"Auction
rate preferred securities is the largest fraud
ever perpetuated by Wall Street on investors.
It dwarfs all frauds in history, including Madoff."
- Harry Newton
|
July
10, 2009
TD Ameritrade
Founder Buys Chicago Cubs;
Online Firm's ARS Clients Still Striking Out
By Phil Trupp (MVA News Service)
Washington,
July 9-J. Joe Ricketts, founder of TD Ameritrade,
may be having lots of fun this summer with his
newest toys-the Chicago Cubs, Wrigley Field and
a 25 percent stake in a regional cable network.
Unfortunately, his company's ARS clients won't
be hitting any home runs, let alone munching peanuts
and Cracker Jacks. While the boys of summer do
their thing on the ball field, TD's unfortunate
clients keep striking out.
In February, reports circulated stating that TD
was "close" to reaching a settlement
with the SEC over auction rate securities valued
at $694 million, including $192 million in custody
for clients of independent RIAs.
A TD spokesperson the earlier reports of a "close"
settlement were inaccurate. TD's auction rate
clients remain illiquid.
"The SEC is still looking it," the spokesperson
said. "Nothing's changed. When things do
change, we'll issue a statement."
Meanwhile, ARS clients are not reacting with joy
over Mr. Ricketts' $900 million tab for the Cubs,
the Wrigley stadium, and the cable hookup in what
is being derisively labeled a "Ricketts Family
Deal." Unhappy investors point to the Cubs
price tag as being almost equal to TD's stash
of frozen ARS.
"Apparently this crowd cares more about baseball
than the financial condition of its clients,"
complained one fed-up investor.
In addition to J. Joe, the Ricketts family includes
J. Peter Ricketts, 44, former TD COO and founder
of Drakon LLC, an asset management firm in Omaha.
Ricketts the Younger now sits on the TD board
alongside his 66-year-old father, who reportedly
draws $650,000 annually for his board duties.
In 2006, Peter Ricketts, a staunch family values
republican, spent more than $11 million out of
his own pocket to field a right wing political
campaign against Ben Nelson for the U.S. Senate
seat in Nebraska. Ricketts succeeded in setting
an all-time state record for out-of-pocket political
spending. He lost the election but later was soothed
by Forbes magazine whose editors placed his family
among the richest in the country with a net worth
of about $2.6 billion.
"We didn't make a market in these (ARS) bonds,"
said a TD official reached earlier this week by
Auction Rate Preferreds. Org. "We weren't
like the big banks." The official declined
to be named for this story because of the sensitive
and litigious nature of the ARS debacle.
"We're trying to get Nuveen to come up with
something," he said.
TD chairman and CEO Fred Tomczyk earlier this
year said the Omaha-based firm is less exposed
to ARS problems than other midsize or online brokers.
In an interview with Investment News, Mr. Tomczyk
said he would not expect an ARS settlement to
be "material" to company earnings. He
expects private-sector litigation to continue,
though he apparently shrugged it off as a cost
of doing business.
Mr. Tomczyk said TD is not actively pursuing acquisitions
of asset management firms. He reported that the
company has a $1 billion cash cushion and is trying
to lessen dependence on active online traders
and become more of an asset-gathering firm.
However, the company is apparently buying thinkworm,
Inc., a Chicago options trading outfit.
At the same time, TD is cutting expenses by 6
percent to offset declining revenue from its online
trading business. The company recently was upgraded
to investment-grade status because of its reportedly
sound capital position.
With $1 billion in cash and approximately $886
million in frozen auction rate bonds-to say nothing
of the $2.6 billion in the family's coffers-TD
apparently can afford its "What, me worry?"
stance.
"I'm not singing Take Me out to Ball Game,"
fumed one of TD's ARS clients.
Late breaking news:
TD also has purchased naming rights for Omaha's
new 24,000 seat College World Series baseball
stadium. Sources said the price of the 20 year
deal is about $750,000 a year, with annual escalators,
for the $128 million downtown park. The stadium
is set to open in 2011.
The ballpark will be known as TD Ameritrade Park.
Sports experts say the deal, finalized in June,
is "significant," due to a depressed
sponsorship market, especially for stadium naming
rights.
Bill Gerber, TD Ameritrade executive vice president
and CFO, said the collegiate link "ties us
to customers, and as they graduate and start making
money, they have to invest."
Asked if the stadium is acting as a gigantic billboard
to pull in new clients, Mr. Gerber replied, "I
would still tell you this isn't about generating
a lot of new accounts, as much as it is recognition
of our headquarters community."
Mr. Gerber's altruistic remarks rankled some of
the company's ARS holders.
"It's just touching," said one client.
July
1, 2009
Oppenheimer
Strains to Reassure ARS Clients
But June Statement Fuels Pointed Skepticism
By Phil Trupp (MVA News Service)
Washington,
July l -- Oppenheimer & Co., Inc., continues
to spell out its auction rate securities (ARS)
woes as it pitches conflicting statements aimed
at soothing its increasingly livid and totally
frustrated client base.
In
its late "June 2009 ARS Update," the
company admitted it "has been subject to
ongoing investigations" into its sale of
nearly $1 billion in auction rate securities.
But not to worry. Clients should keep fingers
crossed for a happy ending.
Oppenheimer's
"interrogators" include FINRA and "various
state regulators," whose names were not included
in the update.
Though
the company failed to name the state regulators,
it is known that two of them are Massachusetts
Secretary William Galvin and New York Attorney
General Andrew Cuomo, who may be seeking a global
settlement in the ARS scandal.
Secretary
Galvin has set a November trail date to air a
scathing list of allegations against the company,
including insider trading and fraudulent sales
of ARS as "cash equivalents."
In
a puzzling use of logic, Oppenheimer has consistently
claimed it was not an ARS market participate,
leaving its clients to wonder how the company
managed to sell nearly $1 billion in ARS paper
while not being part the market-wide $336 billion
boondoggle. This riddle was compounded by a seemingly
contradictory statement in its June 2009 statement:
"Oppenheimer,
in conjunction with other industry participants,
is actively seeking a solution" to ARS illiquidity.
In
addition to Oppenheimer's approximately $925 million
in frozen ARS paper -- the company appears not
to redeemed one nickel of ARS -- the company estimated
that various buy-backs, mostly through settlements
offraud charges by various state attorneys general,
have halved the outstanding global debt to $165
billion--$5 billion less than previous estimates
obtained by Auction Rate Preferreds.org. What
that has to do with its miserable record no one
has yet figured out. Except that Oppenheimer management
enjoys giving new meaning to obfuscation.
The
June update appears to have fueled the frustration
of Oppenheimer's ARS clients. It is a semi-ambiguous
recitation of previous remarks in which the firm
claims to be seeking pools of liquidity which
never seem to materialize.
"Since
last fall, we have been looking for a means to
begin a buy-back of ARS held by our clients,"
the company explained. "In the current environment,
there has been no lending available through commercial
sources and we therefore have looked at various
federal programs as a solution to this pressing
problem."
Oppenheimer
Trust Company recently received approval for a
change to its charter in the state of New Jersey
to become a commercial bank, a move requiring
FDIC approval.
"Unfortunately,
we now believe this option holds only limited
value in terms of providing a liquidity solution
to a large group of our clients," according
to the June update. Oppenheimer has repeatedly
fed this piece of bad news to its long-suffering
ARS holders.
"You
have to swallow the idea that the company is operating
on fumes," said one client who asked not
to be named because he believes the company is
making a list of ARS holders "who are the
squeaky wheels" -- a sort of Oppenheimer
Enemies List. The source further believes
these "squeaky wheels" will never get
the grease.
This
grim skepticism appears to be shared by other
Oppenheimer clients. Some have noted with irritation
that the firm recently repurchased 600,000 shares
of its own stock, diluting the equity float. The
company also announced expansion of operations
into the southeastern United States.
"If
they're so tight on money, they can't redeem their
ARS, what's all the expansion talk?" one
client fumed. He noted that Oppenheimer has also
crowed about hiring new high-priced talent in
order to expand its brokerage, IPO and investment
banking business.
Still
another client referred to the upcoming Galvin
trail in Massachusetts as "meaningless."
Even if the company is ordered to redeem its ARS,
"they'll turn to the federal government and
say, 'Okay, find the money for us!'."
Oppenheimer
in earlier statements said it would seek TARP
relief but later reneged on the option. The company
now claims to be working with congress and "other
industry participants" to for an amendment
to TALF legislation to include ARS as an eligible
asset class for FDIC guarantees, "which we
believe may provide a means to resolve this issue."
In
addition, the company asserted it is in contact
with the U.S. Treasury Department in an effort
to have ARS made an eligible security.
Still,
Oppenheimer clients appear reluctant to sip the
Kool-Aid.
"This
is going to fall on the taxpayer," said one
ARS victim. "Why don't they just come out
and admit they want a federal bailout?"
Oppenheimer
is clearly aware of client discontent. Its June
statement ends with an impassioned bromide: "There
is no higher priority for Oppenheimer than to
provide an ARS solution to our clients."
When
the statement was read to yet another Oppenheimer
client, she replied, "Right! Quit the talk
and show me the money!"
Oppenheimer's
publicly-traded stock has been on a tear recently.
Since its March 9 low of $6.70, it has risen to
$22.18 -- the closing price on July 1. Oppenheimer's
CEO and chairman, Albert G. Lowenthal earned $937,988,
according to figures released by the company.
June
5, 2009
Cuomo
Takes Aim at Oppenheimer;
Mid- and Downstream ARS Sellers
Also in New York AG's Crosshairs.
By
Phil Trupp (MVA News Service)
Washington,
June 5: New York Attorney General Andrew Cuomo
is investigating allegations of fraud by Oppenheimer
& Company in its sale of nearly $1 billion
in auction rate securities, Auction Rate Preferreds.
Org has learned.
The investigation has been ongoing for months,
according to various sources familiar with the
case.
In addition to Oppenheimer, these sources confirmed
that Mr. Cuomo's team of investigators is also
targeting other mid-size and downstream ARS
sellers.
Confirmation of the investigation comes as the
statute of limitations for filing arbitration
against Oppenheimer draws near. The deadline
ends February 2010.
However, the date does not apply to New York
residents.
Apparently Oppenheimer is marking time, hoping
to cut its losses when the deadline passes for
non-New York State residents, these sources
indicated.
The Attorney General's office has been besieged
by angry and frustrated Oppenheimer clients.
"We're aware of the situation," one
insider explained. He suggested that Oppenheimer
clients request an extension of the statute
of limitations. If the company declines and
digs in its heels, the AG's office will likely
speed up the investigation.
Others familiar with the investigation told
AuctionRatePreferreds.Org that Mr. Cuomo's
team will be "most interested" in
Oppenheimer's response to client requests for
deadline extensions. Clients should seek extra
time, he said.
Sources said there is "uncertainty"
surrounding the company's financial condition.
"They've been telling clients they're strapped
for cash and can't redeem their ARS," according
to one knowledgeable source. But in a baffling
high-end public relations move, the company
recently said it was buying back 600,000 shares
of its own stock and recruiting high-priced
talent.
"It doesn't jibe," the source said.
The Cuomo investigation, which has been ongoing,
apparently mirrors many of the allegations against
Oppenheimer by Massachusetts Secretary William
Galvin. The Massachusetts case is set for trial
November 4. The complaint accuses Oppenheimer
of deceptive ARS sales tactics and market manipulation
as well as insider trading of ARS by the company's
top executives.
According to Galvin, Oppenheimer CEO Albert
Lowenthal allegedly disposed of more than $1.7
million worth of ARS with full knowledge that
the auction market was about to implode.
Sources close to the Cuomo investigation were
blunt in their assessment of Oppenheimer's tactics.
"They knew what they were doing,"
according to one source. "And they knew
what they were selling-or certainly they ought
to have known."
It is understood the Cuomo team will make use
of the Martin Act. A rare legal weapon crafted
in 1921 in New York, the Martin Act grants extraordinary
powers and discretion to fight financial fraud.
Those called for questioning under the act do
not have a right to counsel or a right against
self-incrimination.
It is not known if Cuomo intends to file a global
case. Sources refused to be pinned down, but
it is understood allegations likely will be
filed before the statute of limitations winds
down.
Meanwhile, others with knowledge of the case
said Oppenheimer's legal team appears to be
in "disarray." The company's attorneys
also are facing a class-action suit filed in
the Southern District of New York against Oppenheimer
&Co., Oppenheimer Holdings, Inc., and Oppenheimer
Asset Management, Inc.
"They're overwhelmed," according to
one source. "And they're delaying arbitration."
Oppenheimer has recently reincorporated from
Canada to Delaware. Earlier, company officials
said the move would allow the possibility of
TARP relief in order to redeem frozen ARS. Then
the company inexplicably changed course, saying
TARP was an inappropriate venue. It indicated
it would seek TALF relief, but this program
also is seen as inappropriate.
Oppenheimer was not available to comment on
this story.
CEO
Albert G. Lowenthal received $5,876,510 from
Oppenheimer in 2007. See the next story, also.
June
2, 2009
Advice
& Encouragement to Opco Victims
By
Phil Trupp (MVA News Service)
We
recently asked Oppenheimer ARS victims to send
us their stories. The response was overwhelming.
While each story was unique, the similarities
were striking. Rather than publish each response
(it would amount to half of War and Peace) we've
culled the central points and respectfully offer
the following advice to long-suffering victims
of Opco's ARS scam:
+
Your fate is 100% in your hands. No matter
what they tell you, they will absolutely not help
you. In fact, they will never help you get your
ARS money back. Oppenheimer ranks at the top of
our worst-of-the-worst list.
+Get aggressive and stay aggressive. Inundate
your broker, the broker's manager, and Opco's
top corporate weasels, Albert and Robert Lowenthal
with e-mails, letters and phone calls outlining
your case, and don't spare the details or the
outrage. Squeaky wheels get the grease, but only
if they keep on squeaking.
+ Use facts in all correspondence. Lots
of them. Let Opco know FASB and NASD ruled that
ARS can not be defined as "cash equivalents,"
and that having done so, Opco committed fraud.
+ Tell Opco you're aware that fraud cases have
been filed against them. Brush up on the latest.
Go Online and read Massachusetts AG William Galvin's
complaint. There's enough ammunition there to
make you an authority on Opco's insider trading
and its deceptive sales tactics. You might also
inform Opco that New York AG Andrew Cuomo may
soon file a complaint seeking a global settlement.
Copy your e-mails to legislators, AGs, the House
Financial Services Committee, FINRA and SEC. Create
a huge paper trail.
+ It's your money! It was stolen from you.
Insist, demand, confront. Tell them you want your
money back! Tell them more than once and don't
be genteel about it. You don't use political correctness
when dealing with thugs.
+ Write a letter to the editor of your local
newspaper. Follow up with a phone call. Ask
why your financial reporter isn't covering the
ARS scandal. After all, there's still nearly $200
billion in frozen cash unchallenged and tens of
thousands of weary victims. That's enough money
to clear California's debt! Again, use facts.
