Auction Rate Securities: The latest $330 billion catastrophe

Great Blog Peter;

We have the National Mortgage Complaint Center & we are auditing pension fund MBS portfolios. It sort of ages you quickly. Your statement, "we have not seen the last of Wall Streets alphabet soup of financial catastrophe"............may be the years greatest understatement. If anyone thought the 4th quarter of 2007 was bad.............wait till they see the 1st, 2nd & 3rd quarters of 2008. It will be like going from a T-Ball baseball game to the World Series.

I happen to be one of the unlucky people caught in this mess with some of these auction rate securities. I was recommended them by my adviser. I was told that it was short term like money market or cd and when you wanted it it was available every seven days. It was triple A rated and from closed end funds. I asked if it was triple A rated like the CDO junk and was told that these securities have to have at least 2-3 times assets backing the amount borrowed and it wasn't a wrapper. This much was disclosed to me and also some of what I asked about. It was never mentioned that it was auctioned at all or that it's really long term debt masquerading as short term or that any sort of penalty rate was involved if auctions failed.

I'm extremely upset that everything wasn't disclosed to me about what I was buying. If it had been and I still got in I could live with it. When I feel I'm only told half the story and I get screwed then I think that's borderline, if not outright, fraud. Luckily for now I don't need the money any time soon, so if it resolves itself, fine. If not I'm gonna look to take some legal action. It's deceptive especially when I'm fishing around asking things to make sure I'm not getting into something risky. Any sort of liquidity risk wasn't disclosed or even that it could pose the slightest problem.

I'm small potatoes. I've been reading of some much bigger fish who have been caught in this mess with millions tied up and I'm sure they'll be looking to sue, possibly a class action. I'll look to join if it comes to that. I hate lawsuits and think lots of them are nuissance suits but this type of marketing is deceptive and unacceptable. Give full disclosure!!!

I am in the same situation: "closed end auction rate municipals," but in my case, the broker just told me he was opening a money market account for me. I told him I wanted liquidity and no risk. Was told: "this is a money market account." Never any mention of auctions, dutch auctions, auction "failure," risk, possibility of illiquidity, etc. No mention of the critical word "security" or even "buy" or "sell" (which would have tipped me off). OR the fact that my bank was an inside player manipulating the market to stay liquid!

I'm an attorney & experienced litigator. This was so widespread, and so egregious, it should be litigated in the form of a class action with least possible cost to each claimant. I'm talking to one of the most powerful class action firms in the country now, and they want this case, and the settlement could be tremendous. But N.B. everybody the two attorneys who are "advertising"for these cases now, Weintraub and Kaplan, are NOT doing a class action, they are doing individual arbitration actions which will limit your recovery & cutting into your principal loss with their contingency fee.
I'm meeting with class action counsel this week. Anyone who would like more information, please let me know. My loss is "small," too, compared to some investors who had millions stolen from them through this fraud, but I really want the banks brought to justice for what they did. Look forward to hearing from anyone interested in proceeding as a class action plaintiff.

i am in the exact same boat and was told these bonds could be liquidated every 7 days. i was not told about auctions. this is fraud and i want to sue for the money, the interest and damages. i am so distraught over this. jp morgan chase was my offender.

I am the attorney Kaplan about whom Ms. Swanson referred in her post. Her comment about class actions versus arbitrations of auction rate cases could not be more off the mark. My firm practices class action litigation as well as handles individual investor arbitration. And any lawyer who has any understanding of the two arenas would appreciate that investors are far more likely to obtain a faster, better return on their cases through the invidividual arbitration process than through a class action. Further, the notion that "individual arbitration actions . . . will limit your recovery & cut[] into your principal loss with their contingency fee," whereas a class action somehow would not have that result is absurd. First, depending on the contingency fee being charged, individual arbitrations in these cases likely would result in significant net recovery to the investor. And more importantly, a recovery for the indivfdual investor that is far greater than is likely in a class action. Second, where do you think class action fees often are paid from? Absent a defendant-paid fee, which does not always happen, class action attorneys' fees are taken as a percentage of the recovery obtained on behalf of the investors, which obviously decreases the net recovery for the plaintiff and the class. And in a class action of this nature, where only liquidity risk has been incurred as of yet, class action fees likely would be a much greater percentage than the fees charged by reputable contingency lawyers in arbitration cases. Finally, an arbitration case most likely would be completed with recovery paid to the investor long before (likely years before) a class action results in any recovery.

