fail if Merrill withdrew from making bids. Merrill said that while online statements listed auction-rate securities as cash, its "official monthly statements" listed them as "securities," and that most were in fact triple-A.

Some UBS brokers testified to the New York attorney general's office that even they didn't realize the auctions could fail. UBS executives testified that brokers never received any training on how auction-rate securities worked.

UBS says investor guides citing resale risks and the auction process were available online. The firm says it changed its classification of auction-rate securities at the suggestion of an industry group as a result of this year's market difficulties.

Also, regulators say brokers were paid unusually rich commissions to sell the securities. In some cases, they say, brokers received high commissions for a product that appeared to offer high returns but held hidden risks.

The brokers and firms typically shared commissions of 0.25% of the securities sold -- compared with 0.05% for Treasury securities and zero for plain-vanilla money-market funds. Merrill sometimes offered extra commissions, at times up to a total of 1%. Merrill says commissions "didn't change" brokers' approach to auction-rate securities.

To help sell the securities as the market's problems intensified, Citigroup and brokerage firm RBC Dain Rauscher last winter raised commissions to outside brokers for selling Citi's and Dain Rauscher's auction-rate securities inventory, according to emails sent from a Credit Suisse trading desk to Credit Suisse brokers. Dain Rauscher didn't return calls for comment.

Commissions on auction-rate securities were "much higher than for any other equivalent securities," says auction-rate specialist Joseph Fichera, chief executive of Saber Partners LLC, a financial consultant.

State regulators also point to the ways financial firms pressed brokers and research analysts to pitch the securities.

Merrill bond analyst Martin Mauro prepared a research report on last Aug. 22 warning of the dangers of auction-rate securities. It said investors "need to rely on other buyers in the market to redeem the securities at par."

Altered Report

The report was never published, Massachusetts regulators say, because Frances Constable, who ran Merrill's auction-rate-securities desk, shut it down. "It may single handedly undermine the auction market," she emailed two other Merrill employees later that day, according to a complaint filed by the regulators. The regulators say Ms. Constable demanded that the analyst retract and rewrite the report, which appeared the next day with language added that rising rates made the securities "a buying opportunity."

Merrill said the retraction demand didn't change the analyst's views but merely resulted in "a longer, fuller and clearer version." The firm said its research reflected that auction-rate securities offered "higher returns in exchange for less liquidity." Merrill said its employees weren't available to comment.

As the credit crunch developed, financial firms faced pressure to reduce their own holdings of the securities. UBS's holdings of them, for instance, soared through an internal limit of $2.5 billion last September, reaching $11 billon by the time the market froze up this February.

UBS's Mr. Shulman told colleagues on Aug. 22 that he was encouraging UBS brokers "to move more product through the system." But that same day, he sold personal holdings of auction-rate holdings worth as much as $475,000. He sold the last of his personal auction-rate holdings by mid-December, according to the Massachusetts complaint.

The reason, he told Massachusetts investigators, was that some auctions had already failed, and they exceeded his own "risk tolerance." UBS management brought up auction-rate securities in 15 calls with its brokers between August 2007 and February 2008.

Mr. Shulman was one of the UBS executives alluded to, but not charged, in a civil complaint by New York State Attorney General Andrew Cuomo. Mr. Shulman was named but not charged in the Massachusetts regulatory complaint for selling his own stake in auction-rate securities in August.

UBS said that, after its own internal probe, it "found cases of poor judgment" but not illegality by certain individuals, and is "evaluating appropriate disciplinary measures." UBS placed Mr. Shulman on administrative leave in July. Mr. Shulman's lawyer declined to comment on the securities sale.

Brokers at Credit Suisse allegedly misled customers about the safety of auction-rate issues by falsely calling them "student loan" securities, according to a civil suit filed Wednesay. The plaintiff, Geneva chip maker STMicroelectronics NV, was filed Brooklyn federal court and seeks $415 million in damages.

Federal prosecutors in Brooklyn, N.Y., are preparing to file criminal charges against two former Credit Suisse brokers whose clients included the chip maker, according to people familiar with the matter.

Credit Suisse said the brokers resigned in September after the firm "detected their prohibited activity," and that the firm has been assisting authorities. Credit Suisse said clients were given accurate trade confirmations and brokerage-account statements. As for the action filed by ST Microelectronics suit, a spokesman for Credit Suisse said it "declines to comment on meritless lawsuits."

It isn't clear how much in losses Wall Street firms ultimately will record by taking auction-rate securities back on their books. That will depend on if, when and how much the market recovers.

In UBS's Friday settlement, the Swiss bank agreed to buy back $8.3 billion in securities from individuals and charities and $10.3 billion later from institutions. It also has agreed to lend money to holders of the securities at 100% of their par value if they preferred.

On Thursday, Merrill agreed to buy back about $10 billion from about 30,000 investors, and Citigroup agreed to buy back about $7.3 billion from about 40,000 investors.

The article include a diagram called The Mechanics of Auction-Rate Securities.

August 7

Good News from Citigroup, Merrill Lynch and UBS -- update 5
by Harry Newton

Merrill, Citigroup and soon UBS have agreed to redeem at par all their auction rate securities they sold. That amounts to $10 billion for Merrill, $7.5 billion for Citigroup, and $19 billion to $25 billion for UBS. Citigroup will also pay a $100 million fine to state regulators. UBS may pay $150 million in fines.