Make them red hot. Tell your newspaper that while
Bernard Madoff was a cheap swindler who made off
with $65 billion, you are the victim of "institutional
fraud," fraud on a scale which at it's apex
($336 billion) amounted to 2 percent of annual
GDP. If you can't get the press' attention, start
picketing Oppenheimer's offices. Call your local
TV stations and tell them there's a demonstration
outside Oppenheimer's offices. A hunger strike
would get you a lot of attention on the 6 P.M.
local news
+
The telephone hasn't gone out of style. Use
it to call your broker and other co-conspirators.
Call often. Keep repeating: "I want my money
back!" Make the lives of the Opco weasels
as miserable as they've made you. Squeak, squeak,
SHOUT!
" Threaten to sue your broker, Opco, the
local Opco manager.
+ Don't let them intimidate you. There's
been a lot of that going on. Do not be bullied.
Old boxing axiom: "It ain't what you dish
out that always wins, it's how much you can take!"
Dish it out and show them know you can take the
best they've got.
" When demanding the return of your stolen
cash, remind Opco that the company recently announced
it was sufficiently capitalized to buy back shares
of its own stock and was hiring high-priced personnel.
Let them know you won't fall for the lie that
Opco can't afford to repay its ARS victims. Why
did they turn away from TARP? They implied they
were going to use TARP money to redeem the ARS
monies. But then they changed their mind - without
any explanation.
+
The regulators are your friend -- but only
if you take them a well-documented story, with
facts, dates, etc. .
May
30, 2009
Attention
Oppenheimer ARS holders
Where
are your guts?
You
believe that Oppenheimer will redeem your auction
rate securities if you shut up and dont
go public with your story?
Youre
living in fantasy land.
Here are the facts:
+
Oppenheimer has announced absolutely no plans
to redeem your auction rate securities.
+ The company is spending millions of your dollars
buying back 600,000 of its own shares, opening
new offices, including in New York, and hiring
hugely expensive new employees.
+ Oppenheimer's brokers told their clients lies
after lies about where their money was invested
and what their money was invested in. The brokers
never mentioned auction rate securities. They
talked about "cash management."
+
Oppenheimer invested their clients monies in auction
rate securities in contravention of their clients'
own wish for safety and liquidity.
+
Oppenheimer invested its clients money into auction
rate securities for one reason it gets
paid fees on selling these securities. It didnt
get fees if it invested its clients money into
safe money market funds which is what its clients
assumed their monies were invested in. The company
is still collecting fees from the issuers
of auction rate securities on your nearly $1 billion
in frozen auction rate securities.
+ Oppenheimer knew there were problems with auction
rate securities as far back as 2005. Even after
FASB and the NASD ruled that auction rate securities
didn't meet the requirements for "cash equivalents,"
Oppenheimer continued to misrepresent them, using
terms such as "floaters" to mislead
clients. It didnt tell its clients of the
problems nor the risks. It assured all of them
they were being invested in cash-like securities--"safe
as it can be." A complaint against Oppenheimer
by the State of Massachusetts says "substantial
disruptions" occurred in the ARS market during
the summer of 2007, but "Oppenheimer largely
ignored them, intentionally choosing not to inform
all of its Financial Advisers (FAs) or their clients
of the failures." The state added, "They
(Oppenheimer) blissfully pocketed millions of
dollars in revenue while failing to adequately
research and substantiate their sales representations--representations
that proved to be inaccurate and which led to
investors losing access to hundreds of millions
of dollars in assets."
+ Oppenheimer's top brass have been accused by
Massachusetts AG William Galvin of insider trading,
dumping their ARS holdings with full knowledge
of the impending market meltdown. Galvin has alleged
that among those inside-trading executives was
CEO Albert "Bud" Lowenthal, who unloaded
$1.75 million in ARS between January 29, 2008
and February 12, 2008. Others named by Galvin
are COO Larry Spaulding ($700,000), Greg White,
managing director of the ARS department ($300,000),
Louis Gelormino, ARS Desk Supervisor ($75,000).
Now
Oppenheimer is threatening its clients that if
they go public with their story like telling
this column or the Wall Street Journal how they
were cheated theyll never get their
money back. This tactic might have been reasonable
if Oppenheimer was organizing to your ARS redeeemed.
But they have no plan and have done nothing. It's
been over 15 months since the auction rate securities
markets seized up. Honest companies like Deutsche
Bank have redeemed the ARS they sold their clients.
Oppenheimer has done nothing.
Please
recognize Oppenheimer & Co. , for what they
are the worst of the worst. A brokerage
firm with little conscience and littlle honesty.Their
ethics is money out of your pocket into their
pocket.
The
only way you are going to get your Oppenheimer
auction rate securities is if you go public. Tell
the world you story. Put pressure on the regulators
to go after Oppenheimer. Stop clients dealing
with Oppenheimer. Email us
or Phil Trupp, who is closely tracking the Oppenheimer
fiasco. His email address is PZBAR@Comcast.Net.
May
26, 2009
Opinion
Oppenheimer
Makes For Great Fiction.
Only the Truth is Stranger;
The Characters Are Real.
By Phil Trupp (MVA News Service)
What
makes the Oppenheimer story read like a crime
thriller? Or more to the point, why do so many
former clients describe the company as the corporate
incarnation of Tricky Dick Nixon?
To comb through the messy details of the formal
complaint filed against Oppenheimer & Co.,
and its top executives by Massachusetts Secretary
William Galvin is a little like wading through
a surreal scam dreamed up by Elmore Leonard with
Watergate tossed in for a back story.
The plot is at once fascinating and repulsive,
animated by characters who turn out to be amusing
in a creepy way. One can imagine the company's
top brass, Albert Lowenthal, Robert Lowenthal
and Greg White, alleged inside traders of auction
rate securities, giving us the Nixon laser stare
and growling, "We are not crooks!"
We'll see about that. As for rumors of a widow
who was scammed in 2007, I'll get to her.
But first let's admit it: No matter how soft hearted
we may be, there's nothing lovable about the apparent
disdain with which Oppenheimer and its miniature
Masters of the Universe have dismissed the pain
auction rate securities investors have been feeling.
The company is holding on with what amounts to
a death grip to nearly $1 billion in frozen
ARS paper, ginning up the fury of its clients.
And these frustrated investors are angry with
good reason. They say they were lied to and told
by Oppenheimer that ARS was as good as actual
cash -- this despite contrary rulings by leading
authorities such as FASB and NASD. But never mind.
Accounting rules didn't stop Oppenheimer's dodges
and feints which in reality appear incredibly
hollow.
Following the collapse of the auction rate market
in February 2008, Oppenheimer & Co. did a
dramatic geographical bob-and-weave reminiscent
of Nixon's trip to China. With a flourish Oppenheimer
raised a brand new flag. Shareholders approved
reincorporation from Canada to Delaware. This
was supposed to place the company in line for
TARP relief designed to make its ARS clients whole.
Sounds good, right? A rare glimmer of corporate
conscience? But wait. There's a twist.
Reincorporation was approved. It seemed the clouds
would part for ARS investors. But Oppenheimer
shrugged off TARP with the obtuse reasoning that
characterizes much of what passes for smarts in
the world of broker-dealers.
After dissing TARP, the company then suggested
it might opt for other government relief, once
again signaling hope. It teased its auction rate
victims by spinning the possibility of getting
help from the Term Asset-Backed Loan Facility
(TALF). This was another questionable if not entirely
false move. TALF issues asset-backed securities
collateralized by student loans, auto loans, credit
card debt and loans guaranteed by the Small Business
Administration. Too bad ARS is invisible in the
mix.
I have received hundreds of emails from disgruntled-even
desperate- Oppenheimer clients. It's about time
they had their say.
About the widow I mentioned earlier: Some correspondents
claim the company victimizes elderly people. In
researching this particular accusation, I found
more than a few references to a July 2007 action
in which Oppenheimer was fined $1 million by Massachusetts
regulators. At the center of the claim was the
company's apparent failure to supervise an FA
who duped a widow and her dying husband out of
their savings.
The firm minimized the incident, which included
$350,000 in forged checks, and allowed the offending
broker to stay on at the firm until he resigned
a year later. One can only assume top-notch talent
is hard to find.
Oppenheimer also was accused in this case of making
"false and misleading" statements and
withholding evidence from state regulators. The
victimized now-widow hired an attorney and filed
claims in arbitration. Oppenheimer's response:
The woman "only has herself to blame for
any losses or other injury she may have suffered."
The Massachusetts regulator was stunned by the
callous blaming of the victim. "I guess the
message is that anybody stupid enough to invest
with Oppenheimer & Co., gets what they deserve,"
he said. "That's the only way to read a statement
like that."
This might seem an isolated incident if it weren't
for the reams of complaints which come my way
almost daily. For starters, you don't need to
be "stupid" to be victimized. After
all, the global $336 billion ARS scandal (that's
2 percent of annual GDP) trapped 146,000 victims.
Most of them are smart, successful people. Their
only fault was to trust. And Oppenheimer in particular
seems to have a nasty habit of stomping on trust.
I have never been an Oppenheimer client. And from
the tone of the emails and other messages I get,
I think I'll keep my distance.
Here's an example of one of those e-mails from
Oppenheimer victim Brad Dickson, an author and
comedy writer:
"Oppenheimer grotesquely misrepresented the
product (ARS) at point of sale. But it goes beyond
that. I think a company has a certain fiduciary
responsibility to the client post-market collapse.
In the 16 months since the ARS market froze, Oppenheimer
has barely responded to my emails and calls asking
what they're doing to rectify the problem.
"As far as I can ascertain they have not
put even the tiniest bit of pressure on the issuers
to make this good. They've done nothing but stonewall
clients and treat us like dirt, and potential
Oppenheimer clients need to know that this firm
is not to be trusted
If I had it to do over
again, I wouldn't give Oppenheimer a nickel of
my money. I've never seen a company with such
a dismissive attitude toward its customers."
Another correspondent who wished to remain anonymous
wrote:
"I believe this week marks the six-month
anniversary of that scathing complaint filed by
(Massachusetts) against Oppenheimer
The complaint
contained many harsh allegations of insider trading
and (company) execs misrepresenting and unloading
their personal ARS holdings in advance of the
meltdown, and laid out tons of evidence and internal
e-mails apparently proving pretty much all the
allegations and-six months later, we're still
waiting to hear something-anything-more."
Another correspondent wrote of selling her home
in California with plans to move with her husband
to Hawaii and start a business there. She placed
the proceeds of the sale with her Oppenheimer
FA, who in turn placed her money in ARS.
"He (the Oppenheimer broker) told us the
account would act like a money market but with
a better return," she wrote. "He called
them (ARS) 'floaters' because the interest rate
reset weekly. The term 'auction' was never used
"
Then the market froze. Plans to relocate to Hawaii
were dashed.
"Luckily we had some friends visiting us
from San Francisco who had corporate backgrounds.
They immediately rallied us to get info on what
we actually owned
They loaned us money, and
if it hadn't been for them, we would have become
destitute
The FA now refutes our comments
and states we were completely aware and informed
on the
market
The amount of stress we've
gone through is indescribable."
Other correspondents have equally unpleasant experiences
to recount:
"Canada gets rid of Oppenheimer and collects
$2 million as they exit. The U.S. gets another
corrupt financial firm. Just what we needed. Hopefully
by the end of the year, Oppenheimer & Co.,
CEO and other top executives will be in jail and
their auction rate victims will have their money
back."
By now, I suppose, Elmore Leonard would have developed
the character of the super-cop. The following
note would have mysteriously crossed his desk,
as it did mine:
"The United States should under NO circumstances
allow this company to do business here until they
have paid back the money they defrauded from auction
rate securities victims. They are operating with
money that doesn't belong to them-raking fees
off fraudulent investments-and denying the claims,
the same that UBS and Citibank and others settled
long ago. U.S., don't let this criminal corporation
in!"
Too late, I'm afraid. Oppenheimer & Co., is
now part of the murky broker-dealer mix.
The company is optimistic, even cheery, holding
its presence out to be a shining beacon for top
talent and profit-starved investors.
In a May 2 memo, Oppenheimer crowed, "
We
are seeing unprecedented interest in our firm
by highly qualified professionals who are looking
for an understandable culture that provides a
significant competitive infrastructure coupled
with highly understandable and attractive compensation
practices."
Yes, it's garbled prose, typical of some MBA's
twisted romance with three syllable words. But
let's not overlook the beacon, Oppenheimer's chest-thumping
optimism, as the memo continues:
"It has never been more important for us
to be in touch with our existing clients, counseling
them on their investments, and, equally important,
seeking new clients who are adrift in this uncertain
period
We move forward together as U.S. company,
with a strong franchise and untarnished brand."
Oppenheimer & Co., will face Massachusetts
Secretary William Galvin's fraud charges November
4. The official allegations repeat what so many
correspondents have said: "(Oppenheimer &
Co.,) significantly misrepresented not only the
nature of ARS, but also the overall stability
and health of the ARS market
" while
the company's top executives secretly dumped their
soon-to-be frozen ARS holdings.
Until a conclusion is reached in the case we can
neither confirm nor deny Oppenheimer's guilt.
But, hey, no matter how it all turns out, let's
not lose sight of the love. Like Elmore's "LA
Confidential," every twisted mystery needs
a love angle.
Oppenheimer did not return calls seeking comment.
May
21, 2009
Muni
Specalists Endorse "Enhanced Liquidity"
Proposal;
ARS-ARPS Cited as Credit Market Distortions
By
Phil Trupp (MVA News Service)
Washington, May 21: More than a dozen finance
specialists today told the House Financial Services
Committee the 2007-2008 implosion of the auction-rate
securities market played a role in setting off
a chain reaction that distorted municipal credit
and created havoc over wide range of credit instruments.
At a hearing to review proposals to improve the
efficiency and oversight of municipal finance,
witnesses described a weakened municipal market
and called for increased oversight of financial
advisors and municipal market practices.
The house committee has proposed the Municipal
Market Liquidity Enhancement Act of 2009, (MMLEA)
a mechanism authorizing the Federal Reserve to
purchase variable rate demand notes (VRDN) and
to refinance ARS and other short-term municipal
paper. The Fed would become a virtual Liquidity
Central for troubled short-term municipal debt.
Outlining the fallout around last year's ARS market
meltdown, Dallas Mayor Thomas C. Leppert, speaking
on behalf of the U.S. Conference of Mayors, cited
a Bank of New York Mellon study estimating that
municipal issues will decrease by $48 billion,
"a decrease comparable to eliminating all
highway and transit spending for one year,"
Mayor Leppert said.
He endorsed proposed legislation, saying it will
allow local governments with strong credit ratings
to leverage significant infrastructure assistance.
He also called for municipal bond insurance enhancement.
David W. Wilcock, deputy director of research
statistics for the Federal Reserve's Board of
Governors, said the ARS-ARPS market's lack of
an "explicit contractual liquidity backstop"
amounted to a fatal flaw. It was this problem,
he explained, that infected a variety of floating
debt instruments and caused broad credit disruption.
Market stresses have caused municipal bond insurance
to decline from 50 percent in fall 2007 to approximately
10 percent today. Mr. Wilcox noted that liquidity
support for variable rate demand obligations (VRDO)
has become expensive, "while support for
ARS has virtually disappeared." VRDO short-term
rates are currently below one percent, he said.
"Although the market for fixed rate municipal
debt is functioning fairly well, the markets for
floating rate municipal debt are in serious condition,"
he said.
