When the collapsed Auction Rate Securities (ARS) market gets personal

Doug:

You were fortunate in that your FA disclosed to you that these instruments traded. Many of us were told that these instruments were redeemed.

What genius came up with the maximum rates and why were those considered sufficient to allow trading? The low maximum rates in and of them selves would give rise to a circumstance that market spreads would rise above the maximum rates and cause buyers not to desire the securities. Doug correctly analyzed the key problem.

One fund manager wrote me back to say that all was disclosed in the prospectus and it is the brokers problem if he did not pass the information. The Fund President gave the specific risk factor that warned of the risk of a failed auciton and lack of a secondary market. But the Fund President did not cite anything that warned of the risk of the "low maximum rate" which clearly anunattractive cap.

Jan, I feel your frustration. What gets me is why the industry didn't work together last year to fix the system since we now know that the problems already existed back then. If the banks and brokers no longer wanted to support the market, then they should have coordinated something last year with the fund managers to give them some time to come up with alternative financing. Instead, they decided to walk away on the same day in February. I'm sure that the fund managers were upset about the fact that they weren't given enough notice to come up with an alternative financing plan. And they seem to be on their own with no help from the broker-dealers. Rather than just walking away, I feel that the broker-dealers should have told the fund managers that they wanted to reduce their participation it the market, and that they should come up with their own financing arrangements going forward. It should have been a phased in plan from the beginning, with cooperation from all participants.

Jan: Unfortunately, welcome to this board. Your story is like so many others here. Don’t loose hope and try to help your own cause by contacting your state’s attorney general and your congressman (even better if he/she is on the house financial services committee: http://financialservices.house.gov/who.html). I would also keep calling the fund company and demanding they redeem the preferred shareholders.

Jeffery: thanks for your posts. You are an asset to this board and I appreciate your input (even though I disagree with you about the utility of taking non-legal actions). One question for you, why is no one discussing lawsuits against the fund companies? The fund companies created and marketed these securities, knew of the liquidity issues, and are in the best position to solve this mess.

Mike: I’m sort of in the same mind set as you. Although I do believe it’s necessary for the lawsuits to proceed. The more pressure that is put on the broker dealers, the more pressure there will be on the fund companies to delever/refinance these securities. However, if you don’t need the cash right away you are earning better than MM returns. The major downside is that these securities could get re-priced at less than par. So, now instead of $300,000 showing up on your account balance, it may show $250,000.

Lowell, I know that some lawyers are looking into lawsuits against the fund companies (the issuers), In fact, my law partners and I have spent a fair amount of time talking about the legal theories under which claims could be brought against the fund companies. We think there may very well be claims to be brought against the fund companies. But the most straightforward and direct claim is against the broker-dealer that recommended and sold the ARPS to you.

One of the most basis tenets of securities law is that full and fair disclosure must be made to investors. Here, neither was done. Most of the broker-dealers misrepresented ARS as being cash-equivalents or money market-equivalents, which they were not and are not. They also failed to disclose that they often created the very liquidity that they used as a marketing tool, and further failed to disclose that they could erase that liquidity at any time. I have not spoken to a single ARS investor who had any direct contact with the fund companies at the time of sale. All misrepresentations and omissions made to investors were made directly by the broker-dealer. As such, I believe it would be difficult to show any wrongdoing by the issuers at the time of sale. Indeed, the prospectuses I have seen disclose the risks. It is just that the prospectuses were not given to most investors.

The wrong committed by the issuers, specifically the closed-end funds, likely is the wrong they arguably are committing now. They seem to be in a conflict of interest between their duties owed to common share holders and preferred share holders. They also seem to be conflicted between wanting to keep collecting their management fee on the leveraged portion of the funds (the ARPS holders funds) and any duties that they may have to the ARPS holders, which could include a duty to delever the funds and buy out the ARPS holders. A lawsuit of that nature simply is not the most direct and efficient way to obtain liquidity for those stuck in ARPS. It certainly is not as direct and efficient as a direct claim against the broker-dealer who recommended and sold the ARPS. Those claims have clear breaches of various duties owed to the brokerage firms' customers. The legal theories against the issuers are not as cut and dry and are not carved in stone. And the time that it would take to pursue such claims in court likely is much longer than the claims against the brokerage firms. That is, investors likely would not see a result from cases against the issuers for quite some time.