This is great news for three reasons:

1. For virtually all Citigroup's, Merrill's and UBS's suffering customers who got sold the "toxic" paper. They're getting their money back. Some already have.

2. These moves by Citigroup, Merrill and UBS will put pressure on all the other brokerage firms to step up to the plate and buy back the auction rate securities they sold to their unsuspecting customers. To date, the worst offender is PIMCO, followed by Bank of America and Wachovia.

3. For all of us who got sold ARPS from other brokerage firms. One has to assume that Citigroup, Merrill and UBS will now apply huge pressure on the issuers (PIMCO, Nicholas Applegate, Nuveen, Eaton Vance, BlackRock, etc.) for them to redeem the paper which Citigroup, Merrill and UBS will now own and which they won't want to keep -- would you?

For more, Citigroup Is Expected to Buy Back Securities.

The Citigroup and Merrill news is affirmation that our strategy of maximum pressure is working. But it is not time to slack up. Keep the letters and emails flowing. Regulators want to hear from you.

Today's key contact to badger:

Andrew Cuomo, New York Attorney General
Investor Protection Office 212-416-8222
Be nice to Kelly. She's inundated with calls.

You might also want to contact your local attorney-general and ask why isn't he/she involved. Are you listening California? Why are you doing nothing? Many Californians are stuck in frozen ARPS.

And then there's the issue of what you get back if you were sold ARPS by UBS, Merrill or Citigroup and transferred your account to another broker? Apparently this issue is not resolved. You may want to call the New York Attorney General's office 212-416-8060. They'll tell you the settlement is not fully drafted and they are trying to incorporate this issue. They have been getting a lot of calls on this.

P.S. More redemptions from Nuveen.

August 9

Twist for 'Auction Rate' Cases;
Arbitrations Are to Be Heard by Three-Person Panel
By Daisy Maxey, Dow Jones NewsWires
August 9, 2008

Securities regulators have created a special process for resolving claims related to auction-rate securities, a move that was welcomed by some who have been pressing for change in the arbitration process.

The Financial Industry Regulatory Authority -- created by the merger of the National Association of Securities Dealers and the enforcement arm of the New York Stock Exchange -- said that qualifying investors will have the option of having their claims heard by a three-person panel of arbitrators, none of whom are affiliated with a firm that recently sold auction-rate securities.

The new process stems from one Finra developed for the Securities and Exchange Commission's settlement with Citigroup Inc., in which the bank agreed to buy back about $7.3 billion in illiquid auction-rate securities, and pay $100 million in civil penalties, with $50 million going to the state of New York.

"The auction-rate securities matter is more widespread than other issues that have developed in the arbitration forum, and we wanted to make sure that any investor, whether in the Citigroup settlement who elects to have a three-person panel, or any other case related to ARS, all got the same treatment," said Linda Fienberg, president of Finra Dispute Resolution. "This will apply to all auction-rate securities cases that are in our forum whether it's part of a settlement or not."

She said Finra will put the process in place as soon as possible.

Thus far, Finra has confirmed that more than 170 cases involving auction-rate securities have been filed in its Dispute Resolution forum, but there may be as many as 200, Ms. Fienberg said.

The announcement was welcomed by Laurence Schultz, president of the Public Investors Arbitration Bar Association, a national association of attorneys that represents investors in securities disputes, and that has been pressing for change in the arbitration process.

"This is precisely what we've been asking for," said Mr. Schultz, of Driggers, Schultz & Herbst in Troy, Mich. "We're pleased that they have stepped up to this problem and recognized that arbitrators who are associated with firms that were issuing auction-rate securities cannot participate in these panels."

But Mr. Schultz believes that industry-connected arbitrators should be banned in all cases.

Typically, for claims of more than $50,000, the three-member panel of judges must include two public members, who may have limited industry connections, and an industry representative.

In the process announced Thursday, arbitration panels will continue to have that makeup, but individuals who since Jan. 1, 2005, have either worked for a firm that sold auction-rate shares or supervised someone who sold them won't appear on the lists of nonpublic arbitrators from which panel members are selected for auction-rate arbitration cases.

Ms. Fienberg said Finra works to eliminate conflicts of interest in all arbitration cases. It will exclude an arbitrator if it identifies a conflict, an arbitrator may recuse themselves or an attorney or investor may bring a challenge if they feel there is a conflict, she said.

Finra plans to undertake a two-year pilot project, which will begin Oct. 6, in which some cases will be heard before an all-public panel if an investor chooses. The pilot will involve at least 466 cases, but Finra hopes to include more, Ms. Fienberg said.

The regulator will gather data to determine possible future options for arbitration, she said.

Write to Daisy Maxey at daisy.maxey@dowjones.com

August 7

Merrill Joins Citigroup in Buying Back Auction-Rate Bonds (Update2)

By Bradley Keoun and David Scheer

Aug. 7 (Bloomberg) -- Merrill Lynch & Co. said it will offer to buy back about $10 billion in auction-rate securities from retail clients after Citigroup Inc. agreed to take similar steps under a settlement with U.S. and state regulators.