The Fed official said many municipalities have
reportedly refinanced ARS into VRDOs or more traditional
fixed rate debt, "bringing down substantially
the volume of outstanding in the ARS market."
In an apparent slip-up in his calculations, Mr.
Wilcox said outstanding ARS amounts to approximately
$80 billion, a figure far below the estimated
$170 billion-$200 billion in frozen debt-this
18 months after the February 2008 collapse of
the market.
Despite the low rates for VRDOs, "market
participants report that the cost of liquidity
support from banks has risen sharply," Mr.
Wilcox told the committee. "Demand for VRDOs
has reportedly been so weak," he explained,
that the instruments have been turned into so-called
"bank bonds." These bonds present their
own difficulties. They must confront the possibility
of having to amortize debt over very short periods
of time.
A new twist is outlined in the administration's
second Stimulus Package which includes authorization
of "Build America Bonds." These will
give issuers of taxable municipals a 35 percent
federal rebate on interest costs.
Michael J. Marz, vice chairman of First Southwest
Co., indicated that distortions traceable to the
liquidity and credit crunch were exacerbated by
the ARS debacle.
"Some sectors of the municipal market are
still quite distressed," he explained, adding
that "friction" among the sectors is
"causing significant fiscal pain for states
and localities and investors."
Mr. Martz noted that a large volume of ARS remains
outstanding where states and other borrowers have
been unable to refinance to alternative forms
of credit.
He said the committee's proposed legislation will
offer targeted, temporary federal assistance to
help states and localities until the credit picture
returns to normal.
"In January 2008, $330 billion in ARS were
outstanding," Mr. Martz continued. "A
significant volume of these securities have been
refunded and restructured-but nearly $200 billion
remain outstanding."
Some state and local governments have restructured
ARS debt, "curing the problem of high penalty
rates," Mr. Martz said. However, many municipal
and closed-end funds remain illiquid. Mr. Martz
said student loan-backed ARS remain locked down
with little hope of immediate resolution.
It's a kind of toxic closed circuit, he said.
Buy-backs of illiquid paper simply transfer illiquidity
problems from investors to dealers, many of whom
may be facing their own liquidity crunch.
It has been suggested that the Fed expand the
MMLEA to address non-municipal sectors of ARS
and ARPS as well as student loans.
Ben Watkins, director of bond finance for the
state of Florida, endorsed MMLEA and bemoaned
the double-digit rates still being paid by ARS
resets. The proposed legislation also was backed
by Bernard Beal, president of MR Beal & Co.,
and vice chairman of the Securities Industry and
Financial Markets Association (SIFMA).
Sean Egan, managing director of Egan-Jones Rating
Co., had harsh words for MBIA, Inc., the credit
rating agency.
"They (MBIA) face risks over the next couple
of years," Mr. Egan said. He claimed MBIA
is not an AAA-rated business.
The ease of AAA ratings, he added, "misled
investors" into making "dangerous mistakes."
AAA ratings embellished the ARS market and played
a large role in the overall deception of investors.
Mr. Egan said the so-called "compensation
model" of rating securities amounted to a
sure means of inflating their value. The compensation
model is one in which issuers of securities pay
for the golden seal of AAA approval.
"The only real reform for the ratings industry
is to return to the
business of representing
those who invest in securities, not those who
issue them," Mr. Egan concluded.
Friday,
May 15, 2009
About
Time: Virginia sues Stifel, Nicolaus & Co.
over auction rate securities
St. Louis Business Journal - by Greg Edwards
The
state of Virginia is suing Stifel, Nicolaus
& Co. over its sale of auction rate securities
to investors there. It is similar to a suit
filed in March against Stifel by Missouri Secretary
of State Robin Carnahan.
The
suit contends Stifel, an investment firm based
in St. Louis, sold $8.4 million worth of auction
rate securities (ARS) to Virginia investors
while representing that they were as liquid
as cash. Retail clients were systematically
and routinely informed that ARS were safe, conservative,
liquid investments equivalent to cash or money
market funds, a misleading and improper classification,
the suit said.
Stifel
denies any wrongdoing and has offered to repurchase
the securities over three years, the same offer
that it made to Missouri investors, which Carnahan
deemed inadequate.
Investors
across the country have been harmed by Stifels
refusal to provide immediate relief to their
clients holding auction rate securities,
Carnahan said. Virginias action,
along with ongoing investigations in several
other states, reinforces that Stifel customers
should not have to wait over three years for
the immediate relief that so many other firms
have already provided to their clients.
May
11, 2009
This
company is total garbage. Oppenheimer has so
far stiffed its retail customers $930 million
in auction rate securities. It told everyone
lately it was moving to the U.S. so it could
get TARP money in order to redeem the auction
rate securities its brokers sold its retail
customers. Now it doesn't want the TARP money....
but about its poor retail customers who got
sold a large bill of goods? No mention. This
gives disgusting behavior a whole new meaning.
-- Harry Newton
Oppenheimer
Shareholders Approve Reincorporation in Delaware
By Miles Weiss
May
11 (Bloomberg) -- Oppenheimer Holdings Inc.s
shareholders approved its reincorporation from
Canada to Delaware to gain greater access to
U.S. capital markets and bailout funds.
Oppenheimer
Holdings, the Toronto-based parent to Oppenheimer
& Co. of New York, said the reincorporation
proposal was approved by investors holding 85.8
percent of its shares outstanding, with 5.8
percent opposed. Owners of the companys
Class A and Class B shares voted together as
a single class.
The
domicile change originally was intended in part
to give Oppenheimer Holdings access to U.S.
government bailout funds, a possible source
of cash to pay claims by clients holding frozen
auction-rate securities. The company filed a
preliminary application for the bailout program
in November. It may no longer seek that money,
Chief Executive Officer Albert Lowenthal said
in an interview.
We
think domestication in the U.S. would be helpful,
but we are not sure TARP would be helpful,
Lowenthal said, referring to the $700 billion
Troubled Asset Relief Program. The TARP
funding has become better defined now than it
was in the October-November period, and it doesnt
show a clear path to resolution of auction-rate
issues.
Oppenheimer
Holdings said reincorporation in Delaware would
make it more clearly identified as a U.S. company.
In turn, that would make it easier for Oppenheimer
to raise capital in the U.S. through steps such
as selling stock or bonds.
Companys
Roots
Oppenheimer
Holdings, formerly Fahnestock Viner Holdings
Inc., owns Oppenheimer & Co., the brokerage
already incorporated in Delaware, as well as
Oppenheimer Asset Management Inc. Oppenheimer
& Co.s roots date to the late Leon
Levy and Jack Nash, founders of the hedge fund
Odyssey Partners LP.
The
parent companys retail clients were stuck
with about $930 million of auction-rate securities,
typically long-term bonds or preferred shares
whose interest rates are set at auctions run
by broker-dealers. Wall Street companies marketed
the securities as a cash equivalent that offered
higher yields than conventional money-market
funds.
May
8, 2009
"Liquidity
Facility" Proposal to be Reviewed;
ARS, Other "Credit Issues" Targeted;
Congressional Hearings Slated May 21.
By Phil Trupp (MVA News Service)
A
proposal authorizing the Federal Reserve Bank
power to create a "liquidity facility"
dealing with auction rate and other variable
rate notes was announced today by House Financial
Services Committee Chairman Barney Frank (D.,
MA).
Review
of the proposed legislation is scheduled for
May 21.
The
liquidity facility has been discussed behind
closed doors for at least two months. Today's
announcement was good news to frustrated ARS
and ARPS investors left holding an estimated
$170 billion in frozen assets. When the auction
rate securities market collapsed in February
2008, some $336 billion was frozen overnight,
leaving 146,000 investors stuck with illiquid
paper.
The
Liquidity Facility proposal is part of the house
committee's ongoing review of the financial
industry. Rep. Frank said the committee also
will focus on investment advisers of municipalities.
Speaking
before a meeting of the Financial Industry Regulatory
Authority, Inc., in Boston, Rep. Frank said
the proposal will establish a "fiduciary
standard" for municipal financial advisers
and give the Securities and Exchange Commission
new powers to police them. He also called for
creation of a reinsurance mechanism for mono-lines
dealing exclusively in municipal finance.
Rep.
Frank told his audience that the house committee
proposal seeks a "globalization of the
ratings system" for both corporate and
municipal debt.
The
legislation comes in part out of ARS hearings
by the House Financial Services Committee held
last September. Those hearings were a disappointment
to many investors left holding illiquid auction
rate bonds. No proposals to aide ARS-ARPS investors
were announced following 3-1/2 hours of intense
testimony, and relief has only been hinted at
until now.
"We
were tied down with so many problems, we couldn't
act last year," a committee source told
Auction Rate Preferreds. Org. "Now we are
moving forward."
The
proposed legislation comes in direct response
to credit market problems, including auction
rate securities, the source explained. A number
of issuers of municipal debt were invested in
variable rate paper, demand notes and ARS-ARPS.
At
the same time, Rep. Frank said the White House
expects to sign sweeping and comprehensive regulatory
reform by the end of the year.
Votes
on the proposed Liquidity Facility legislation
will begin next month. The committee will also
undertake creation of what Rep. Frank called
a "systemic risk regulator" linked
to a resolution authority to dissolve non-bank
institutions.
The
newly proposed financial authorities will work
within existing federal regulatory framework.
The systemic risk regulator "will not displace"
or diminish the role of FINA, Rep. Frank said.
He
said the new authority will have power to be
emphatic and nimble, with the ability to "step
in and cover" financial flare-ups. The
authority, the details of which will be disclosed
next week, will have a regulatory handle on
leverage, reducing it when necessary.
Rep.
Frank said the federal government will stay
out of the business of executive compensation.
However, there will be a proposal to give shareholders
more power-a "say on pay" vote on
executive compensation packages.
May
7, 2009
Four
brokerages to repurchase auction rate securities,
pay $550K in fines
With the settlements,
Finra has now settled ARS charges with nine
firms
By Mark Bruno, InvestmentNews
The
Financial Industry Regulation Authority Inc.
has reached an agreement with four brokerage
firms to repurchase $554 million in auction
rate securities from clients, and also pay a
combined $850,000 in fines to settle charges
that they misled investors by marketing these
debt instruments as risk-free.
Cleveland-based
NatCity Investments Inc. was fined $300,000;
Buffalo-based M&T Securities Inc. was fined
$200,000; Philadelphia-based Janney Montgomery
Scott LLC was fined $200,000; and M&I Financial
Advisors Inc., which is based in Milwaukee,
was fined $150,000, New York and Washington-based
Finra revealed in an announcement today.
As
part of the settlement, these brokerages neither
admitted nor denied the charges brought by Finra,
according to the announcement.
With
this latest round of settlements, Finra has
now settled auction rate securities charges
with nine firms.
Combined,
these firms have paid more than $2.6 million
in fines to the authority, and have agreed to
return more than $1.2 billion to investors who
purchased the instruments.
May 6, 2009
The
farce called FINRA has no shame.
by
Dan Solin, author of the bestseller, The
Smartest Investment Book You'll Ever Read
Posted
on the Huffington Post: The Financial Industry
Regulatory Authority (FINRA), is the "non
governmental" regulator for U.S. securities
firms. FINRA runs the mandatory arbitration
system for the resolution of all disputes between
brokers and their clients. Many believe (and
I am one of them) this process is biased and
rigged against investors.
FINRA's
Board of Governors is a who's who of the securities
industry. Prudential, Merrill Lynch, Pershing
and other industry insiders are well represented.
They "govern" their fellow brokers
the same way the SEC "governed" Bernie
Madoff.
FINRA's
kangaroo court is currently processing cases
brought by investors who purchased auction rate
securities. These investors were told ARS were
"as good as cash." It turns out the
markets were rigged (much like FINRA's arbitrations)
by the market makers, who made huge underwriting
profits packaging and selling these "investment"
products. The ARS markets froze in February,
2008 leaving investors holding more than $100
billion.
We
now learn that FINRA itself bought more that
$860 million of ARS. Unlike investors who are
stuck with these bonds, FINRA dumped all its
holdings less than six months before the market
for them froze up.
What
remarkable foresight!
FINRA
is the ultimate insider. Is it really possible
it did not know the market for ARS was in deep
trouble when it got rid of its ARS?
In
October, 2007, Mary Schapiro, formerly the head
of FINRA, gave a speech in which she said that
"individuals bought auction-rate securities
even as institutional investors were dumping
their shares." Shapiro posed "the
question" as follows: "Was that information
freely shared with individual investors?"
At
the time, FINRA's own sale of its ARS was not
publicly disclosed.
Ultimately,
it will fall to the SEC to investigate the propriety
of FINRA's conduct. That could present a problem.
Mary Schapiro is now the head of the SEC. How
vigorously will she investigate her own behavior?
In
the meantime, gullible investors will proceed
with their FINRA arbitrations, clinging to the
false hope of a fair hearing.
And
pigs will fly!
May
4, 2009
Credit
Suisse Ex-Broker Likely to Plead Guilty in Auction
Rate Fraud Case
By AMIR EFRATI, The Wall Street Journal
Julian
Tzolov, a former Credit Suisse Group broker
accused last year of deceiving investors about
investments known as auction-rate securities,
is expected to plead guilty to fraud charges,
his lawyer said in a court hearing last month.
If
Mr. Tzolov pleads, it would mark the first criminal
conviction stemming from the auction-rate securities
mess, in which hundreds of thousands of investors
were left holding billions of dollars worth
of securities they couldn't easily sell.
Federal
prosecutors in Brooklyn, N.Y., last year brought
charges against Mr. Tzolov and a former colleague
at Credit Suisse, Eric Butler, alleging they
marketed to clients auction-rate securities
backed by student loans, but instead used client
funds to purchase riskier auction-rate securities
backed in part by subprime mortgages, which
brought in higher commissions for the brokers.
The
market for those riskier securities, whose interest
rates reset at periodical auctions, collapsed
starting in 2007 and they have lost much of
their value. Prosecutors said clients lost as
much as $500 million from the alleged fraud.
At
the hearing, Mr. Tzolov's lawyer, Benjamin Brafman,
said his client expected to resolve the case
before trial, which is set for June.
The
announcement came after prosecutors told the
court they had evidence Mr. Tzolov, a native
of Bulgaria, lied in his application to become
a U.S. resident. It's unclear whether Mr. Tzolov
will testify against Mr. Butler as part of an
eventual plea agreement with prosecutors. Greg
Andres, the prosecutor handling the case, declined
to comment, as did Paul Weinstein, a lawyer
for Mr. Butler.
Credit
Suisse has said it cooperated with authorities.
May
1, 2009
Opinion:
FINRA
Knew and sold its ARPs Before the Auctions Froze
-- Update 1
By
Phil Trupp (MVA News Service)
We
make a big fuss about bank robbers. But what
about banks robbing us?
We have come to expect taxpayer rip-offs, and
now we find disturbing evidence that the cops
helped the crooks pull off the auction-rate
securities heist.
FINRA,
the bank-owned regulator, sold more than $862
million iARS it owned right before the
market collapsed. What did FINRA know that we
didn't? And why did a high-ranking congressional
economist call the market collapse a "scripted
failure" following only one day of hearings
last September by the House Financial Services
Committee? Clearly there was method to the ARS
"script," and each day we find new
ghost-written clues.