I am also caught up in the ARS mess. Have a significant amount frozen in these securities. I would be interested to know what my options are legally; my offender is Smith Barney. Is anyone taking any legal action at the moment, or are people waiting to see how things develop over the next few weeks?

Ms Swanson, I dont see your contact information in this forum. I would like to join in on the class action lawsuit.

i would also like to be a part of a class action suit. smith barney sold these to me as a safe short term investment. i have closed end preferred nuveens. how do i get in touch with you.

i have saved money for 15 years to pay for my childrens' college tuition. i have worked way too hard to have this money taken away from me. this was my "safe" money- not invested in the stock market - meant to be liquid - as cash for my business, money put away for taxes, and saivngs for tuition. what a fool i feel like. how unamerican it is to actually save money and invest conservatively. where does it get you. my smith barney advisor knew i needed this money as cash. no problem- when you need it just let me know on a friday and you'll have it the next week. now im being offered a loan for 50% of my investment, at interest higher than what i am earning. it's a shakedown. i have closed end preferred nuveeens- not to worry -right? AAA and 3x collateral. im not sure whether it's better to go with a class action suit or a private attorney. i am looking for help. does anyone have a securities lawyer in the los angeles area?

Sorry, I've been commenting on another thread. My email is lisaswanson@earthlink.net.

Mr. Kaplan, I respect your decision to solicit and to take these cases as individual arbitrations. But let me make clear why I am investigating the class action route first.
There was such widespread damage here and such a vast class of investors in the same boat, and the fraud was so blatant and egregious that the defendants' standard operating procedure looks like a fraud on the market.
Second, because I think the brokerages (and the funds) prefer to fight on the turf of the individual arbitration; that's why they put it in their boiler plate, and why they try to get investors to waive their class action rights in their boiler plate, too: they think they can defeat us one at a time if they make out that each individual investor was a "lone wolf," or foolish, or did not understand, etc. This cannot be a he said/she said situation. It has to be one plaintiff after another marching to the witness stand and telling the truth--that there was no disclosure.
Third, if (or perhaps I should say when) the class formulates its theories of damages, the damages exposure of the brokerages and perhaps funds will be tremendous. HUGE. And it gives each individual more leverage than he/she would have singly.
Fourth, the fee issue. The fact is that in the class action form, the way attorneys get paid can be much more creative, especially if there has been a benefit to the public. It's not a perfect system, especially now that it's been savaged by the legal activists who don't like it--nonetheless it seems worth it to me to explore the possibility of alternatives to contingency fees via the class action, since most people just want their principal back right now, and oughtn't, perhaps, to be paying 30% of whatever they do recover directly over to an attorney. Even a pro bono class action is a possibility, since this injury is so very public in its nature.

So, perhaps we will all want to go to FINRA arbitrations, tell our "lone" stories, and go mano a mano. I think about it all the time. Perhaps some of us will hire you. But as you well know, and everyone else should know too, if a class action does go forward you will have a right to opt out of it and bring your claim separately....and if you don't like a class action settlement at the end of it all, you can opt out.

And I'm keeping my options open till they're all explored.

you will get your money back. Just need to wait at this time you earn more interest.

You hope that something this wrong never happens. Well, it has happened. And my life with my wife and newborn son are in serious jeopardy. UN believable.

Ms. Swanson,

I appreciate you followup comments. Having practiced in both the class action arena and the securities arbitration arena, I still feel strongly that individual arbitrations would be the most beneficial and effecient way for individual to seek redress in this situation. I appreciate and generally agree with the strength in numbers approach in class actions and I am aware of the fraud on the market theory but know that such a theory is not a slam dunk. If you would recall the attempted NY class action against Merrill Lynch based in part on fraud on the market theory stemming from fraudulent research reports on tech stocks, such a theory certainly is not fool proof. And putting aside the legal hurdles, such as "point-of-sale representation" issues that could cause a court to refuse to certify the case as a class action in the first place, I remain confident that absent a defendant-paid fee in a class action, which cannot be counted on, investors likely will see a far lower recovery on the dollar in a class action. I obviously cannot speak for other class action firms, but I would be surprised to see a firm take the case on a pro bono (free) basis. Finally, I agree with you that individual investors should not pay attorneys 30 percent of the recovery if the attorney merely accomplishes rescission of the auction rate transactions, i.e., if the auction rates securities have not lost value and the recovery only entails the brokerage firm buying the securities back from the investor at par. I do not know which other attorneys you have spoken with, but I know that we are not seeking such fees in that situation. All that said, best of luck in resolving your situation. I believe that this has been a massive fraud perpetrated by Wall Street and I hope that and everyone else in your situation obtains the recoveries that you seek.