Merrill will pay face value for the securities, according to a statement today from the New York-based firm. The buybacks will begin in January and continue for a year. The investments have been frozen in customer accounts since Wall Street firms backed away from the market in February, leading to claims by customers and investigations by the U.S. Securities and Exchange Commission and regulators in New York and Massachusetts.

"Our clients have been caught in an unprecedented liquidity crisis,'' Chief Executive Officer John Thain said in the statement. "We are solving it by giving them the option of selling their positions to us.''

Regulators have been probing how banks and Wall Street firms sold auction-rate securities before the $330 billion market collapsed in February. Citigroup, the biggest U.S. bank by assets, earlier today reached an agreement with state and federal regulators to buy back about $7.5 billion in securities from its brokerage clients.

Regulators in Massachusetts filed a civil complaint against Merrill last week, claiming the firm and its analysts pitched the securities to investors as the market was collapsing.

"When one major firm settles a material piece of litigation, others follow suit pretty quickly,'' said Anthony Carfang, a partner at Treasury Strategies, a Chicago-based financial consultant. "It puts pressure on other institutions to make their customers whole.''

Merrill extended its offer to individual investors, charities and small businesses. The firm said it doesn't expect purchases during the buyback period to have "a materially adverse impact on its capital ratios, liquidity or consolidated financial performance.''

The firm must still resolve pending regulatory complaints. Massachusetts Secretary of the Commonwealth William Galvin said in a telephone interview that Merrill's redemption timeline is "not satisfactory.''

"It's a start I suppose,'' Galvin said. "I'm glad they did it, but I think for most investors it's not the solution they need.''

New York Attorney General Andrew Cuomo, who announced the Citigroup agreement at a press conference today in New York, said in a statement his office was evaluating Merrill's offer.

`Huge Sums'

"We've had an ongoing investigation into Merrill Lynch,'' Cuomo said. "We are reviewing their plan to begin returning money to investors, which is obviously one of the goals we've established.''

Thomas Ajamie, a Houston-based securities lawyer who won a $429 million arbitration award against Paine Webber Group in 2001, said Merrill may be hoping its announcement will pressure regulators to accept the offer.

"There is probably a balance here between recognizing that people are entitled to it, and recognizing the realities of the size of this crisis,'' Ajamie said. "They are trying to find a timetable to give people their money, yet recognize that they need to keep banks stable. These are huge sums of money.''

Merrill says clients currently hold about $12 billion of auction-rate "curities, and that number will be reduced to $10 billion by January through ``announced and anticipated issue redemptions.'' On a conference call with investors last month, Merrill Chief Executive John Thain said the firm had reduced the frozen auction-rate securities from $22 billion by getting issuers to refinance them.

In those deals, "everyone got their money back,'' Thain said. Merrill has more than 16,000 financial advisers and oversees about $1.4 trillion of assets.

Citigroup agreed to pay a $100 million fine and make offers by November to buy back clients' auction-rate securities. The accord may set a precedent for negotiations with firms including UBS AG, the Swiss bank named in civil complaints by Cuomo and authorities in Massachusetts.

"Firms that don't settle are going to be frowned upon by investors,'' Texas State Securities Commissioner Denise Voigt Crawford said.

Auction-rate securities are bonds or preferred shares whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck in what had been pitched to them as money-market-like instruments.

"Lots of investors are still stuck,'' said Joseph Fichera, chief executive of Saber Partners, a New York-based financial advisory firm. There's a "light at the end of tunnel, but not a full resolution.''

To contact the reporter on this story: David Scheer in New York at dscheer@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

August 7

Citigroup does the right thing for investors stranded in auction-rate debt, but where's the rest of Wall Street?
by Tom Petruno, LA Times

Finally -- a bailout for small investors.

Citigroup Inc. today agreed to do the right thing by unfreezing $7.3 billion of its customers’ funds that are tied up in so-called auction-rate securities.

Now, will the rest of Wall Street follow suit?

The financial services industry has been the beneficiary of massive government help this year. If only some of that would have trickled down to the industry’s customers.

Brokerages turned their backs on clients after the auction-rate debt market seized-up in February, stranding investors in more than $300 billion of securities that had been marketed as being highly liquid -- meaning you were supposed to be able to get your cash back on demand.

But that liquidity hinged on whether other investors would be willing to buy if you wanted to sell. When the credit crunch worsened and bids dried up for any security that looked too complicated, the auction-rate market froze solid.

Investors in the securities still were earning interest but they couldn’t get their principal -- say, to make a college tuition payment, or pay a hospital bill.

It would have been the right thing for brokerages at that point to step up and offer to buy the securities back from any investor who wanted to sell.

That didn’t happen. No way was the industry, on its own, going to offer to bail out customers who had, in many or most cases, clearly been misinformed about the relative safety of auction-rate debt.

Let’s review some of the high-profile bailouts that did happen this year:

-- The Federal Reserve saved the brokerage industry from a potential meltdown in March by arranging the marriage of failing Bear Stearns Cos. with JPMorgan Chase & Co.

-- As part of that rescue, the Fed opened its borrowing window to securities firms for the first time.

-- Last month, Congress agreed to allow the Treasury Department to pump taxpayers’ dollars into struggling mortgage giants Fannie Mae and Freddie Mac if the firms are threatened by insolvency.