Let's
begin with the most obvious. After examining
dozens of class action suits, and following
interviews of leading attorneys, I find a one
size fits all sales pitch scripted carefully
as a bad sit-com, with only slight variations,
and no laughs. For example, the details of ongoing
class action suits by San Francisco-based Girard
Gibbs against Wells Fargo, Raymond James, and
Deutsche Bank depict a course of conduct by
the banks that is consistent with the allegations
in virtually all other law suits which have
appeared since February 2008, when the auction
rate securities market tanked and ARPS owners
were stuck with "cash-equivalent"
securities that weren't.
By
now readers are painfully aware of the deceptive
methods by which these bonds were sold. There
was a clear plan, a lock-step sales pitch designed
to deceive 146,000 otherwise smart investors.
The scam worked because the broker-dealers spoke
with a single voice. Investors wondered: could
so many Wall Street gurus and how could so many
CFOs of public companies be wrong?
We
have since been made aware of massive insider
trading of ARS and ARPS when the market was
set to fail. The spectacle of dumping soon-to-be-illiquid
bonds into investor portfolios might make a
conspiracy theorist look sage, even prescient.
And guess what--more than a few observers have
a hunch that Lehman Brothers sent an unwritten
memo in late December 2007 or January 2008 that
it was prepared to allow auctions to fail. As
one attorney speculated, Lehman might have sent
"a signal" to the rest of the industry
that the game was over. Winner take all!
"You
have to wonder why all the players allowed the
market to collapse on the same day?" this
attorney said.
According
to Aaron Sheanin of Girard Gibbs, "Had
the SEC been more active five years ago, we
might have had a different outcome. Peeling
back the onion of the scandal has revealed a
common scheme to manipulate the market for these
securities in order to take money from investors."
Where
does the SEC fit in? Not long ago, I lunched
with a high-ranking Bush Administration official
who spoke anonymously on background. I pressed
him on the administration's deregulation mantra
and how it may have contributed to current economic
meltdown.
"It
was a factor," this official admitted.
"In hindsight, no question about it."
I
wondered if former SEC Chairman Christopher
Cox enabled the administration-wide caveat emptor
philosophy.
"Well,
Chris wanted to be a circuit judge in the Ninth
District of California," he replied. Senator
Barbara Boxer (D., CA) was opposed to the appointment
and blocked it. ARS investors would have been
better off if Cox had returned to his native
California. A legislator who spent 17 nondescript
years in congress, Cox was "tired of the
game," the official said. "There was
a vacancy at the SEC. He was a conservative,
so we offered him the chairmanship."
The
appointment of Cox in 2006 was a tacit signal
to the financial markets.
"What
else could Chris Cox do?" the administration
source shrugged. Cox was a "free market
guy." Like President Bush, he believed
in self-correcting and self-policing mechanisms-the
market as demi-god. A convenient belief, if
one also believes that Zeus and Hera once controlled
the destiny of Mankind.
"He
wasn't going to over-regulate," the cabinet
official said. Thus the method was given official
blessing from the White House and the Department
of Justice. "Chris believes markets work
themselves out," the former official explained.
In
a recent Bloomberg article, it was revealed
that FINRA officials claimed not to know the
market was headed for oblivion. FINRA's sale
of its own auction-rate securities in advance
of the crash could not be seen as connecting
any of the methodical dots, according to Herb
Perone, the agency's spokesman.
And
Mary Shapiro, FINRA's former CEO and now SEC
chairperson, has made it clear that FINRA's
purchase and sale of auction-rate paper was
based on the advice of a "professional
investment committee, in consultation with professional
investment managers." It's hard to imagine
that so many professionals were unaware of market
fractures. But then ignorance, real or feigned,
fits neatly into the toolbox of method.
Larry
Doyle, an institutional money manager with 23
years of Wall Street experience, says the actions
of FINRA and SEC in the auction market scandal
"smacks of incompetence and negligence."
But Richard Ketchum, Ms. Shapiro's successor,
said bankers in touch with Washington regulators
had every reason to suspect the market was doomed.
The
game played in Washington has by now instilled
in state securities regulators distrust of congressional
proposals to create a federal systemic risk
regulator-a kind of Risk Czar. It has been suggested
that the Federal Reserve might play such a role.
What gives pause to state securities regulators
is that the idea is supported by the Securities
Industry and Financial Markets Association of
New York and Washington, hardly the most objective
of organizations.
Monica
Lindeen, Montana state auditor and commissioner
of insurance and securities, has argued that
the federal government needs to keep state regulatory
powers intact. She believes the states have
been strong, active players in the securities
venue. However, a number of state AGs remain
on the sidelines in the ARS debacle. Given the
depth of the overall financial crisis, the idea
of a monolithic federal Risk Czar "does
make me nervous," Ms. Lindeen says.
Sen.
Susan Collins (R., ME) has introduced legislation
to create a council to oversee systemic risk.
The Financial System Stabilization and Reform
Act would create an independent "Financial
Stability Council" (FSC) to oversee Wall
Street. Similar legislation has been introduced
in the House by Rep. Michael Castle (R., DE).
State legislators insist on being part of the
mix.
It's
not a bad idea. But if lessons learned from
the ARS fraud are any indication of how additional
regulation may play out, chances are a future
FSC will be co-opted and made yet another piece
of the method by which banks continue to loot
the U.S. Treasury and mug investors.
Clarification:
Larry Doyle was incorrectly identified as an
institutional money manager in the May 1 opinion
column (above). During his 23 year career on
Wall Street, Doyle traded and sold mortgage
securities. He now writes financial commentary
at his Internet site, "Sense on Sense,"
and was the first to discover FINRA's ARS holdings,
later reported by Bloomberg News.
April
29, 2009
Finra
Oversees Auction-Rate Arbitrations After Exiting
Market
By
Darrell Preston
April
29 (Bloomberg) -- The Financial Industry Regulatory
Authority, supervising 344 investor arbitration
cases over auction-rate bonds, skirted losses
from the securities by selling its holdings
months before the market collapsed.
Finra,
responsible for educating and protecting investors,
owned as much as $862.2 million of the debt
before exiting the market in the spring of 2007,
less than six months before auctions began to
fail, according to spokesman Herb Perone. The
Washington-based group is conducting arbitration
hearings filed against banks by bondholders
stuck in the $176 billion market.
Investors
who were sold the securities as money-market
alternatives say Finra, a non-profit corporation
owned by banks that oversees 5,000 brokerage
firms and 659,000 brokers, failed to protect
them. The market froze in February 2008 when
banks, which had supported the debt for two
decades through periodic dealer-run auctions,
stopped buying bonds that investors didnt
want as losses from subprime mortgages spread.
Nobody
was defending any investors, said Mike
Offit, a 52-year-old real estate capital markets
consultant in New York. In a Finra arbitration
claim Offit blames Charlotte, North Caroline-based
Wachovia Corp. because he lost access to cash
he had tied up in auction-rate debt. This
is a banker-created problem, he said.
Auction-rate
bonds are long-term notes and preferred stock
with interest rates reset through sales every
seven, 28 or 35 days. Auctions failed when banks,
beset by mounting losses on bonds tied to subprime
mortgages, stopped buying bonds that went unsold.
Borrowers were forced to pay penalty rates of
more than 20 percent and investors got stuck
with unwanted securities.
Dozens
of auctions continue to fail daily, according
to data compiled by Bloomberg.
If
they had these securities, they had to know
the market was in trouble, said Ed Dowling,
54, the owner of a clothing manufacturer in
New York City, referring to Finra. Dowling said
he has $2.25 million of auction-rate securities
he cant sell.
Finra
didnt know the auctions were poised to
weaken, Perone said. The regulator issued its
first guidance for investors caught in the debt
on March 31, 2008, more than a month after the
failure rate rose to about 80 percent.
The
national organization followed state regulators
led by Massachusetts and New York in punishing
Wall Street banks that sold the securities.
The
states went ahead and did it themselves,
said Peter Chepucavage, a former attorney with
the U.S. Securities and Exchange Commission
and the National Association of Securities Dealers,
a precursor to Finra. The states were
able to get it done.
Finras
regulation didnt have anything to do with
the markets collapse, Perone said. The
organization doesnt regulate over-the-counter
securities transactions such as trades
in auction-rate bonds, which arent listed
on an exchange, he said.
The
regulator has been involved in more than two-dozen
investigations into firms conduct
with respect to auction- rate securities,
Perone said. Finra enforcement has returned
$2 billion of investor money, he said. States
and the SEC have recovered more than $50 billion.
Finra,
known as the National Association of Securities
Dealers until its 2007 merger with the regulatory
unit of the New York Stock Exchange, invested
in auction-rate securities with funds from the
$1.6 billion sale of the NASDAQ electronic trading
system starting in 2000, Perone said.
NASD
held $257.5 million in 2003, according to its
annual report. By July 2006, the investments
totaled $862.2 million.
It
was for cash that we needed to have parked for
a temporary period of time, Perone said.
It was common to take cash you needed
to hold and put it in auction-rate securities.
Finra
decided to invest in auction-rate debt after
a committee review, according to Mary Schapiro,
Finras former chief executive officer
and the current SEC chairman. The SEC will have
a role in reforming how securities markets are
regulated after credit markets froze and stock
markets tumbled last year.
Decisions
as to how to invest Finras assets are
developed through a professional investment
committee in consultation with professional
investment managers, Schapiro said in
a prepared statement. The procedures for
researching, analyzing and recommending investments
are well established and publicly disclosed.
Finra
also owned stakes in hedge funds, Treasuries
and exchange-traded funds, according to financial
statements.
The
SEC was investigating auction-rate dealers while
Finra was buying the securities, and fined 15
dealers $13 million in May 2006 over practices
that included bidding to prevent failures. The
dealers, who didnt admit or deny wrongdoing,
were allowed to continue the practice as long
as it was disclosed.
To
me it smacks of incompetence and negligence,
said Larry Doyle, who worked 23 years on Wall
Street and runs a Web site called Sense on Cents.
Finra is supposed to police the market.
Finras
predecessor, the NASD, reclassified its auction-
rate holdings in July 2006 as trading
securities instead of available-for-sale,
its annual report for that year shows.
The
new designation signaled the securities could
less easily be converted to cash. Corporations
that invested in the debt were also moving the
investments from short-term or cash- equivalents
to long-term investments in their financial
reports.
The
market was functioning normally when NASD was
investing in these securities, Perone
said. At the time, auction-rate securities were
viewed as high-quality cash equivalents and
as acceptable investment for institutions,
he said.
Individuals
bought auction-rate securities in 2007 even
as institutional investors and companies
were dumping their shares, Schapiro said
in an October speech at Dominican University
in Forest River, Illinois.
Many
institutions understood the risk in terms of
their own investments, but the question is:
Was that information freely shared with individual
investors? Schapiro said in the ethics
and leadership lecture on regulation. There
was both a legal and ethical obligation to do
so.
Bankers
knew the market was going to fail, said Richard
Ketchum, Schapiros successor, at a Finra
seminar on March 23. The impending scarcity
of new buyers at auction was, at some point,
no real secret.
Some
investors said Finra didnt move fast enough
to protect investors after the market failed.
Ive
got doubts about the efficacy of the regulatory
system, said W.E. Benton, 60, a retired
attorney in Little Rock, Arkansas, stuck with
$25,000 of auction-rate securities.
To
contact the reporter on this story: Darrell
Preston in Dallas at dpreston@bloomberg.net.
April
28, 2009
Oppenheimer
Faces Massive Class Action Suit;
New York Court Filing Alleges "Egregious
Conduct," Market Manipulation, Insider
Trader of ARS; 'TARP' Relief Seen As Unlikely
"Hail Mary" Strategy
By
Phil Trupp (MVA News Service)
Washington,
April 28: Oppenheimer & Co. "continues
to dodge responsibility" to its auction
rate securities clients and engaged in "egregious
conduct" by off-loading its own ARS inventory
when company executives knew the market was
failing in 2007, according to a comprehensive
class action suit filed April 10 in the Southern
District of New York.
Lead attorney Norman E. Siegel of Stueve Siegel
Hanson LLP told Auction Rate Preferreds.Org
that Oppenheimer and its affiliates created
a "façade of liquidity they knew
was coming to an end," yet continued to
push ARS-ARPS on its clients.
Openheimer's Canadian parent, Openheimer Holdings,
Inc., based in Toronto, has asked shareholders
to approve incorporation in Delaware, placing
the firm in line for a potential bailout from
the U.S. Treasury's Troubled Asset Relief Program
(TARP). The move, according to the company,
may act as an "assist" in repurchasing
illiquid ARS-ARPS.
Mr. Siegel scoffed at the TARP tactic.
"It's a Hail Mary strategy, and they know
it," he explained. "It's a very long
shot and highly unlikely."
Mr. Siegel said the class action covers all
Oppenheimer clients. He could not place an exact
figure on the frozen cash being held by Oppenheimer
clients. It is estimated that retail clients
are stuck with at least $930 million in illiquid
debt. Last November, the Massachusetts Securities
Division filed an administrative action to compel
Oppenheimer to make state residents whole to
the tune of $56 million.
The company last month was told that US Airways
Group, Inc., and Hansen Beverage Co., have filed
arbitration claims with FINRA. US Airways, based
in Tempe, AZ., is demanding that Oppenheimer
buy back $250 million in ARS. Hanson is seeking
payment of $60 million.
In late March, Oppenheimer admitted the obvious:
that its failure to redeem auction rate securities
from its customers "presents a significant
issue for us with our clients and regulators."
The company added that TARP, "might under
certain circumstances provide the liquidity
necessary" to unfreeze the cash. Oppenheimer
failed to define what those "certain circumstances"
might involve.
Mr. Siegel pointed to allegations in the Massachusetts
case as an example of the insider game played
by Oppenheimer before the February 2008 collapse
of the market. He said the company pushed auction
rate paper to its clients while Chief Executive
Officer Albert Lowenthal and other members of
the management team sold their personal holdings.
Mr. Siegel said Oppenheimer's "TARP play"
appeared to be smoke and mirrors, little more
than a ploy designed to mollify legions of furious
investors. He said that long maturity dates
on most auction rate paper, much of it extending
20 to 30 years, likely disqualifies it from
the Treasury program. "Auction rates aren't
exactly the kind of assets the government wants
to assume," he explained. The long maturities
would likely create deep discounts.
Mr. Siegel cautioned that earlier ARS-ARPS settlements
by other banks and broker-dealers may not set
a precedent for the upcoming Oppenheimer case.
"People think those cases have solved the
problem," he said. "This is a dangerous
assumption."
Oppenheimer Holdings, formerly Fahnestock Viner
Holdings, owns Oppenheimer & Co., which
is now incorporated in Delaware. The company
is separate from OppenheimerFunds, Inc., which
is a part of Massachusetts Mutual Life Insurance
Co.
This latest court case, filed April 10 in the
Southern District of New York, is docketed as
Civil Action No. 08-CV-4435 (LAP), a consolidated
action complaint for violation of federal securities
law. Defendants are Oppenheimer Holdings, Inc.,
Oppenheimer & Co., Inc., and Oppenheimer
Asset Management, Inc.