Jeff, At least try to get multiple plaintiffs similarly situated into your FINRA arbitrations, don't you think? E.g., residing in the same state, protected by the same state law, defrauded by the same brokerage.
The reason this seems vastly different from the Merrill tech stock suitability class action is that that involved subjective judgments and knowing assumptions of risk on the part of the players. Play stocks and you play risk. Here, the brokerages professed objective judgment re: liquidity, and the investors were told they'd be liquid, nothing about risk. Very different can of worms. On one's brokerage statement, identified securities (eg stocks) are rated openly according to risk. These "things" were called cash equivalents across the board.
At the very least a call to all NY investors defrauded by UBS to all testify to the same course of broker conduct would bolster your case tremendously. I do hope you choose to take that course and that you modify your fees accordingly.
There ought to be more than enough here to compensate counsel even taking 1-5%, given the stunning numbers of investor assets we are talking about.
Mutual cooperation with parallel actions in other jurisdictions and even against other brokerages by those taking action on behalf of individual investors, will, I think, be extremely helpful if not essential. My hope is that we all end cooperating unselfishly to make sure a grave wrong is righted here.

This subject surfaced about a month ago for me, when a colleague of mine mentioned something to me about "failed" auctions and clients not being able to gain immediate access to their funds. I asked what she meant, as money market or bank funds are available upon client's request anytime. Clients can call in, request a check for pickup or have funds transferred to their bank account. She said no, this was something different called an auction rate security. Well, an "auction rate" security sure sounds like a security to me and from her description was not a money market or bank deposit. Waiting 7, 14, 28, or 35 days for a reset and/or funds to become available is by definition a short-term investment. Lo and behold this has now become a big problem for many clients of substantial means and more importantly less substantial means, for those who can't afford to wait.

For me, I interpret liquidity as immediate notice to request and receive funds for whatever reason, whether to pay taxes, go on a vacation, make a purchase or even move funds to a stock, bond or add to a mutual fund, WITHOUT having to borrow "on margin" against my margin-able securities at the current broker call loan rate, which in many cases could be close to 9%, otherwise known as a lending facility.

I don't how these investments were "sold" or "marketed" to clients with intentions of immediate liquidity, but apparently full disclosure was not made in all cases, if clients were UNAWARE of the remote risk of a "failed" auction. Not so remote with the credit market woes of late, of course, but hindsight is 20/20. And if a client was risk averse, I assume the investment grade ratings and short term exposures were used as marketing tools.

Our own company website contains what equals a 4-page document explaining what auction rate securities are and they are listed under the heading Fixed Income products. It also clearly defines specific risks associated with such investments, including "failed" auctions. Fixed Income is not Money Market. After reading these disclosures about auction rate securities, personally I doubt I would of been interested in moving funds into such a vehicle, just for the sole purpose of chasing higher rates, sacrificing my piece of mind associated with having my funds available to me immediately.

The problem arises if the client ONLY relied on what was mentioned in a conversation, without substantiation in writing or at the very least a full disclosure of risk, significant or otherwise in the conversation, leading to document forwarded to the client before investment. A "failed" auction, or the risk of a failed auction (however remote) is a significant risk effecting the availability of funds. Another "significant" disclosure discussed is... "The fact that an auction clears successfully does not mean that an investment in the ARS involves no significant liquidity or credit risk."

The advisor has a fiduciary duty to his or her clients in regards to understanding what investments would or would not be suitable for a portfolio. But I could not solely lay blame on an advisor that understood the product, adequately disclosed the risks to their clients, made sure a client intends to make such an investment, but was caught unknowingly by a "dislocated" market, as we have witnessed most recently. I could and would lay blame if a client is completely risk averse and made their thoughts known to the advisor, in which case they shouldn't be in anything but treasuries, CDs, bank savings or quality money market funds.

Also note, there have not had failed auctions until most recently. I did a search going back to last year and only recently did investors begin to turn away from these auctions.