For stranded auction-rate debt investors, however, little help was forthcoming from Wall Street. Only now that Citi has been bludgeoned by New York Atty. Gen. Andrew Cuomo, other state securities regulators and the Securities and Exchange Commission has the firm agreed to put up its own money to make its small investors in the auction-rate market whole.

The North American Securities Administrators Assn. says it is investigating or negotiating with 11 other brokerages that have customers trapped in the debt. Two firms -- UBS and Merrill Lynch & Co -- are facing state securities-fraud charges related to their sales of the debt. They have denied wrongdoing.

Harry Newton, an online investment newsletter writer who has been keeping close tabs on the auction-rate debacle here, estimates that $200 billion still is locked up in the securities.

The Fed rushed money to Wall Street. The Treasury stands ready to rush money to Fannie Mae and Freddie Mac.

What good excuse does the brokerage industry have for failing to rush to help its own clients?

August 5, 2008

First Success of VRDP Shares Sold is Reported by Nuveen -- Will Lead to Full Fund ARPS Redemption.
by Harry Newton

Nuveen today reported that it had successfully sold Variable Rate Demand Preferred (VRDP) shares from four of its funds. In each press release, Nuveen said, " Proceeds from the offering are expected to be used, in conjunction with proceeds from the creation of tender option bond (TOB) trusts by the fund, to redeem all of the fund's outstanding auction-rate preferred shares (ARPS) totaling (whatever was the total -- see below). The fund intends to announce a formal redemption notice for the ARPS in the coming days."

This is HUGE good news for those of us investors trapped in ARPS. It means that money market funds have accepted these brand new securities as securities they would buy for their money market funds.

The Nuveen funds are:

1. The Nuveen Dividend Advantage Municipal Fund 2 priced and placed with investors $196 million of its Variable Rate Demand Preferred (VRDP) shares.

2. The Nuveen Insured Premium Income Municipal Fund 2 priced and placed with investors $219 million of its Variable Rate Demand Preferred (VRDP) shares.

3. The Nuveen Insured California Tax-Free Advantage Municipal Fund priced and placed with investors the private offering of $35.5 million of Variable Rate Demand Preferred (VRDP) shares

4. The Nuveen Insured New York Dividend Advantage Municipal Fund priced and placed with investors the private offering of $50 million of its Variable Rate Demand Preferred (VRDP) shares.

All four press releases include the following statement:

"The VRDP shares will include a liquidity feature that allows holders of VRDP to have their shares purchased by a liquidity provider in the event that sell orders have not been matched with purchase orders in a remarketing. The liquidity feature was provided by Deutsche Bank AG, acting through its New York Branch. VRDP dividends will be set weekly at a rate established by a remarketing agent. Conditions to the fund's issuance of VRDP will include the receipt of both short-term and long-term credit ratings for the VRDP that are in the highest rating category from two nationally recognized statistical rating organizations."

All releases are on Nuveen's web site.

July 31

Three Brokerage Firms Hit with Fraud Suits+ One Congressional Hearing -- Update 1

There are now fraud suits out against UBS, Merrill Lynch and one about to be filed against Citigroup. These three were the worst, based on emails which have flooded into me from their suffering clients. But they're not alone. Others to be hit with suits shortly will include Allianz, PIMCO, and Wachovia. Those three are the second tier of "worst."

The latest news. New York AG, Andrew Cuomo, told Citigroup it was in big trouble. Cuomo outlined his intentions in a letter to Citigroup’s general counsel dated Friday, saying that charges were imminent. (See below for a lot more.)

In the letter, the New York Attorney General’s office alleged that the nation’s largest bank “has repeatedly and persistently committed fraud by material misrepresentations and omissions” in the underwriting, distribution and sale of auction rate securities, touting them as safe, cash-equivalent investments.

Cuomo’s office claimed that the sale of these securities had “a severe detrimental impact” on tens of thousands of Citigroup customers. (And boy, is he right.)

Congress is now also involved. It has scheduled hearings for September 18 and warns the issuers and the brokerage firms to get their act together and redeem the frozen ARPS between now and then -- or there'll be hell to play..

To glean a full understanding of just how badly Wall Street has treated its customers, you need to read the news items below and across. These will give you a summary. But then you need to read the various documents from Willam Galvin, Secretary of the Commonwealth of Massachusetts:

UBS Fraud Accusation documents.

Merrill Lynch Fraud Accusation documents.

And you need to read the New York State press release and complaint against UBS which can be found here.

You'll see how UBS and Merrill knew their auction rate securities were toxic, needed to get rid of them and conspired to lie to their brokers to convince them to sell the toxic paper to their unsuspecting, but trusting, clients -- you and me.

After you've read this stuff, you'll ask yourself the obvious question, can Wall Street ever be trusted again? Next time you watch CNBC, keep an eye out for the UBS -- you and us -- advertisements. You will wonder how a company being sued for fraud (and in legal problems up the whatzu) can, in all conscience, run these incredible BS ads. I guess Wall Street assumes all of us are stupid and gullible.

FYI, I don't post every article on auction rate securities. I post the ones with something new. You may also want want to read BusinessWeek's July 30 issue. It has a piece called The Investment "Albatross" at UBS.

Meantime, the theoretical salvation of frozen ARPS is their hoped-for conversion into securities which money market funds will be able buy. Nuveen and others have announced they're working on the conversion. Theoretically, we're meant to hear soon -- in the next 30 days. I've asked around to find out what the "hold-up" is. I've been told there is no hold-up, just "lots of moving pieces."