The plaintiffs allege Oppenheimer sold auction
rate paper to "thousands of customers"
represented in the class action. It was noted
that separate actions by individual class members
would create a risk of "inconsistent and
varying adjudications."
Mr. Siegel charged that Oppenheimer manipulated
the auction market and underwrote billions of
dollars worth of ARS that carried "insufficient
maximum rates to ensure the liquidity of those
securities if the auctions failed."
He said underwriters encouraged issuers to establish
maximum yield in order to gain AAA ratings,
"creating the appearance of quality and
safety." Oppenheimer touted the ratings
in its sales pitches to clients.
The court filing paints a stark picture of deception:
"Unbeknownst to investors, however, the
same maximum rates that enabled
AAA ratings
also limited the liquidity of those securities,
and ensured that, once an auction failed, investors
would receive interest rates that were below
market value and insufficient to compensate
for the lack of liquidity."
To mask this problem, Oppenheimer allegedly
engaged in a wide range of tactics to conceal
the liquidity characteristics of the securities,
"while protecting themselves from the consequences
of intervening in auctions to prevent failures."
The suit claims Oppenheimer misrepresented and
omitted facts about the market and obscured
inherent risks.
The company earned "lucrative commissions
and fees" for selling and underwriting
the securities, and directed its financial advisors
throughout the U.S. to present "uniform
sales presentations" with assurances of
liquidity and cash equivalency. .
"Oppenheimer knew or was grossly reckless
in not knowing that auction rate securities
were not equivalent to cash," according
to the complaint. It noted that since March
2005, the "Big-4" accounting firms,
the Financial Accounting Standards Board (FASB)
and the SEC said that ARS did not meet the standard
for cash equivalents. The securities carried
long-term maturities and lacked any guarantee
that ARS holders would be able to liquidate
holdings.
The liquidity pitch by Oppenheimer's financial
advisors was promoted and pushed by "management
directives," the court document stated.
Financial advisors also sold ARS, under directions
from Oppenheimer management, without disclosing
how the market operated, and "without transparency
to investors, thus enabling manipulation by
broker-dealers."
"Oppenheimer contacted investors with significant
cash holdings
via unsolicited telephone
calls and encouraged those investors to invest
their cash in auction rate securities,"
according to the court documents. "At all
relevant times, Oppenheimer financial advisors
uniformly failed to disclose" important
facts concerning the real fragility of the market.
Other allegations include:
* Oppenheimer failed to provide mandatory instruction
or compliance training to its financial advisors;
* Financial advisors lacked "rudimentary
understanding" of the securities they were
selling or the ARS market conditions;
* Oppenheimer's practice was not to deliver
prospectuses;
* As the market unraveled, Oppenheimer sought
to enrich itself rather than protect its clients.
The company worked to deter clients from selling
their ARS prior the market's collapse, though
the crash was seen in advance by Oppenheimer
management;
* In a July 11, 2007 email, Oppenheimer instructed
its Auction Rate Securities Desk to ensure that
its clients held any new purchases for a "minimum"
of two to four auctions: "These holding
periods are in place to ensure that Oppenheimer
continues to maintain and build positive long-term
relationships with underwriters
continues
to be shown these new issues, and receive favorable
allocations
";
* If a client "must sell prior to the minimum
holding period," Oppenheimer would financially
penalize an advisor who allowed the early sale.
The company's own advisors described this practice
as an "in-house rule" running contrary
to the interests of their clients;
* In early February 2008, only days before the
market collapsed, insiders began selling their
holdings. Among those named were Greg White,
an Oppenheimer ARS specialist who sold $300,000
of his own ARS holdings; Louis Gelonmino, the
desk supervisor of the ARS department liquidated
$75,000 of ARS holdings. On February 7 and 11,
Oppenheimer's Chief Operating Officer, Lawrence
Spaulding liquidated $700,000 of his personal
ARS. Between January 29 and February 12, 2008,
Oppenheimer chairman and CEO sold $1.7 million
of his personal ARS holdings;
* "While Oppenheimer senior management
was unloading their personal holdings
and
despite the fact that Oppenheimer was well aware
that the (ARS) market was near collapse, Oppenheimer
made no effort to correct its prior false statements
or material omissions related to the (ARS) it
had sold to its customers. Instead, Oppenheimer
continued to encourage investors to purchase
(ARS) through the first half of February 2008,
despite increasing turmoil in the
market."
Norman
Siegel was emphatic that the class action suit
might be a "last best hope"
for Oppenheimer clients. On a more positive
note he added, "I believe we'll get a fair
shake form the judges" and end the misery
of Oppenheimer's frustrated and long-suffering
clients.
April
26, 2009
E*Trade
should be in your "Hall of Shame"
Hello
Harry,
E*Trade
has been totally intransigent, unresponsive,
and demonstrated nothing but stonewalling and
plain rude behavior. Complaints with FINRA about
E*Trade just seem to languish. ( The same is
true of Ameritrade and Schwab I understand.)
I
have been "frozen" in $250K ARS trash
at E*Trade since February 2008. As you are well
aware E*Trade is one of the worst of the scum.
I won't give you my details on them as it is
the same recounting as others have well documented.
I digress.
My
nominee is:

Fred
J. Joseph, Colorado Securities Commissioner
Colorado Div. of Securities
1560 Broadway Ste 900
Denver, CO 80202
This
"regulator" has demonstrated, so far,
a total disregard, complete unresponsiveness,
and lack of concern in this matter. I have been
writing his office, to his attention, for a
year asking for help and an investigation into
this matter and I have not even received a "
thank you for contacting your State Securities
division."
One
gets the feeling he is in the pocket somehow
of the likes of E*Trade, TD Ameritrade. The
State of Colorado seems to be viewing this ARS
fraud as essentially a non-event or of no concern,
unlike some states such as NY, MO, PA, MA.
Here
is a synopsis of my correspondence to his office
I will share with you.
March
16th, 2009 ( as well as three dates prior starting
with April 2008.)
Colorado Div. of Securities
1560 Broadway Ste 900
Denver, CO 80202
RE:Auction
Rate Securities
Dear
Fred J. Joseph, Colorado Securities Commissioner:
I
want to bring to your attention the fact that
many Colorado residents - and people throughout
the country - are still trapped in auction rates
through firms like Oppenheimer, E*Trade, Charles
Schwab, and TD Ameritrade. Actually, the number
of people trapped in each one of these firms
easily surpasses the number trapped through
Citibank.
I
know my brokerage, E*Trade, has done business
in Colorado for almost ten years. Many individuals
who live in Colorado are trapped in auction
rates sold them by E*Trade and the other brokerages
above, to the tune of $X,X00,000's individually.
The
frozen auction rate money is money that would
be used to purchase goods and services and homes
in Colorado and throughout the nation.
Anything
you can do to bring E*Trade and the others to
justice is appreciated. As you know these securities
were grossly misrepresented by the firms who
sold them, and many of those trapped are elderly.
I know of one elderly woman who is unable to
pay for her cancer medication because her money
is frozen. Anything to can do to right this
travesty is appreciated.
The State of Colorado should revoke the securities'
licenses of the aforementioned firms to do business
in Colorado until they redeem all of the ARS
for those investors who want them redeemed.
FINRA is nothing but a kangaroo Court and is
biased to the brokers, the expense notwithstanding
to folks who can ill afford to pay arbitration
fees just to get their own money back.
Sincerely,
John Oughtred
April
23, 2009
Read
the followings two stories and ask yourself
why Wells Fargo is acting so stupidly. All the
big brokers have caved in and redeemed all the
ARPS at par. Why not Wells Fargo? My guess is
twofold: they're getting fees every month from
"managing" these things. Money is
money. Second, they'll cave in shortly when
they discover -- surprise, surprise -- that
they don't have a leg to stand on. But meantime,
Wells Fargo attorneys are billing hours and
more hours. Someone ought to read the attorneys
the riot act. -- Harry Newton
Wells Fargo
accused of securities fraud by state lawsuit
Attorney General Jerry Brown says customers
were misled into believing that auction-rate
securities were safe. Wells Fargo disputes that,
and says it aided customers hit by the collapse
of the market.
By Martin Zimmerman of the Los Angeles Times
April
23, 2009: California today sued investment subsidiaries
of Wells Fargo & Co. for securities fraud,
alleging that the San Francisco financial services
company misled investors by selling $1.5 billion
worth of risky securities that it peddled as
being as safe as cash.
The
securities "were sold to customers on the
basis that they were like cash and people could
get their money back in eight days," Atty.
Gen. Jerry Brown said in an interview. "Now,
it turns out they were not like cash and people
can't get their money back even after many,
many months, and they're mad as hell."
The
lawsuit, filed in state court in San Francisco,
seeks to recover money invested in what are
known as auction-rate securities, which Wells
Fargo subsidiaries sold to Californians. As
the name implies, interest rates on auction-rate
securities are reset in periodic auctions. Billions
of dollars worth of the securities were sold
to investors nationwide in recent years.
Regulators
have charged that many investors were misled
into believing the securities were safe and
the equivalent of cash. But when the $330-billion
market for auction-rate securities collapsed
early last year, many investors couldn't sell
the securities, or could only sell them at a
loss.
About
2,400 Californians bought auction-rate securities
from Wells Fargo, according to the attorney
general's office.
Brown's
lawsuit names Wells Fargo Investments, Wells
Fargo Brokerage Services and Wells Fargo Institutional
Services as defendants.
Wells
Fargo disputed the state's allegations, saying
that it had taken steps to help customers hit
by the collapse of the auction-rate securities
market, including offering loans to tide them
over.
"We
fully understand and deeply regret the effects
this prolonged liquidity crisis has had on our
clients," Charles W. Daggs, chief executive
of Wells Fargo Investments, said in a statement.
"Wells
Fargo could not have predicted these extraordinary
circumstances, and even with the benefit of
hindsight is not responsible for them."
Several
financial services companies that marketed auction
rate debt to investors have agreed to repurchase
billions of dollars worth of the devalued securities.
Last
month, Wachovia Corp., the bank acquired by
Wells Fargo last year, agreed to repurchase
$1.5 billion of the securities from California
investors in a settlement with regulators. Brown
said that case didn't involve the securities
at issue in the lawsuit he filed today.
Last
June, the attorney general sued Countrywide
Financial Corp., accusing the mortgage lender
of causing thousands of home foreclosures by
deceptively marketing risky loans to borrowers.
That suit, which sought restitution for borrowers
who were deceived by Countrywide, was settled
in October when the lender agreed to reduce
loan payments and provide other benefits that
could total as much as $8.7 billion nationally.
To
see the attorney general's press release, CLICK
HERE.
To
see the attorney general's lawsuit, CLICK
HERE.
To
see Wells Fargo's statement, CLICK
HERE.
April
22, 2009
Wells
Fargo ARS Practices Targeted
By Washington State Regulators as Bank
Reports Record $3.05 Billion First Quarter;
$3.93 billion ARS/ARP Probe May Crack Bank's
Refusal to Thaw Assets Frozen Since February
2008
By Phil Trupp, (MVA News Service)
Washington,
April 22, 2009-Calling for redemption of $3.9
billion in frozen ARS and ARPS assets, Washington
State securities investigators have charged
Wells Fargo Bank and its divisions with misrepresenting
and failing to "disclose material information"
to clients about its sales of auction-rate securities.
Washington State Securities Administrator Michael
E. Stevenson said regulators are poised to move
ahead rapidly with their case if the bank continues
to refuse "full cooperation" with
the State Securities Division.
In a series of blistering allegations released
yesterday to MVA News Service, state securities
officials have threatened to suspend the bank's
broker-dealer investment adviser registration
if the legal foot-dragging continues.
Ironically, the threat came one day before Wells
Fargo reported record first quarter earnings
of $3.05 billion. There was no indication of
how the $25 billion taxpayer bailout figured
in the calculation. Nowhere it its quarterly
report did Wells President and CEO John Stumpf
mention the bank's impending clash over its
ARS and ARPS redemption problems.
Instead, Mr. Stumpf offered comforting bromides
to shareholders. "We remain focused on
proactively identifying problem credits,"
he said, adding that the bank is sensitive to
"troubled borrowers" who will "receive
the attention and help they need."
He did not mention the firm had spent $700,000
on lobbying in the first quarter.
Wells Fargo began selling ARS in 2001 as short-term
"cash equivalents" to retail and institutional
investors. The bank is still receiving compensation
for its auction management and dealer services,
while "all purchasers who wish to sell
their shares
are forced to continue holding
their positions," according to Washington
State securities officials.
These officials allege the bank actively solicited
customers for ARS, touting higher yields and
safety. Referrals were prized within the organization.
"Both on the banking side and on the investment
side, the number of internal referrals an employee
made was used as part of a matrix to determine
eligibility for bonuses," according to
the state's official court filing. Regulators
complained that customers were not informed
of risks or other pertinent details, even after
the auction-rate market began to fail in August
2007.
State investigators found an alarming lack of
knowledge about the auction market among Wells
Fargo employees. Many were "generally unaware
that auctions could fail and were failing,"
they said. Nor were many Wells Fargo employees
aware that PriceWaterhouseCoopers had issued
an interpretive opinion on March 4, 2005 stating
that under existing Financial Accounting Standards
Board (FASB) guidelines, ARS could not be classified
on bank balance sheets as cash or cash equivalents.
Clients were later shocked to learn that Wells
Fargo "salespersons" were aware that
several ARS market-makers were involved in a
2006 settlement with the S.E.C., and that 2007
was riddled with auction failures.
"It was all a big game," one former
Wells Fargo client said. "And they're still
acting like, 'What, me worry'?"
Washington securities officials said Well Fargo
failed to disseminate information about market
problems to bank salespersons and their supervisors.
They alleged that Wells Fargo "knew of
increasing (market) risks" as early as
May 2005, but changed none of its practices.
In November 2007, the bank's Trust Department
prepared a document titled, "Fixed Income
Update: Failed Auction Risk in the Auction-rate
Preferred Market," according to state officials.
They said despite this warning, Wells Fargo
made a decision to keep pushing its auction-rate
sales, making sure not to disclose how the auction
failures might affect liquidity.
The state's allegations reveal a stunning lack
of accountability by the bank. For example,
the securities officials found that "the
fixed income desk failed to communicate material
information to salespersons," and that
bank supervisors provided no "product training
for ARS." The regulators said Wells Fargo
"failed to obtain prospectuses, disclosure
documents" or other details helpful to
understanding ARS products.
These investigators said when the bank first
began offering ARPS, it placed its orders after
contacting Nuveen. Later, the bank placed its
orders for ARPS "exclusively through Oppenheimer."
Both Nuveen and Oppenheimer provided ARS/ARPS
brochures to Wells Fargo. Even though the brochures
failed to address market risks, Wells Fargo
did not make the documents available to clients,
investigators explained.
"Branch managers regularly approved ARPS
for customers with low tolerance for risk,"
they charged, citing yet another securities
violation.
In January 2008, the Fixed Income Desk learned
of an auction failure of a Nuveen ARPS for which
Lehman Brothers acted as the auction's managing
dealer. State investigators said Wells Fargo
remained mum, avoiding any mention of the failure
to its clients.