Don't confuse the two issues of solving the entire ARS freeze up with the opportunity and right of ARS investors to bring claims to have their shares bought out. One really has nothing to do with the other. For example, if you bring an arbitration claim against the broker-dealer who sold you the ARPS (or even a lawsuit against the particular issuer) you would not be asking the arbitrators or the judge or jury to fix the entire problem (something that they could not do in any event). You simply are seeking to have them fix YOUR problem (or the problem of the particular group of investors on whose behalf a group claim or even a class action is brought).

Finally, I am not saying that non-legal actions (such as press, etc.) are meaningless. I think they do serve a positive role. But non-legal actions likely will not bring about a quick resolution to this problem.

Before deciding on a class action suit, please read "Class action warning for auction rate victims" at InvestmentFraudPRO, I cannot believe how low the recovery amount is.

arc parked

you are missing some very serious problems with student loan arcs. They will not be redeemed, that option will never be approved by trustees or else they will leave themselves open to lawsuits from taxpayers of the states. Second and most important, just the student loan arcs have amendments to thier prospectusus dated last year(so you need prospectus AND amendments) that basically say the "trusts" cannot pay more then t bill plus 120 bps on any 12 month period on average. This will cause student loan arcs to reset to 0 coupons and many already have. As far as I know these trusts are irrevocable, and each arc is it's own trust with it's own trustees.

Class Action, but NOT class action lawsuit.
============================

1) This afternoon I made a web page to sum the findings about our problem and alert investors in similar instruments that they are not alone.
The page is http://nothingcontroversial.com/UBS-ARC-FRAUD/ARS.html
I try to give credit to all posters, but sometimes this is not practical,
If you feel your copyrights are violated, please send me e-mail and your opinions/facts will be removed promptly.

2) To my HUGE surprise, in less than 12 hours the web page had over 400 visitors and this gives me the idea.
There are over $330,000,000,000 outstanding ARS out there. We, you and me, did not put all our eggs in ARS and I estimate we, the holders of those ARCs hold over ONE TRILLION DOLLARS in securities with handful of firms. 1 trillion dollars...THIS is POWER IN NUMBERS and this is VOICE. Just like politicians, none of those firms care about you, me, Lisa, John, Michael, but they DO CARE about outflow of capital worth 1 trillion dollars. Therefore, we shall find Financial firm which
A) Has no conflicts of interests and not involved in ARS in any shape or form
B) Capable of accommodating 1 trillion dollars worth of new customers
C) Willing to help us with our fight to free our money.

1 trillion dollars...think about it. My brains are not big enough to put together the comprehensive plan how can we use this loud voice to our best advantage, but I am sure some of you CAN do it.

UBS, Merrill, BAC, Wachovia, and such can NOT afford to lose 1 trillion dollars off their very shaky already books.

I'd like to add a comment on how my own saga with ARS (the MARS, not ARPS, in my case) came to an end. I called the CFO of the issuer (yes, my broker put all the ones I wasn't able to sell with one issuer) to find out if they were going to call them back. He was very helpful and friendly, and by the end of the day, called me back with the exact dates each CUSIP was being called (these are California munis); all, ironically, this coming week (one was cashed on last Friday, in fact). I am relieved.

I truly believe each of the MARS and ARPS holders will get redeemed at par during the next six months. I realize this is of little comfort to one who has cash locked down without the certainty of knowing when s/he can get to it. People do tend to assume the worst in the absence of information.

Of course, my optimism about the end game for investors does not excuse the marketing campaign that was done by Wall Street and the resulting stress investors are undergoing as they wait.

The broker/dealers, by the way, are keenly aware of the April 15th tax date looming; I received a "research report" on muni bonds mentioning ARS and this date.

Lisa, thank you for your detailed examination of the contingency fee structure of one law firm. I would strongly suggest that anyone entering into a contingency agreement have their own personal attorney evaluate the agreement. It's not like these securities we hold aren't worth anything there's a large liquidity problem in the financial markets.

I am concerned that some of the obvious points are being missed. One, these is that we;re concerned with "preferred" units and that in itself was a sales tool to sell these products.

Preferred means preferred; I'm sorry for the common shareholders but they knew there funds were leveraged with preferred obligations. They should be prepared to take a beating when these funds are deleveraged and one way or another if we're not paid back they will be decoupled

My financial adviser at Northern Trust Securities told me that the "preferred" status combined with the approximately 3 to 1 collateral was my guarantee for the principal at the time of sale. I suspect we were all told something like that and that the auctions were open which also assured liquidity.

I am of the opinion that it would be exceptionally naive to believe that Nuveen, Blackrock et al. did not know and take advantage of the way these products were being marketed to the public by the investment houses and financial advisers. The advisers are already pointing fingers at them.