I pray nightly for a personal fortune equal to 1% of the daily legal fees being incurred on this ARPS mess. If I were a lawyer with no other business (and there are many -- the economy is not doing well) -- I'd want to drag this out forever, too.

Meantime, none of this abrogates your responsibility as a frozen ARPS holder to bring pressure. Send letters, make phone calls, sit on doorsteps. Bring pressure on the brokerage firms never to deal with the issuers of ARPS -- unless they clean this mess up quickly. The issuers of ARPS have not been sued -- yet. But we can make their lives very uncomfortable. Accelerate your efforts, please.

Clearly our efforts are working. But we nee to keep them up, until the last one of us has received every nickel of his frozen monies back. -- Harry Newton.

But most of the big closed-end fund firms have been working on ways to either restructure ARPs so that they have a liquidity feature or replace them with a new kind of preferred security that has one, in order to make them money-fund eligible and bail out investors holding the ARPs.

Eaton Vance, the third-largest manager of closed-end funds in the U.S., said this month it received a no-action letter from the Securities and Exchange Commission allowing it to go forward with a plan to issue a new type of security: liquidity protected preferred shares

Called LPPs, the shares would pay a dividend reset every seven days in a remarketing process administered by one or more financial institutions, a structure similar to that of ARPs. But banks that agree to provide liquidity for LPPs must purchase all unsold shares, unlike the broker-dealers that back ARPs auctions.

Eaton Vance doesn’t yet have any formal agreements with liquidity providers, although Jonathan Isaac, head of its closed-end fund business, said the firm is close. “We’re in conversations with many, and fairly confident that we’ll get agreements in place.”

On the same day that Eaton Vance received its no-action letter, the Treasury Department issued guidance on adding liquidity features to ARPs. According to its guidance, the Internal Revenue Service “will not challenge the equity characterization of auction-rate preferred stock for Federal income tax purposes as a result of adding a liquidity facility.”

The treatment of the new preferred shares as equity, and not debt, gives closed-end funds more freedom to issue them. Under the Investment Company Act of 1940, closed-end funds can only issue debt if they have at least $3 of assets for every $1 of debt issued. The minimum ratio for equity, however, is only $2.

Meanwhile, the largest and second-largest closed-end fund managers, Nuveen Investments and BlackRock, respectively, have been working on solutions of their own. Like Eaton Vance, Nuveen said it has been developing a new type of security, called variable rate demand preferred shares, which would replace ARPs. In a press release last month, Nuveen said it expected the new securities to come to market within the next 30 to 60 days. BlackRock, on the other hand, says it will likely apply a put feature to existing ARPs.

A key difference between Eaton Vance’s plan and the others would be that for a limited time, the company would allow the liquidity provider to put shares directly back to Eaton Vance. In a statement, the firm added that it did not think there would be an ongoing need to put the LPP shares back to Eaton Vance once a market gets rolling.

Mr. Isaac said that since the ARPs market stalled, Eaton Vance has been able to redeem $3.3 billion of its $5 billion of outstanding ARPs through various refinancing methods. He added that if the new securities take off, he hopes LPPs will replace a majority of the remaining ARPs.

For that to happen, Mr. Isaac must not only line up liquidity providers, he also needs to find money-market funds willing to buy the securities. Even though the Treasury Department and the SEC have more or less given their blessing to the new securities, money-market funds may choose to steer clear of anything connected to the troubled auction-rate market. But Mr. Isaac is optimistic. “I think everything we’ve heard suggests that they are interested,” he said. “The proof of the pudding will be when [LPPs] are out there, available to be purchased.”

Last month, Federated Investors issued a statement about the new securities resulting from the refinancing of ARPs, saying that “Federated will consider these notes for investment in prime money market funds only after employing the same thorough due diligence process that we use for all investments.”

“How well will the money-market funds accept the new product? That is a big question mark,” Herzfeld’s Ms. Gondor said, adding that the firms have been talking with money market fund managers, who seem receptive. “The question is, are they going to put their money where their mouth is?” FW

++++++++++++++++++

June 24

ARS Suits Against Citigroup Consolidated
By Amanda Ernst, amanda.ernst@portfoliomedia.com

Portfolio Media, New York (June 24, 2008)
A district court has consolidated five proposed class actions brought against Citigroup Inc. on behalf of purchasers of auction rate securities, despite arguments that consolidating all the claims, including those that do not fall under the Private Securities Litigation Reform Act, would delay recovery for the class members.

On Tuesday, Judge Laura Taylor Swain of the U.S. District Court for the Southern District of New York consolidated four cases that asserted violations of federal securities laws against Citigroup with one case that only asserted claims under the Investment Advisor Act, which is not subject to the PSLRA.

Judge Swain noted that one of the four cases that asserted claims that are subject to the PSLRA also claimed violations of the Investment Advisor Act.

Samuel Sporn, an attorney for the lead plaintiffs in the Investment Advisor Act case – Stockhamer et al. v. Citigroup Inc. et al. – claimed that the progress of his case would be slowed by the consolidation, but Judge Swain ruled that other class members would be prejudiced if the Stockhamer case was not combined with the other cases.