Following the February 2008 collapse of the
market, the bank arranged loan programs for
its ARS customers. The first such program was
a margin loan of 50 percent of par value of
the security. Later, this amount was boosted
to 90 percent.
In a long preface detailing the many hardships
suffered by Wells Fargo ARS clients, the investigators
claimed the bank had "no ARS guidelines
for determining the suitability of a recommendation
to a customer
" Thus many retired
or soon-to-be retiring clients found themselves
strapped for cash at a most pressing time in
their lives.
Investigators said the bank has continued to
dodge important questions.
"Respondents have not provided a complete
response to requests for discovery" by
the Washington State Securities Division. The
bank has failed even to produce witnesses, according
to the state's court filing.
One source following the case noted with some
irony that it was unseemly for a bank which
boasts $1.3 trillion in total assets to refuse
to "make its ARS investors whole."
But CEO Stumpf, in his first quarter report,
was proud to announce that Wells Fargo had opened
14 new retail outlets, bringing the bank's total
to 6,638. Mr. Stumpf also reported mortgage
applications amounting to $190 million, up 64
percent in the quarter.
All very nice for Wells Fargo. Not so nice for
its long suffering ARS victims.
April
15, 2009
State
collects $2.3 million in fines from Citigroup
and Wachovia
By
Jay Greene, Crain's Detroit Business
The Michigan Office of Financial and Insurance
Regulation on Wednesday announced it will recover
more than $2.3 million in fines in a settlement
with Citigroup Global Markets Inc. and Wachovia
Capital Markets over the sales practices of
auction-rate securities.
This
deal is good for Michigan investors and pumps
over $2 million into the general fund,
said OFIR Commissioner Ken Ross in a statement.
Consumer protection pays dividends for
Michigan.
In
a multi-state investigation, Michigan and other
states alleged that Citigroup and Wachovia misled
investors regarding the liquidity risks associated
with investing in the securities.
Auction-rate
securities are debt instruments with rates that
vary and are sold generally on a weekly basis
in auctions overseen by brokerage firms.
Since
February 2008, when most auctions have failed,
the market has been frozen, and many corporate
or municipal bond holders have lost money or
did not have access to it.
Last
September, Michigan Attorney General Mike Cox
announced that Comerica Bank agreed to buy back
$1.46 billion of the auction-rate securities
from its customers. Nearly $1 billion was held
by Michigan residents, he said.
Comerica
also agreed to pay Michigan a civil penalty
of $10,000 and $100,000 to the Michigan Investor
Protection Trust Fund.
Citigroup
and Wachovia also agreed to offer full buybacks
to any eligible customer who purchased the securities
from the brokerage firms, including up to $717
million from Citigroup and up to $159 million
from Wachovia.
Citigroup
agreed to pay Michigan a $1.72 million administrative
fine and Wachovia a $654,000 fine. Some 90 percent
will be deposited into Michigans general
fund and the remaining amount will go into OFIRs
Michigan Investor Protection Trust.
April
15, 2009
Citigroup
Global Fined Over Auction-Rate Debacle
By Gordon Gibb, LawyersandSettlements.com
Phoenix, AZ: Long after the auction rate securities
market dried up practically overnight, the fallout
over the products and how they were sold continues.
Auction rate securities were sold 'as good as
cash,' but many an investor who went the auction
rate route soon found out that things were not
as they seemed.
This week Citigroup Global Markets Inc. was
ordered to pay almost a half-million dollars
in fines over its role in misleading investors
with regard to auction-rate security sales in
Arizona.
Investment LossMisleading investors in the auction-rate
securities arena seems to have been a common
occurrence.
At one time auction-rate securities were a relatively
easy and lucrative way for investors to temporarily
park cash. Securities could usually be purchased
and sold fairly quickly and interest rates were
attractive compared with competing products.
It was not uncommon for investors to park cash
for a college or vacation fund, or for any other
reason.
The word on the street, as well as the words
in the vending agent's office, were that the
auction-rate security was safe, liquid and 'as
good as cash.'
That was the sell. In reality, auction-rate
securities were anything butlong-term
investments subject to a complex auction process
that had the potential to lead to illiquidity
and lower interest rates.
For holding back that little tidbit of truth,
Citigroup Global Markets Inc. was fined $455,128
by the Arizona Corporation Commission for its
role in leading investors down the garden path.
As part of the settlement Citigroup also agreed
to buy back the now-vilified securities and
reimburse those investors who sold at a loss
(if they were lucky enough to sell at all).
That bill totals about $97.7 million worth of
auctionrate securities from some 839 investors.
It seemed, at the time that everyone knew exactly
what the auction-rate security was. Everyone
perhaps, save for the investor. He was left
out in the cold. He didnt know that what
he was really buying was a long-term product,
such as a municipal bond with something like
a 30-year term to maturity.
When the market was hot there were buyers a-plenty
and investors were flipping auction-rate securities
like real estate moguls flip properties.
However that only works when you have buyers.
Without the buyer, you can't sell. And once
that begins to happen, you're going to stop
buying.
That's how a massive market for auction-rate
securities that had been steaming along for
years, ground to a halt almost overnight.
Suddenly, investors are holding investment products
they can't sell. Instead of the expectation
of selling an auction-rate security over the
course of a couple of weeks or a month, investors
suddenly were made to realize the truth about
their investment and the scope: without access
to those funds, they couldn't fund the kid's
college tuition, or carry on with whatever plan
or need the money was intended for.
If brokers knew the score they either weren't
telling, or were actually beginning to believe
the auction-rate security was as good as cash
themselves. Who would believe the bubble would
burst and the market would implode as quickly
as it did?
The Arizona Corporation Commission investigation
was part of a 12-state inquiry probing the behavior
of prominent Wall Street firms with regard to
allegations that they knowingly misled investors
into thinking they were buying completely liquid
products with full and unfettered access to
their money, without disclosing the risks.
Observers have stated the funds currently tied
up in failed auction-rate securities would go
a long way in helping stimulate the US economy,
were those funds to get back into circulation.
Instead, the auction rate is dead and a robust
auction-rate securities market is but a distant
memory. However, the loss and pain are still
being felt. If you count yourself as one of
them and have not derived any satisfaction from
the vendor, you would be well advised to seek
out an auction-rate securities attorney to discuss
the possibility of launching an arbitration
case to recover your losses.
April
14, 2009
GETTING
PERSONAL:
Activist
Buys Auction-Rate Shares
By
Daisy Maxey
A
DOW JONES NEWSWIRES COLUMN
NEW
YORK (Dow Jones)--Activist investor Karpus Investment
Management has scooped up a large portion of
one closed-end mutual fund's auction-rate shares
at a discount on the secondary market, and hopes
to pressure the fund to refinance them.
It's
a move that could be emulated by other activist
investors as frustrated auction-rate preferred
shareholders, many now stranded for more than
a year, look to sell.
The
Pittsford, N.Y.-based investment manager purchased
nearly 88% of the auction-rate preferred shares
issued by closed-end fund First Trust/Four Corners
Senior Floating Rate Income Fund (FCM) at a
significant discount on SecondMarket, a marketplace
for illiquid assets.
In
an April 9 letter, Karpus notified the fund
that it has nominated two candidates - Phillip
Goldstein, principal of Bulldog Investments,
a Purchase, N.Y., hedge fund; and Brad Orvieto,
president of Strategic Asset Management Group,
of Plantation, Fla. - for election as preferred
directors to its board in September, when two
such positions come open. Preferred directors
are elected by preferred shareholders, but serve
both common and preferred shareholders.
Karpus
wants the board to find some way to refinance
its auction-rate shares. "This fund hadn't
announced a definitive plan to refinance, so
we're doing this to sort of pressure the board
to do something now rather than later,"
said Cody Bartlett, managing director of investments
at Karpus.
First
Trust Advisers, the fund's investment adviser,
didn't return calls seeking comment on Karpus'
proposal. The fund used debt to redeem about
$35 million, or 61%, of its $57 million in outstanding
preferred shares last year.
The
fund now faces a decision on whether to allow
two dissidents on its board or find some way
to redeem the shares, said Cecilia Gondor, executive
vice president at Thomas J. Herzfeld Advisors,
a Miami investment-advisory firm.
For
years, closed-end funds issued auction-rate
preferred shares to boost income for common
shareholders. In February 2008, buyers pulled
back from the auctions, leaving many investors
stranded.
Karpus
started buying the preferred shares on the secondary
market in April 2008 and is still buying, Bartlett
said. He said they're being sold by shareholders
that need liquidity or are simply tired of waiting
for some other solution.
The
new investors will be less patient than retail
investors have been, Bartlett said. "They
have the capital, and they aren't going to get
paid 1% on auction-rate securities."
Art
Lipson, sole manager of Western Investment LLC
and another activist investor, says he's not
involved with auction-rate preferred shares,
but wouldn't be surprised to see more activists
getting involved.
Among
the shares issued by the fund are four shares
George Karpus, president of Karpus Investment
Management, bought at $16,250 on Oct. 30, according
to a filing with the Securities and Exchange
Commission. At par, they're worth about $25,000.
Karpus
"paid 65 cents on the dollar for a triple-A
investment, and they can afford to wait a long
time to capitalize on that gain and still have
a decent return," said Lipson.
Kevin
O'Connor, managing director and co-head of SecondMarket's
auction-rate securities market, said that from
December to late January, the market was "extremely
active" and probably traded more than $200
million of closed-end fund preferred shares.
Activity then eased, before picking up again
in recent days. Shares are selling at approximately
70% of par value, he said, with both institutional
and individual investors selling.
Many
shares were left in the hands of institutions
after settlements with regulators, in which
many banks and fund companies bought back shares
sold to retail investors.
Former
publisher Harry Newton, who had $4.5 million
stranded in auction-rate preferred shares that
have since been redeemed, called Karpus' move
brilliant. "When these activists start
screaming and shouting and carrying on, these
funds will just buy them off at par," he
said.
Newton
continues to run an online hub of information
on auction-rate preferred securities at www.auctionratepreferreds.org.
He said there's a lot of frustration on the
part of investors still stranded.
"People
would be very happy to get rid of them maybe
at 75%" of par, he said. "Nobody in
their wildest dreams thought they'd be sitting
here in April 2009, more than a year from when
this thing locked up ..."
(Daisy
Maxey is a Getting Personal columnist who writes
about personal finance. She covers topics including
hedge funds, annuities, closed-end funds and
new trends in mutual funds, and can be reached
at 201-938-4048 or at daisy.maxey@dowjones.com)
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April
10, 2009
There is some good news. Slowly, but surely,
more and more attorneys-general are on the case
and getting investors' ARPS money back. This
is slow and painful. If you're still stuck,
you need to get on your local AGs' case big-time.
Point out to him (or her) that how many AGs
(or similar) from many states -- including New
York, Massachusetts, and Missouri -- have helped
their local investors big-time. The latest is
Missouri which has settled with Stifel Financial
(a big hold-out). See right-hand column. --
Harry Newton.
April
10, 2009
Call
to Oppenheimer Clients. Get Off Your Duff
Harry,
We are told there are thousands of Oppenheimer
clients still frozen in ARPS. Missouri would
force Oppenheimer to settle if they got enough
complaints. So far only seven (7) of the thousands
of Opco clients have bothered to file with Missouri.
(They take your complaint over the phone, it
takes about 3 minutes). This is appalling. Any
chance we can appeal for Opco clients to contact
Missouri on your site? The contact person in
Missouri is Judi.Lahr@sos.mo.gov.
Thanks. Ed Dowling and Brad Jeffries.
April
10, 2009
Bank of America
pays $4.7M securities fine to Massachusetts
By Gaurav Singh, Universal Business News
Bank
of America Corp. (BAC) paid a $4.7 million fine
to the Massachusetts Securities Division after
an investigation of its marketing and sales
of auction-rate securities, Secretary of the
Commonwealth William F. Galvin said Wednesday
(April 8)
The
bank last year agreed to buy back about $4.5
billion worth of auction-rate securities held
by roughly 5,500 customers nationwide as part
of a settlement agreement with state regulators.
More
than a dozen banks and securities companies,
including Citigroup Inc. (C), UBS AG (UBS) and
JPMorgan Chase & Co. (JPM), last fall reached
agreements with regulators to repurchase more
than $50 billion in auction-rate securities
at the full amount, mostly from retail and smaller
investors.
Under
that agreement North Carolina-based Bank of
America said it would buy back securities at
the value at which customers purchased them.
Massachusetts
Secretary of State William Galvin said Wednesday
the fine paid by the bank signals the end of
the investigation. The money will go into the
states general fund.
April
10, 2009
Investment
firms fined by Delaware officials
BY NICK REES
WILMINGTON, Del. (Legal Newsline) - Misleading
investors about the safety of the auction rate
securities market has lead to fines of more
than $309,000 for two investment firms in Delaware.
Wachovia
Securities, LLC and Wachovia Capital Markets,
LLC sold more than $60 million in auction rate
securities in Delaware, while Citigroup Global
Markets Inc. sold more than $92 million.
The
securities were marketed as cash alternatives
by Wachovia and investors were told that they
would be provided with one-day or same-day liquidity
for redeeming the securities. In February 2008,
however, when the securities market crashed,
Wachovia stopped abiding by its offer.
"These
agreements send a clear message to investment
firms that we will hold them accountable for
misleading investors about the sale of these
supposedly safe and liquid investment products,"
said Delaware Securities Commissioner James
Ropp.
Auction
rate securities, which are long-term financial
instruments with interest rates that reset through
weekly or monthly auctions, can be bought and
sold on a regular basis when the auctions are
run properly.
There
were not enough buyers for the securities being
sold by the companies, however, causing the
auctions to fail and forcing investors to hold
onto their auction rate securities until the
next successful auction. The majority of these
auctions have failed since early 2008, causing
investors to be unable to sell their frozen
holdings.
A
multistate investigation into the failure of
the auction rate securities market lead to a
settlement in November between state and federal
securities regulators and 11 investment firms
offering the securities for sale.
The
firms agreed to repurchase more than $60 billion
of auction rate securities from investors nationwide.
The firms also agreed to notify investors of
the repurchase offer.
April
6, 2009
Wells
Fargo Trust Division Research Said 'No' to ARS
in '07
But Data Failed to Reach WF Brokers;
Possible Investigation Underway by Washington
State AG
By Phil Trupp
Washington,
April 6-- Auction-rate securities posed too
much risk for Wells Fargo's Trust Division,
which pulled out of the market two years ago,
according to financial advisors who claim they
were "left out of the Trust Division's
research loop."
The Trust Division, which serves institutional
investors, researched the now-collapsed auction
market in 2007, these sources said. But the
data allegedly was not passed "down the
line" to financial advisors (FAs) who service
retail accounts .
Many Wells Fargo ARS investors remain stuck
with frozen cash, and FAs apparently have faced
a non-stop pounding by furious clients.
"We still can't get information on the
(auction) market," according to one source.
"It's locked up at the top."
The FAs said regulators in various states where
Wells Fargo does business may be viewing the
bank as a possible "underwriter" of
ARS/ARP, allegedly opening the way for lawsuits
and penalties.
According to one FA, the Washington State Attorney
General's office began investigating the bank's
role in the market six month ago, but so far
has taken no action.