But the same could be said, albeit, to a lesser degree about investment grade corporate bonds that a few years ago sold for par or better and now are selling for a fraction of par. How many people were sold investment grade bonds, only to find out their position is worth significantly less now. Witness Countrywide and GMAC debt. This, of course, in no way relieves a financial advisor of his or her fiduciary duty, especially in dealing with a risk averse client. With this in mind, the advisor can only make recommendations based on what is "known" about the client. Pertinent facts concealed by the client in regards to personal aversions cannot be duly noted by the advisor i.e., what keeps the client awake at nights, therefore an empirical tenet in the investment relationship has just been breached. Advisors have a fiduciary duty to their clients, likewise clients should not conceal significant facts thus impairing the ability of an advisor to do his or her job. How can one be expected to draw conclusions and make recommendations on unsubstantiated assumptions?

Profession and regulatory volumes have been written on this subject, and we take industry exams, complete yearly compliance programs and even major in course work to assure the capable, unbiased management of client portfolios, free of any conflict of interests. We are expected to be well versed in the "know your client" rules and regulations of our industry through regulatory channels and company policies. We are expected to maintain the "highest degree of commercial honor" and maintain an unquestionable level of ethics in dealing with our clients. Most make a concerted effort to do well by doing right, far fewer don't. Unfortunately, those who are least able to weather a "deep freeze" in these securities will suffer the most, and judging from discussions I have had recently and comments discussed herein there seems to be no safety net cast in the near term.

Ms. Swanson,

We are filing auction rate FINRA arbitration cases throughout the country against many of the major Wall Street firms. And while we do not believe we need other investors to testify in each of our individual cases because each case has very strong merit on its own, we will include testimony and evidence of other investors when warranted. And, as always, we expect to cooperate with other plaintiffs' counsel nationwide so that we can collectively right this massive wrong.

Jeff,
As you rightly point out, this was a "massive wrong" perpetrated simultaneously on hundreds of thousands of people.
You will be doing your clients a grave disservice, in my view, if you do not bring in evidence of the massive, across-the-board "course of dealing" that characterized this fraud. That will entail quite a bit of cooperation with other witnesses, victims, and counsel.
I hope you see clear to adjusting your fees to enable such cooperation at least cost to your clients.

I am also an experienced Securities Arbitration Attorney former securities regulator in the NY Attorney Generals Office Investor Protection and Securities Bureau and before that Ass. DA in the Manhattan DA's office. We are in the process of filing many of these claims throughout the country as well with regard to many firms - Citigroup, JP Morgan Chase, UBS, Wells Fargo, Merrill Lynch, etc.
In my opinion these are very strong claims and we are gathering significant evidence as time goes on in support of the claims from the various people contacting our office.

There is no question that if the damages are significant as these are an individual claim is much better than any Class Action. We work with Class Action firms as well but only if the client does understands that they will at best receive pennies on the dollar and/or do not want to take the time etc to pursue an individual claim.

Anyone who like more information please see our web site www.stockesq.com

1350 Broadway, Suite 1510
New York, NY 10018

Attorney Advertising

My law office is experienced in handling securities arbitrations and class actions. I have several comments. My office, also, is interested in handling auction rate preferred claims. I have a unique perspective. I was sold these funds just as the others have recounted. I also thought that my cash was being deposited in a money market equivalent without risk of illiquidity. I have handled many class actions, and generally class actions do serve as an effective device to allow securities investors to recover without cash outlay by individual investor class members. However, a class action against broker dealer sellers of auction rate preferred securities may be subject to hurdles which in all likelhood will preclude those cases from being certified as class actions. Generally, customers of brokerage firms almost without exception have agreed to arbitrate all disputes with their firm. Courts have upheld the enforceabilty of these arbitration provisions which appear in the customer's account opening documents. You may say that you cannot recall whether or not you were presented with a document containing such an arbitration provision, and it may be worth contacting your broker to get copies of your account documents so that you can review them. Most brokerage customers will find an agreement to arbitrate buried in the account documents. So, unlike the prior commentators on this site, I don't believe the issue is whether the damages are significant enough for an individual claim or whether the investor would be better off accepting whatever benefits however small flow from the Class Actions that have been filed. The issue is whether you are a customer of a firm (that sold the securities and made misleading representations) that require you to arbitrate pursuant to an agreement to arbitrate (at FINRA). My office is investigating whether it is appropriate to file arbitration claims against Citigroup, JP Morgan Chase, UBS, Merrill Lynch, and others. Anyone who would wish to discuss this matter can
contact me at 1250 Broadway, Suite 3710
New York, NY 10001 (212-300-0345). This is attorney advertising and is for informational purposes only and does not constitute legal advice.