“Consolidation of the Stockhamer case with the other actions is warranted,” Judge Swain concluded. “These cases deal with substantially the same claims, substantially the same defendants and substantially the same discovery.”

After determining that the cases were to be consolidated, Judge Swain set about ruling on the lead plaintiff and lead counsel motions.

Sporn had also requested that his client and his firm, Schoengold Sporn Laitman & Lometti PC, be considered for roles as co-plaintiff and co-counsel to handle all of the Investment Advisor Act claims.

Besides Stockhamer, two plaintiffs sought the lead role before Judge Swain on Tuesday: Dr. Michael A. Passidomo, a retired doctor who had purchased almost $11 million of auction rate securities during the proposed class period; and Wedgewood Tacoma LLC along with Jemstone LLC, which purchased almost $4 million in ARS and still have significant assets frozen in the market.

Although Passidomo had the greatest assets involved in the dispute, making him an ideal candidate for lead plaintiff, Wedgewood Tacoma’s attorney, Jerome Congress of Milberg LLP, claimed the doctor had not been forthright about his background and was therefore unfit to be lead plaintiff in the consolidated case.

According to Congress, Passidomo had been reprimanded by medical boards in various states and had his license to practice medicine revoked in Kentucky after a dispute arose over allegations that he ordered possibly unnecessary high-contrast scans for some patients.

Congress told Judge Swain that Passidomo had hid this information about his background and had avoided answering questions about it when the Milberg firm queried him in court papers.

Passidomo’s attorney, Jeffrey Zwerling of Zwerling, Schachter & Zwerling LLP, said Passidomo would be a “zealous advocate on behalf of the class,” as evidenced by his challenge of the claims waged against him over the allegedly unnecessary scans. He fought for years to “set the record straight,” Zwerling said.

Ultimately, Judge Swain named Passidomo the lead plaintiff in the case and appointed Zwerling Schachter lead counsel.

“There is no dispute that Dr. Passidomo has the largest financial interest in the litigation,” Judge Swain said.

The judge also ruled the Passidomo met the typicality and adequacy requirements of a lead plaintiff, and said that the other plaintiffs seeking lead status had not rebutted that assumption.

Judge Swain also was not persuaded that a co-lead plaintiff or counsel was necessary to pursue the Investment Advisor Act claims in the consolidated suit. She instructed Zwerling to include those claims in his amended consolidated complaint, due in 60 days.

After Judge Swain finished ruling on the matter, Zwerling said he thought the judge had followed the requirements necessary for appointing a lead plaintiff in such a case.

“There were some unwarranted attacks made against Dr. Passidomo,” Zwerling said. “I think the judge also saw things that way.”

Attorneys for Citigroup, which supported the consolidation of the cases, declined to comment Tuesday.

The suits against Citigroup claim that during the class period of March 27, 2003 to Feb. 13, 2008, Citigroup, Citigroup Global Markets Inc. and Citi Smith Barney were among the largest sellers and underwriters of auction rate securities.

“Throughout the class period, defendants represented to investors that ARS were highly safe and liquid investments that were equivalent to cash or money market funds,” Passidomo said in his motion seeking lead plaintiff status. “However, unbeknownst to investors, ARS were complex, long-term financial instruments whose liquidity and stability was dependent on defendants’ artificial support and manipulation of the ARS market.

“Thus, when defendants and the other major broker dealers withdrew their support of ARS auctions, the ARS market quickly collapsed.”

The plaintiffs are represented in this matter by attorneys from Zwerling, Schachter & Zwerling LLP; Schoengold Sporn Laitman & Lometti PC; Milberg LLP; Zimmerman, Levi & Korsinsky LLP; Girard Gibbs LLP and Seeger Weiss LLP.

Citigroup is represented in the matter by attorneys from Paul, Weiss, Rifkind, Wharton & Garrison LLP.

The cases are LHB Insurance Brokerage Inc. v. Citigroup Inc. et al., case number 1:08-cv-3095; Swanson v. Citigroup et al., case number 1:08-cv-3139; Wedgewood Tacoma LLC v. CitiGroup Inc. et al., case number 1:08-cv-4360; Ghalayini v. Citigroup Inc. et al., case number 1:08-cv-5016 and Stockhamer et al. v. Citigroup et al., case number 1:08-cv-3904, all in the U.S. District Court for the Southern District of New York.

All Content Copyright 2007, Portfolio Media, Inc.

+++++++++++++++++

June 24

Hooray for HSBC!!!!
Finally An Honest Broker
Yes, there is one. Only one!

From Bloomberg yesterday:

HSBC Securities Offers to Buy Clients' Auction-Rate Securities

By Christopher Condon
June 23 (Bloomberg) -- HSBC Holdings Plc's U.S. securities arm became the first major brokerage to offer to buy back auction-rate securities from customers unable to sell since that market froze in February.

HSBC Securities USA will buy all its clients' municipal bonds and student-loan-backed bonds sold on the auction-rate market, spokeswoman Juanita Gutierrez said in an e-mailed statement from New York today. The brokerage will also repurchase some auction-rate preferred shares issued by closed-end funds,
Gutierrez said.

Firms organizing the $330 billion auction-rate market stopped acting as buyers of last resort when demand faltered amid concern that bond insurers would be downgraded. Investors holding about $230 billion in auction-rate securities remain unable to sell.