"The Trust Division tried to pass on its
data to us," a source told Auction Rate
Preferreds.Org. "But the FAs never saw
that research." He indicated the data has
been deliberately withheld.
But how could the FAs have missed the details
of auction-rate woes, a reporter asked?
"As a rule," an FA explained, "we're
very busy with our clients. We rely on the research
department. We understood that ARS are different
from ordinary money market mutual funds. We
were paid a small commission to sell them. That's
about all we knew. As for new brokers--ARS isn't
even in their vocabulary."
Chief Financial Officers have been fired over
ARS scandal, sources said. "These were
very sophisticated people," one source
explained, "and even they didn't have a
thorough grasp."
One source noted that many of the illiquid ARS
are still rated AAA. "It's mind-boggling,"
he complained. "I'd like to see Wells Fargo
step up and follow Wachovia's lead."
Wachovia settled ARS fraud allegations following
a July 17, 2008 raid on the company's offices
by a multi-state task force led by the Missouri
Securities Division. As was the case with Wachovia,
Wells Fargo management has warned its FAs not
to speak with the media.
Raymond James brokers recently broke silence
and voiced complaints over management's alleged
decision not to redeem frozen securities. Since
the market collapse in February 2008, there
appears to be a widening gulf of frustration
between management and FAs at a number of broker-dealer
operations. FAs are taking the brunt of client
complaints and suffering an exodus of accounts
in the wake of the ongoing $336 billion ARS
debacle.
A Wells Fargo FA said, "It's the worst
year of my career--and it has nothing to do
with stocks falling. If I were a client (with
frozen cash) I'd be screaming, too. There's
no justification for this."
One source was even more blunt: "We have
to kick butt. My boss is frustrated. His boss
is frustrated" with information pooled
at the top and a moat of silence surrounding
it
April
1, 2009
UBS
Dismissal: The End of Auction Rate Securities
Lawsuits?
reprinted with permission from The D&O
Diary, by Kevin
LaCroix
A
federal judge has ruled that securities class
action plaintiffs who availed themselves of
UBSs auction rate securities regulatory
settlement cannot separately maintain claims
for damages against UBS. But while this ruling
would seem to represent at least the beginning
of the end for many similarly placed plaintiffs,
we may still be a long way from the end of the
auction rate securities litigation, despite
the regulatory settlements.
Background
UBS
was one of the 21 different companies named
as defendants in the wave of auction rate securities
lawsuits filed during 2008. The names of all
of the auction rate securities lawsuit targets
can be accessed here.
Background regarding the case against UBS can
be found here.
Essentially
the plaintiffs alleged that UBS had failed to
disclosure the liquidity risks associated with
the auction rate securities, and also failed
to disclose that UBS and other broker dealers
regularly intervened in the market for the securities
to maintain trading --and allegedly to manipulate
the market as well. When the broker-dealers
simultaneously stopped supporting the market
on February 13, 2008, the market for the securities
collapsed and investors were left with securities
for which there was no active market.
On
August 8, 2008, UBS announced a nearly $20 billion
settlement with regulators regarding the auction
rate securities (about which refer here).
In the settlement, UBS agreed to buy the securities
back from retail investors at par value, or
to make up the difference to retail investors
who had already sold for less than par.
The
plaintiffs in the UBS auction rate securities
settlement took advantage of the regulatory
settlement and redeemed their securities as
par. The defendants moved to dismiss the lawsuit
on that basis.
Judge
McKennas Ruling
In
a March 30, 2009 opinion (here),
Southern District of New York Judge Lawrence
McKenna granted the defendants
dismissal motion, with leave to amend. Judge
McKenna found that
Given
that Plaintiffs have availed themselves of the
relief provided in the Regulatory Agreement,
Plaintiffs cannot now allege out-of-pocket damages.
When Plaintiffs elected to have UBS buyback
their ARS at par value, they received a full
refund of the purchase price. Therefore, Plaintiffs
have already been returned to the position they
were in before they purchased the ARS and before
any fraud ensued
.Plaintiffs out-of-pocket
damages are necessarily zero because after choosing
to rescind the ARS purchases, Plaintiffs have
effectively paid nothing for their ARS.
Plaintiffs
argued that they were entitled damages despite
the regulatory settlement because "UBSs
fraudulent acts prevented Plaintiffs from receiving
a sufficiently high rate of interest or dividends
to compensate them for the risk of illiquidity
associated with their ARS investments."
Essentially, they were arguing that if they
had been appropriately informed about the securities
liquidity risk, they would demanded and would
have been paid higher interest rates or otherwise
have enjoyed a higher investment return.
Judge
McKenna rejected this argument because plaintiffs
in securities actions must choose among prospective
remedies, between rescission and out-of-pocket
damages. Having elected rescission, the plaintiffs
"may not now seek additional interest or
dividends as benefits of ARS purchases they
have already elected to disavow."
Finally,
Judge McKenna found that the class plaintiffs
lack constitutional standing to asset claims
on behalf of "class members who purchased
UBS-underwritten ARS from brokerage firms other
than UBS and investors who transferred to another
brokerage firm ARS they purchased from UBS before
October 2007."
Discussion
Judge
McKennas ruling might seem to suggest
that the regulatory settlements represent the
end of the auction rate securities lawsuits.
However, conclusions along those lines could
well prove to be premature.
First,
Judge McKenna granted the motion with leave
to amend. Although there is ample reason to
doubt that these plaintiffs can circumvent Judge
McKennas concerns in an amended pleading,
the case itself is not over yet.
Second,
other courts may decline to follow Judge McKennas
conclusions. Indeed, in a March 31, 2009 AmericanLawyer.com
article (here)
Alison Frankel quotes the plaintiffs attorney
from the UBS case as saying "were
not convinced other courts will rule the same
way."
Third,
there are still the claims of those erstwhile
class members who were frozen out of the UBS
regulatory settlement, such as those who bought
the auction rate securities from a non-UBS broker
or who transferred their account away from UBS.
As the plaintiffs lawyer from the UBS
case also is quoted as saying in the American
Lawyer article, "the key to the auction
rate securities litigation is plaintiffs whose
securities were not bought back by the banks."
This
category of investors who were shut out of the
regulatory settlements also includes the investors
who bought their securities from banks or broker
dealers who have not yet entered regulatory
settlements.
Fourth,
in all the regulatory settlements, institutional
investors interests were treated differently.
For example, in the UBS settlement, institutional
investors cannot hope to have their investment
redeemed until at least 2010. These investors
liquidity issues continue to give rise to new
litigation; for example, I described in recent
post (here) the lawsuit that KV Pharmaceuticals
filed in late February against Citigroup, in
which the company alleged that the illiquidity
of its auction rate securities investments was,
among other things, forcing the company to lay
off workers.
And
finally, there is the separate category of litigation
that has arisen against auction rate securities
investors, rather than against the auction rate
securities sellers. These cases involved companies
whose balance sheet exposure to auction rate
securities has harmed their financial condition,
and who face litigation from their own shareholders
who claim the companies failed to disclose their
exposure. The most recent of these cases, involving
Perrigo Company, is discussed here.
In
short, while Judge McKennas opinion unquestionably
represents a significant milestone, it by no
means represents the finish line for auction
rate securities litigation. Unfortunately, these
cases likely will be around for some time to
come.
All
of that said, Judge McKennas opinion does
hold out the hope that a large portion of these
cases can eventually be cleared out, and the
problem at least reduced over time, perhaps
to more manageable levels.
I
have in any event added the UBS dismissal to
my roster of settlements, dismissals and dismissal
motion denials in connection with the subprime
and credit crisis related lawsuits. The roster
can be accessed here.
March
30
Citigroup,
Wachovia Settle Auction Rate Probe With California
By Michael B. Marois
March
30 (Bloomberg) -- Citigroup Inc. and Wachovia
Corp., the bank purchased by Wells Fargo &
Co., reached an agreement with California regulators
under which their brokerage units will return
$4.7 billion to buyers of auction rate
securities.
Wachovia
agreed to repurchase $1.5 billion of the debt,
while Citigroup agreed to repurchase $3.2 billion
of auction- rate obligations it sold to customers
in California, Corporations Commissioner Preston
DuFauchard said in a statement.
Across
the U.S., about 20 banks and securities firms
have agreed to repurchase more than $50 billion
in debt to settle federal and state claims they
improperly touted the investments as safe, cash-like
investments. Banks managing frequent auctions
of the securities abandoned the $330 billion
market in February 2008, leaving thousands of
investors unable to sell their holdings.
Todays
multibillion-dollar agreement is an important
and timely relief for investors who lost funds
in the collapse of the auction-rate securities
market, DuFauchard said.
The
market unraveled when banks that supported auctions
of the securities for two decades with their
own money as buyers of last resort pulled back
to preserve capital amid the mortgage market
collapse that has led to $1.3 trillion of credit
losses and writedowns worldwide.
States,
student-loan agencies and closed-end mutual
funds were the primary issuers of the securities,
long-term bonds with interest rates set at weekly
or monthly auctions. The debt, marketed by bankers
as cash equivalents, offered investors yields
of a quarter-percentage point or more above
conventional money-market funds, indexes show.
When
the market flourished, borrowers paid dealers
on average quarter-percentage point a year of
the par value of the debt to run the auctions,
generating about $825 million annually based
on the amount of sales. Citigroup increased
the commission its financial advisers earned
selling the bonds to investors as the market
stalled.
To
contact the reporter on this story: Michael
B. Marois in Sacramento at mmarois@bloomberg.net
March
30
If
Oppenheimer Gets Handout, Blame Canada
Commentary by Susan Antilla
March
30 (Bloomberg) -- With word out that the U.S.
is offering generous new welfare benefits, it
was only a matter of time before those opportunistic
foreigners who provided Lou Dobbs with his shtick
started crossing the border with their hands
out.
This
time, the benefits are bailout goodies for banks
and other financial institutions, and the grovelers
are management of a Canadian brokerage firm.
Oppenheimer
Holdings Inc., based in Toronto, said in several
regulatory filings this month that it wants
to reincorporate in Delaware and perhaps seek
federal rescue money.
Oppenheimer
is exploring becoming a U.S. corporation
and a U.S. bank holding company in order to
help resolve the ARS problem for our clients,
the company said in its annual letter to shareholders
released last week. (Torontos Oppenheimer
& Co. isnt related to OppenheimerFunds
Inc., a unit of Massachusetts Mutual Life Insurance
Co.)
The
"ARS problem," of course, is the nasty
pickle Oppenheimer has gotten itself into with
customers who hold $929.6 million in auction-rate
securities, the ill-fated investments that
flat-lined in February 2008. The auction-rate
meltdown left investors at Oppenheimer and many
of its Wall Street brethren unable to liquidate
positions that had been marketed as, well, pretty
darned liquid, to customers who often had no
clue about the products risks.
Regulators
and the public cried foul, and firms including
Citigroup, Merrill Lynch & Co. and UBS AG
ponied up the money to make customers whole
after getting strong-armed by state regulators
and the Securities and Exchange Commission.
While
those firms caved, so-called downstream firms
like Oppenheimer dug in their heels in the face
of an onslaught of arbitrations, private lawsuits
and assorted allegations by securities regulators.
Downstreamers
said that they werent responsible for
the mess to the same degree as underwriters
like Merrill and Citigroup were. Hey, all they
did was sell the stuff, not underwrite it. Over
time, though, some downstreamers such as Fidelity
Investments bowed to pressure and made customers
whole, which increasingly makes Oppenheimer
look the part of the piker.
And
dont think they dont know it. If
ARS markets stay frozen, more client claims
may come, the company said in its annual report
filed with regulators on March 3. Worse, it
could mean a competitive disadvantage
now that competitors have settled similar litigation
with clients, Oppenheimer wrote.
Not
enough of a disadvantage to move them to buy
out their customers frozen positions,
though. The company does not currently
believe that it is obligated to make any such
purchases, it said.
Not
currently perceiving an obligation
to make good to customers could turn on a dime,
though, should Oppenheimer shareholders vote
for that move to Delaware and seek federal funds.
It
isnt a slam-dunk that Oppenheimer will
actually move its base to Delaware; nor is it
certain that the company will ask for or get
any dough out of the various U.S. financial
rescue kitties. Oppenheimer has spilled a fair
amount of ink, though, in describing the possibilities
of leaving Canada, then attempting to secure
federal money.
Brian
Maddox, a spokesman for Oppenheimer, says the
firms reasons for seeking to incorporate
in Delaware include goals that are unrelated
to getting aid from the Troubled Asset Relief
Program or other government programs.
In
regulatory filings this month, the firm said
that the move, if approved by shareholders,
would simplify its corporate structure, establish
Oppenheimer unambiguously as a U.S. corporation
(its operations are largely in the U.S. anyway),
and enhance shareholder value by giving it a
larger role in U.S. capital markets.
That
shareholder value part might get
tricky, though, if the day comes that Oppenheimer
does accept bailout money. In the March 3 filing,
Oppenheimer said that should it become a bank-holding
company, which is under consideration, its financial
condition could be adversely affected
by new regulations. The company may also
be required to issue preferred shares or warrants
to the government, which might dilute current
shareholders, the company said.
Asked
why U.S. taxpayers should help Oppenheimer repay
its customers, Maddox said the company has
not yet been able to find a viable private sector
or market solution to the auction-rate
problem. Oppenheimer believes that the
federal programs recently adopted were instituted
to add liquidity to markets where no market
solution exists. Ah, remember the days
when Wall Street officials pounded the table
that the market always had an answer?
Come
one, come all, to America. Because it is only
here that you can peddle a product that blows
up on customers, fight the regulators who tell
you to give customers their money back, and
then rush to the government breadlines when
you see Uncle Sam whipping out his checkbook.
Presto, before you know it, taxpayers are paying
one another back for money they lost at the
hands of their trusty brokers -- even if the
brokers work for companies based outside the
munificent U.S.A.
Susan
Antilla is a Bloomberg News columnist. The opinions
expressed are her own. To contact the writer
of this column: Susan Antilla in New York at
santilla@bloomberg.net
March
26, 2009
Oppenheimer
May Seek TARP Funds to Repay Auction-Rate Clients
By
Miles Weiss
March
24 (Bloomberg) -- Oppenheimer & Co.s
Canadian parent said it may seek money from
the U.S. governments financial- bailout
programs to repay brokerage customers facing
losses on frozen auction-rate securities.
Oppenheimer
Holdings Inc., based in Toronto, asked shareholders
to approve an incorporation switch to Delaware,
which would make the firm more likely to qualify
for the rescue funds, according to a March 13
proxy statement. Money from the Treasurys
Troubled Asset Relief Program could assist
us in repurchasing securities from clients
trapped when the $330 billion auction-rate market
seized up, the company said in the filing.
It
takes your breath away, Anthony Sanders,
a finance professor at Arizona State University,
said in an interview. Were going
to ask taxpayers, the people who got hurt by
these securities, to pay for buying them back.
Sanders, a former head of mortgage-backed securities
research at Deutsche Bank AG, testified before
Congress this month on TARP fund use.