One of my attorneys is doing an extensive West law search of the filed cases.

Serge: Thanks so much for taking the time to create the website. I just went to it and I think it's a great idea!

ARS Survivor, thanks,
and thre is some new developments over night:

if you would like to add your situation to the list

http://nothingcontroversial.com/UBS-ARC-FRAUD/victims.html

I'll gladly list it there so folks who are in the similar situation can contact you direct and
share information close to your particular case(s)
share attorney contacts / fees
etc,etc,etc

Our strength is in the numbers, shared resources,
we are all in it together.

"United we Stand" or was this slogan taken already?

Here's a link to the transcribed testimony from the March 12th House Financial Services hearing. Erik R. Sirri (Director, Division of Trading and Markets, U.S. Securities and Exchange Commission) is an important SEC player in all of this. I would NOT assume each division of the SEC is working together to find a solution. His email is SirriE@sec.gov; phone (202) 551-5500

http://www.sec.gov/news/testimony/2008/ts031208ers.htm

Hi Jon - I also hold CA munis. My sell order keeps failing and failed again at auction today.
I would like to get the information of the CFO you contacted.
Thank you,
Kathleen (k_carroll@yahoo.com)

Auctions fail but the brokers apparently still get paid

Bloomberg: New York paid 10 securities firms more than $600,000 since mid-February to handle bids for auction-bonds even though the sales failed, saddling the state with penalty interest rates. Citigroup, Goldman Sachs and eight more firms receive $10 million a year to oversee periodic bidding that sets rates on about $4 billion of auction bonds. When there aren't enough buyers, the yields rise. A total of 188 of the state's 201 auctions since Feb. 12 have failed, according to data supplied by the state.

The email for SEC complaints that Lisa alerted us to looks like it is up. I sent my email today. PLEASE send your complaint to the SEC. The brokers do not care about their clients. However, the SEC, if they get enough complainta, will do something. Again the email address and info needed is as follows. Send your email today and I think because this blog is getting so large we need to publish this address from time to time so that new blog joiners know where to send their SEC compalint. We should also publish this complaint email on as many other websites, etc as possible so that the SEC realizes how large a problem this is.
Here is the email address for official complaint. ENF-ARScomplaints@sec.gov They want to know:

-who your brokerage and financial advisor were
-when this happened
-exactly what you were told and what you asked
how these were described to you--ie why and how you were led to believe this was always liquid no risk to principal
-whether you ever saw a prospectus or anything in writing regarding risk
-whether you received any verbal information regarding risk
-how the account was described on your statement or application for account (cash equivalent, money market, 7 day paper, etc.)
-any communication (or LACK thereof) from your brokerage clarifying what your investment was subsequent to the opening of the account to the present or any warning that it was "imperiled"
-anything you think your brokerage might be relying on as a written defense, and why it didn't give you meaningful understanding of your investment given what the brokerage actually told you.

TAKE FIVE MINUTES AND SEND YOUR EMAIL NOW IT WILL HELP

Jon (#552) - You mentioned "The broker/dealers, by the way, are keenly aware of the April 15th tax date looming; I received a research report on muni bonds mentioning ARS and this date."

Is it possible for you share this report? Perhaps you could have Serge put it up on his website?

Apr 15 is a freight train that has us in its sights and we are currently tied to its tracks.

Thank you in advance

Allianz announces a Closed-End Funds ARPS Market Update. More of the same....seems all the issuers are pursuing this variable debt put option...which is in their best interest & not ours.

Conference call scheduled for April 3

http://www.allianzinvestors.com/newsAndMedia/NewsAllianzGlobalInvestorsNews03242008.jsp

Got the same announcement from allianz today via my Nicholas Applegate closed end preferreds..

The sec email definitely works, as mine went thru this morning.

Im still on the fence about using an attorney, not sure what they can do. Will take over a year to get to arbitration.

Nobody should sell in secondary mkt yet, as that will bust the value of everybodies arps..imo....

Think we need to continue pressure brokers and funds. I have spoken with Dennis Faro, CEO of Evergreen. I email him every 3-4 days. We must annoy these guys to no end.

I spoke with my UBS FA and this si what he told me:

Good News: UBS lends money using ARS securities as collateral and charges the same rate as what ARS pays.

Bad News: if and when the secondary market starts pricing them, there is a very good chance the client will get...MARGIN CALL!!!!!

Can you believe getting margin call borrowing your own "cash alternative"? No, you can't?
too bad we live in interesting times where your own "cash" costs you dearly.

P.S.
UBS lends money but in the EMERGENCY CASES ONLY!