Auction-rate securities allowed sellers to raise long-term capital while paying short-term rates. The securities carry a fixed face value and a variable interest rate that resets at auction every 7, 28 or 35 days.

HSBC Securities didn't disclose how much its clients hold in auction-rate securities. The company said securities and banking laws prevented it from buying some closed-end preferred shares.

Gutierrez said she couldn't provide more details.

London-based HSBC is Europe's largest bank by market value. Its brokerage unit isn't an auction manager. Firms that sold auction-rate securities, including Citigroup Inc. and Morgan Stanley, have been named in at least 24 proposed
lawsuits in which shareholders claim they were misled and told they were buying safe, liquid investments. The companies have said the suits are without merit.

State and local governments, hospitals and colleges were the largest users of the auction-rate market. Many were forced to pay high penalty rates when their auctions failed. Since March, they have bought back or made plans to repurchase at least $81 billion of the $166 billion they issued.

Closed-end funds also used auction-rate securities to boost returns. About 70 percent of closed-end funds borrowed money by selling preferred shares on the auction-rate market.

When the market collapsed, closed-end funds had $64.3 billion in outstanding preferred shares, which weren't subject to high penalty rates. Pressure from shareholders and regulators has led closed-end fund companies to repurchase or schedule redemptions for about $16.5 billion.

Debt backed by student loans makes up most of the rest of the auction-rate market.

To contact the reporter on this story:
Christopher Condon in Boston at +1-617-210-4633 or
ccondon4@bloomberg.net

To contact the editor responsible for this story:
Larry Edelman at +1-617-210-4621 or ledelman3@bloomberg.net.

HSBC's Public Statement

I contacted HSBC this morning and a very sweet Juanita Gutierrez sent me HSBC's statement:

In light of the unprecedented market conditions in the auction rate securities market and the high value we place on our customer relationships, HSBC Securities (USA) Inc. is making a private offer to purchase at par from its customers certain auction rate securities which have been impacted by the disruption in that market. This offer is being made to provide liquidity to HSBC Securities' customers, should they need or want it, and adheres to HSBC’s values and principles. HSBC Securities (USA) Inc. services the brokerage needs of its private bank, premier and retail clients.

Key points to consider:
+ In light of the unprecedented market conditions in the auction rate securities market and the high value we place on our customer relationships, HSBC Securities (USA) Inc. is making this private offer to address the liquidity needs of its customers affected by the disruption in that market.

+ In order to provide liquidity to its customers currently holding auction rate securities, HSBC Securities is offering to purchase at par all ARS issued by student loan providers and all ARS issued by municipalities currently held in its customers' accounts. To provide additional liquidity, HSBC Securities is offering to purchase from its customers certain ARS issued by closed end mutual funds within the limits of applicable law. HSBC Securities has placed limitations on offers to purchase ARS issued by closed end mutual funds to comply with certain securities and banking laws.

HSBC Securities has not managed or co-managed any auctions of ARS that have experienced failed auctions this year.

As this is a private offer to our customers, HSBC is not disclosing further details. I thank you for your understanding. However, please let
me know if I can be of further assistance.

Juanita Gutierrez
Dir, Public Relations | HSBC Bank USA, N.A.
452 Fifth Avenue, 13th Floor
New York, New York 10018
Phone. 212-525-6282
Fax. 212-525-6875
Mobile. 917-560-7983
Email. juanita.gutierrez@us.hsbc.com

++++++++

June 24

Today's Wall Street Journal shows what we've known all along: Our auction rate preferreds are ultra-cheap (perhaps the cheapest) leverage financing and that financing can't be easily replaced. Hence the only solution to get our money of disgusting companies like Pimco, Neuberger Berman, Dreyfus and Pioneer Investments -- remains PRESSURE -- legal and public. These companies need to understand that we (and no one else) will ever do business with them ever again if they continue their present immoral, greedy behavior. I think an avalanche of letters, emails, and phone calls to Bill Gross is called for.

This is villain number one -- Bill Gross. He manages the world's biggest bond fund at PIMCO.

Here's today's Wall Street Journal piece. -- Harry Newton.

When 'Preferred' Holders Come Second
In Auction-Rates, Some Funds
Choose Not to Redeem,
Protecting Common Shares
By SHEFALI ANAND, Wall Street Journal
June 24, 2008; Page C1

Over recent weeks, some of the biggest closed-end fund companies, ranging from Eaton Vance Corp. to Nuveen Investments Inc., have unveiled plans to redeem their auction-rate preferred securities, allowing frustrated investors to cash out.

But some other prominent closed-end fund companies, like Pimco, are not rushing to redeem auction-rate preferreds, because cashing out this quasi-debt would hurt the funds' common shareholders. Funds function like stand-alone companies, with common shareholders and debtholders. As of now, Pimco and its cohorts appear to be favoring investors in the common.

So their preferred holders may have to wait months or even years before they can cash in. For closed-end funds, issuing auction-rate preferreds adds leverage that can juice returns, a potential boon to investors in the funds' common.

Allianz SE's Pimco and Nicholas-Applegate funds, Lehman Brothers Holdings Inc.'s Neuberger Berman funds, Bank of New York Mellon Corp.'s Dreyfus funds, and Pioneer Investments are among the prominent closed-end operations that have not announced plans to redeem auction-rate preferreds. They have a total of $7.6 billion of auction-rate preferred among them.