Federal
and state regulators forced companies including
New York-based Citigroup Inc. and UBS AG of
Zurich to buy back more than $50 billion of
auction-rate securities that plunged in value
in February 2008 after underwriters pulled out
of the market. Oppenheimer Holdings, whose retail
clients were stuck with about $930 million of
the debt, said in a March 3 regulatory filing
that repurchasing the securities would
likely have a material adverse effect
on its financial condition.
Brian
Maddox, a spokesman for the company, said getting
TARP money is only one reason to reincorporate
in the U.S. The move also would simplify its
corporate structure and provide greater access
to U.S. capital markets.
No
Assurance
We
have no assurance that we would qualify for
U.S. bailout funds, Oppenheimer Holdings said
in the proxy statement, nor have we determined
that we would participate in any of these programs.
Oppenheimer
Holdings, formerly Fahnestock Viner Holdings
Inc., owns Oppenheimer & Co., which is already
incorporated in Delaware. The New York-based
units roots go back to the late Leon Levy
and Jack Nash, founders of the hedge fund Odyssey
Partners LP. The company is separate from OppenheimerFunds
Inc., a unit of Massachusetts Mutual Life Insurance
Co. of Springfield, Massachusetts.
Auction-rate
securities typically are long-term bonds or
preferred shares whose interest rates are set
at weekly or monthly auctions run by broker-dealers.
Wall Street firms marketed the securities as
a cash equivalent that offered higher yields
than conventional money-market funds.
Massachusetts
Action
Many
investors got stuck holding auction-rate securities
when outside bidders disappeared and investment
banks that ran the auctions refused to buy the
securities.
After
getting underwriters such as Citigroup to buy
back the securities at face value, state regulators
began focusing on banks and brokerages that
resold the auction-rate debt.
In
November, the Massachusetts Securities Division
filed an administrative action seeking to compel
Oppenheimer & Co. to make state residents
whole on as much as $56 million of auction-
rate securities.
The
state said Oppenheimer & Co. promoted auction-rate
securities to clients as Chief Executive Officer
Albert Lowenthal and members of management sold
their personal holdings amid the markets
decline. Oppenheimer Holdings denied the allegations
at the time and said it planned to vigorously
defend the brokerage unit.
Arbitration
Claims
A
Financial Industry Regulatory Authority arbitration
panel last month ordered Credit Suisse Securities
USA LLC of New York to pay some $400 million
in fees to resolve claims it misled STMicroelectronics
NV into buying auction-rate securities. At the
time, experts said it could lead to a spate
of other arbitration claims.
Oppenheimer
& Co. was notified last month that two clients,
US Airways Group Inc. and Hansen Beverage Co.,
had filed arbitration claims with FINRA, according
to the firms March 3 annual report. US
Airways, the Tempe, Arizona-based airline, wants
Oppenheimer & Co. to buy back $250 million
in auction-rate securities. Hansen Beverage
is seeking to have a $60 million purchase rescinded.
Many
of our competitors have redeemed auction-rate
securities from their customers and our failure
to have done so presents a significant issue
for us with our clients and regulators,
Oppenheimer Holdings said in its proxy statement.
Programs
such as TARP, might under certain circumstances
provide the liquidity necessary to redeem
auction-rate securities held by clients.
Daniel
Cravens, a spokesman for US Airways, declined
to comment on the airlines arbitration
claim. Heather Marsh, an attorney at Hansen
Natural Corp. of Corona, California, the parent
company of Hansen Beverage, didnt immediately
return a call.
March
17
Insurgent
FAs at Raymond James Stage Revolt;
Reveal
Company's Tactics to Push ARS
By Phil Trupp
Washington,
March 17: A group of irate Raymond James
financial advisors (FAs) have turned to insurgency,
charging the firm and its board of directors
"lied, manipulated the truth, and threatened...employees"
if disclosure of the company's policy regarding
the sale of auction rate securities was made
public. The company's board first discussed
the liquidity problems of auction rate securities
in October 2007, but failed to alert its clients
or brokers, according to these FAs.
In internal documents and e-mails made available
exclusively March 11 to AuctionRatePreferred.Org.,
the Raymond James FAs said their firm "aggressively
pushed ARS onto both financial advisors and
clients without regard to client suitability,"
describing the securities as "AAA and totally
safe" in company e-mails, booklets, and
on conference calls.
Sources said the company, while using the typical
sales pitch of ARS liquidity and safety, "just
like money market funds," dictated which
ARS issues would be placed in client accounts,
"without consulting either FAs or clients."
The company failed to provide a prospectus to
its FAs or its clients, these sources said.
When the market collapsed in February 2008,
the firm told its brokers and clients, "You
should have read the prospectus," according
to company sources.
As late as February 1, 2008, Raymond James warned
its FAs to avoid purchases of Nicholas Applegate,
but said "other ARS are still strong buys,"
according to an internal memo. The insurgent
FAs, many of whom are left holding frozen ARS,
said the February 1 message was followed by
a notice to certain board members and the Chairman's
Council to sell their ARS holdings.
They said the Investment Policy Committee pushed
ARS as "higher cash flows for your cash
balances, with a trail." At the same time,
a company research analysts assured FAs and
clients that proper research was conducted prior
to the market collapse on February 14, 2008.
Referring to the research analysts, the FAs
said the effort was "miniscule. They published
nothing."
"The firm has brazenly and repeatedly said
it has no intention of resolving complaints
unless forced to do so," these sources
said, adding: "On the last earnings conference
call for stock analysts, Mr. Tom Jones, the
CEO said, 'When it comes to auction rates, I
am not worried about class action lawsuits or
the government. The regulators are engaging
in extortion, pure and simple.'"
AuctionRatePreferred.Org received more than
150 internal e-mails from the aggrieved FAs.
The purpose of the supporting materials, they
said, was to demonstrate "how vigorously
the firm sold ARS as liquid cash equivalents,
both to financial advisors and to clients."
The FAs complained that there was no "natural
demand for ARS until Raymond James created it."
They said their clients are not wealthy people:
"Some have medical bills, some have kids
in college, and some could lose their homes,"
the FAs explained. "The firm is causing
real hardship for investors--and real hostility."
March 26, 2009
If
you haven't been fully redeemed yet....Update
5
You've
got to kick up a major stink with AGs, regulators,
the press and you should insist that your broker
do NO business again -- and ever -- with your
ARPS issuer until your ARPS issuer has redeemed
100%.
You
need to take legal action against your broker
(individually), against his firm collectively,
and against the issuer of your ARPS.
You
need to accept the fact that getting your money
back in full is NOW your full-time job. And...
You
need to accept the fact that if you want the
press (including this blog) to help you, then
you have to come clean and be prepared to publicly
reveal your situation -- including how much
you have at stake, who sold it to you, what
they told you when they sold it to your and
everything you've learned since. The press will
NOT tell your story if you don't tell your story.
And
you'd better start mobilizing people who are
still stuck in ARPS. The more names you have,
the more pressure you can bring on the various
government people who can help you -- like the
attorneys-general. Remember the only thing most
AGs care about is being elected governor. They
see their job as a stepping stone to the governorship.
You need to make them understand they also need
to help you the taxpayer/voter, and that you
represent lots of votes. I've suggested to every
reader who's emailed me that if you send me
your name and a small ad or press release, I'll
run it on this site for free. Then you can organize
your own group. But frankly, I'm not doing your
work for you.
Now,
I don't want to sound mean or unsympathetic,
but there are a heck of a lot of you out there
with unredeemed ARPS paying horribly low interest
rates, who somehow think that waiting and praying
will get you your cash back. You have to understand
that no one on Wall Street cares if your wife
is sick, if your ARPS money is the last money
you have, if you've been forced to sell your
house and you've been forced to eat in soup
kitchens. Many brokerage firms are still getting
fees off your ARPS. And the issuers are earning
big money and extra fees because they're using
your ARPS as cheap borrowing/leverage. Face
it: appealing to Wall Street's better nature
doesn't work. (I've read many of your letters.)
The people who invented and sold them to you
don't care about you. I repeat: they don't care
about you. They care about their fees. The only
action that will get your money back is when
the regulators threaten them with fines and
insist on redemption at par. Some of our Attorneys-General
have done well for ARPS holders -- New York
and Massachusetts stand out. And there are other
legal actions you can take. "Legal"
is all that's left to you. It's been over a
year. The evidence of ARPS wrong-doing is destroyed
as you read this. Get up and do something now!
If
I were still holding ARPS, I'd want to set myself
up as the contact point for people in my state
still stuck in ARPS and for people still holding
ARPS by my issuer and sold to me by my broker.
I'd want to collect names, numbers, addresses,
stories, etc. I'd alert everyone to the fact
that I'm doing this with the specific aim of
making a big enough stink to get our money back.
I'd take small ads in the Wall Street Journal.
I'd buy ads on Google. etc. The more names I
have the more power. Names are all that attorneys-general
care about. Remember they're political animals.
--
Harry Newton
|
March
12, 2009
PIMCO
to buy back $225 million of auction rate securities
DOW
JONES NEWSWIRES
Five
closed-end funds at Pacific Investment Management
Co. will buy back another $225 million in auction-rate
securities as the giant money manager looks to boost
its minimum asset coverage in order to resume dividend
payments.
The
funds were forced to suspend their March and April
dividend payments because of the falling value of
the auction-rate preferred shares.
The
buyback is reversal for Pimco, which had refused to
redeem these securities for months after the auction-rate
market froze up a year ago. But deteriorating markets
and legal requirements are forcing Pimco to do so
after all. Late last month, the funds announced plans
to buy back about $342 million of the securities.
The
purchases will push the company's asset coverage of
the auction-rate preferreds back above the 200% level
required for the funds to pay dividends.
The
Pimco funds involved in the move are the Corporate
Income (PCN), Corporate Opportunity (PTY), High Income
(PHK), Floating Rate Income (PFL) and Floating Rate
Strategy (PFN) funds. The buybacks begin March 30
for all the funds, except the Floating Rate Income
fund, which launches April 1.
Pimco's
closed-end funds, like dozens of others, have for
years issued auction-rate preferreds to borrow money
and add leverage to the funds. Such securities are
long-term debt with lower, short-term rates that are
set at periodic auctions.
When
the auction-rate market froze, holders wanted their
money back, so most closed-end fund shops started
redeeming some securities or worked on plans to do
so. But Pimco balked, pointing out that redeeming
the preferreds would reduce leverage in its funds,
which in turn would shrink income for closed-end fund
shareholders. The firm's preference for its common
shareholders incensed brokers and preferred holders.
-By
Lauren Pollock, Dow Jones Newswires; 201-938-5964;
lauren.pollock@dowjones.com
March
11, 2009
Oppenheimer
has been the worst -- totally intransigent and unsympathetic
-- according to ARPS holders who were sold their stuff
by Oppenheimer. Now the company has a new wrinkle
-- Get the U.S. Government to redeem the ARPS money.
This gives chutzpah a whole new meaning. Read on.
Oppenheimer Plans Move to U.S.
New
York Times Dealbook: As Washington considers putting
a tighter leash on Wall Street, some have expressed
concern that financial firms might flee in the face
of new regulation.
But
the opposite is happening with Oppenheimer Holdings,
a Toronto-based securities firm that announced Wednesday
it would seek shareholder approval to move to the
United States. The company, which last year bought
Canadian Imperial Bank of Commerces 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 Oppenheimers business is in the United States,
so being incorporated there as well would simplify
the firms 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
Wednesdays 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, Oppenheimers 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
companys 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 Oppenheimers 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.
Thats
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 Oppenheimers 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
Stifels 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,
its time for Stifel to do the same.
Kruszewski
had originally said last month that Stifel shouldnt
have to repurchase all the auction rate securities
because the company didnt 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, Stifels lack
of knowledge of the impending market collapse is the
critical difference that serves the foundation of
Stifels 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, Carnahans
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.
Stifels
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, its 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 didnt have as much knowledge as
the larger firms of the impending market collapse
so it shouldnt 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, Carnahans
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
markets meltdown, the result of the seizure
in credit markets, initially left investors with bonds
they couldnt 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 Boards 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 doesnt 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 didnt
underwrite the securities or run auctions, so proving
they knew the market might fail may be more difficult,
she said.
A
resolution cant 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.
Im
getting paid virtually nothing, Dickson said.
This is money thats frozen, that basically
has a zero return, and Im 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 worlds largest financial institutions.
Individual
investors hold at least $20 billion of the debt, with
companies and institutions owning the remainder, according
to Americas 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 havent
reclaimed includes $57.7 billion tied to student loans,
corporations and mortgages, Bloomberg data show.
Yesterday,
Moodys 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, Moodys
said in a statement.
Most
of the trusts are expected to generate slightly negative
to zero gross excess spread, Moodys 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 cant 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 doesnt
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 states 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 Universitys
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
Americas 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 Treasurers 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,
Americas 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 DCunha.
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, DCunha
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
DCunha.
The
whole ARS market should have failed a lot sooner than
February 2008, DCunha 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,
DCunha 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 Americas 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.
Its
difficult to account for exactly how much is stuck
in the ARS market, due to a lack of transparency,
Martin said. Theres 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 theyre
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 DCunha, largely dependent on what a companys
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 Nuveens most current data, as of Jan. 29
a total of $5.3 billion in ARPS has been redeemed
or defeased, but thats 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 wasnt 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.
Were
in a lucky position with our rates being around 2
percent right now, Palian said. Its
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 werent 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 DCunha. 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 couldnt
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 its the
agency admitting that it had credible allegations
of wrongdoing at Bernie Madoffs firm starting
in the 1990s and continuing for years and years that
were never properly investigated. Now, $50 billion
of alleged losses later, its 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
were 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 regulators 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.
Its
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 thats
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 wont
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 banks 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 Citis responsibility
to pay clients back, in effect, for defective investments
distributed by her brokers and bankers. Citis
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 wont 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 havent
been able to sell these securities because the market
for them collapsed.
The
representations ended up not being truthful,
Cox said. They couldnt 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 hasnt 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. Comericas 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 attorneys 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 clients
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 banks clients,
disputes Credit Suisses 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
banks 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
companys 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 Wachovias total
increase in legal reserves to $1.2 billion during
the quarter.
On
Monday, New York Attorney General Andrew Cuomo expanded
his offices investigation into the sale of auction-rate
securities to include Wachovia, JPMorgan Chase &
Co. and Morgan Stanley.
Last
week, Cuomos 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, Cuomos 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 weeks 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 states 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 industrys
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 couldnt 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
didnt 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.
Lets
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 Citigroups general counsel dated
Friday, saying that charges were imminent. (See below
for a lot more.)
In
the letter, the New York Attorney Generals office
alleged that the nations 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.
Cuomos
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 doesnt yet have any formal agreements
with liquidity providers, although Jonathan Isaac,
head of its closed-end fund business, said the firm
is close. Were in conversations with many,
and fairly confident that well 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 Vances 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 weve 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, Herzfelds
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 Tacomas 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.
Passidomos
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 HSBCs 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.
REDEEM
OR NO?
What's New: Some closed-end funds
aren't jumping to redeem their "auction rate"
preferred securities partly because it could be
costly for common shareholders.
Background: The market for auction-rate
securities has been frozen since February, thanks
to the credit crunch.
Bottom Line: Investors in preferreds
issued by companies like Pimco and Neuberger Berman
may be stuck in these for a while. |
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
|