Pimco's closed-end funds have some powerful common shareholders, including legendary bond-fund manager Bill Gross and Pimco Funds' chairman, Brent Harris.

According to data from FactSet Research Systems Inc., Mr. Gross has about $43 million in nine Pimco closed-end funds, which have issued auction-rate preferreds, based on filings made last year, the latest available. He was the largest investor in one of these funds as of last August, the Pimco Corporate Opportunity fund. Mr. Harris has $775,000 in two Allianz closed-ends, one from Pimco and another from Nicholas-Applegate.

A Pimco spokesman said employees' personal holdings "play no role whatsoever in the firm's search for an appropriate and sustainable solution." To say otherwise, it added, "is outrageous."

Auction-rate preferreds are long-term securities that functioned like short-term investments. When the market was working as intended, rates would be reset at weekly or monthly auctions, and investors could sell the securities there. In February, as the credit crunch worsened, buyers for these securities vanished.

Holders of auction-rate preferreds are left in limbo by fund houses like Pimco and Neuberger Berman. Ed Dowling, 53 years old, of Huntington Station, N.Y., owns preferreds issued by five fund companies. Neuberger Berman is the only one that has stayed silent on redemptions. He holds $300,000 in Neuberger's preferreds, and he worries that he could be stuck in them for a long time.

"What if Lehman goes under? What happens to Neuberger? What happens to me?" Mr. Dowling asks. He is considering selling the securities in the secondary market, even if it means getting 90 cents on the dollar. "I don't want to wait and bite my fingernails," he

There are bad investments, and then there are really, really bad investments.

In the $330 billion world of auction-rate securities, put bonds backed by education loans in that latter category. Not only are investors stuck with about $80 billion of the unsellable bonds, many of them are now getting paid zero interest for their troubles.

Regulators and issuers are scrambling to find a way out for thousands of investors, but this will typically mean that investors who want to sell will have to do so at a loss.

Late Wednesday, the Missouri Higher Education Loan Authority told investors in some $3 billion of its outstanding auction-rate bonds that it would buy back $30 million or so at a discount, through a secondary trading market set up in February by Restricted Stock Partners. It is the first issuer of student-loan-backed auction rates to step into the secondary market.

"Mohela," as the state's lending authority is known, won't say what that discount will be, but Barry Silbert, the president of New York-based Restricted Stock Partners says other bonds backed by student loans have sold at discounts of 20% to 25% or more.

In April, JPMorgan Chase told investors in three student-loan-backed bonds that it would buy back $1.1 billion at par. Other banks, including UBS, have told investors it would mark down their auction-rate holdings.

Auction-rate securities are another one of those obscure and increasingly toxic securities products that have gotten caught up in the credit-market turmoil. They are long-term bonds, the rates for which reset at periodic auctions, usually at intervals of seven to 35 days. They allow issuers, like municipal agencies and student lenders, to get better borrowing terms for long-term debt. For investors, they had behaved pretty much like cash--until this year.

But, of course, they aren't cash. When the credit markets seized up, investors started shying away from fixed income, and the investment banks that cooked up the products and sold them to investors refused to step in and buy, allowing those auctions to fail. That left investors unable to sell their holdings.

It was an unhappy circumstance for the issuers, too. According to the terms of the bonds, the interest rates would reset at much higher penalty rates in the event of an auction failure, then fluctuate in subsequent auctions.

Municipal agencies like the Port Authority of New York and New Jersey make up the bulk of auction-rate issuers, about $185 billion worth. For many, the higher penalty rates (for the Port Authority, rates reset to 20% from 4% after a failed auction in February), threatened to derail infrastructure projects, and many issuers have refinanced into more traditional fixed-rate bonds.

At least the investors in bonds backed by municipal debt get paid the high penalty rate for the inconvenience of having illiquid holdings. Investors in student-loan-backed auction-rate securities are seeing the initial reset rates plummet to zero because of the technical way these bonds are structured. That means they are holding 30-year bonds paying no interest. The 30-year Treasury, by comparison, pays 4.59%.

For example, $5 billion of auction-rate securities issued by Pennsylvania Higher Education Assistance Agency, one of the biggest in the market, recently reset to zero.

The investors in these securities include thousands of ordinary people who thought they were buying money-market securities, according to Karen Tyler, the state securities regulator in North Dakota and president of the North American Securities Administrators Association.

Instead, these investors are stuck and can't sell without taking a loss. And many have locked up funds they had set aside for mortgage down payments or living expenses, small-business payrolls, and, in the case of farmers, spring planting funds, Tyler said.

Eleven states, the Securities and Exchange Commission, and the New York Attorney General's Office are investigating how investment banks marketed and sold auction-rate securities. Hundreds of complaints have poured in to state regulators.

Merrill Lynch and Goldman Sachs have said they had received requests for information from various governmental agencies regarding auction-rate securities, including the recent failure of auctions, and are cooperating.

Massachusetts state regulators subpoenaed Merrill, UBS and Bank of America in March in regards to their auction-rate activities.

The solution may be that regulators force the banks to return the money to investors, which is why the task force is looking into how the products were presented and sold. "If it was represented that they were as good as cash, then investment banks need to pay cash for them," Tyler said. "The investment banks need to make the liquidity event happen."