March 6, 2012

For Many Auction-Rate Investors,
the Freeze Goes On


Four years ago the market for auction-rate securities, an investment touted as safe and liquid, froze up. Four years later, despite various settlements and repayment efforts, many investors are still fighting for the return of their money.

All told, about $100 billion from individual and institutional investors remains outstanding in the former $330 billion market, according to SecondMarket, a broker-dealer and secondary market for illiquid assets. Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction.

As the uncertainty has lingered, investors have put off buying homes, expanding businesses or retiring. Others have stood by, their money on the sidelines, as financial markets made a tremendous recovery in the wake of the financial crisis and global recession.

Thomas Martin, president of Americas Watchdog, a private consumer group in Washington, said he has received phone calls from numerous investors still trapped. "Where's the outrage?" he asked. "Here comes another spring and these poor people don't know where their money is, what their retirement situation is; they're forgotten. Where are the regulators?"

Municipalities, nonprofit hospitals, utilities, housing-finance agencies, student-loan finance authorities and universities were among the frequent issuers of auction-rate securities. Among the investors in the securities were corporations, charities and individual investors. Many purchased them on the advice of brokers, who touted them as a safe, liquid alternative to cash.

But in February 2008, the market froze amid the credit crunch. By the fall of 2010, dozens of big banks and brokerages that underwrote the offerings had repurchased billions of dollars of the securities in settlements with regulators. Since then, various brokerages have redeemed some securities in batches and some investors have won their money back via arbitration. But some banks and brokerages fell through the cracks or have been slow to cash out investors.

The situation is fraught for investors. Many of those who can afford attorneys have hired them because they faced a statute of limitations on filing arbitration claims. Others fear they'll be placed at the end of the line in any redemption process should they speak out. Brokers who hold the securities in their own accounts fear losing their jobs if they discuss the issue.

The exit avenues aren't appealing. Investors can sell the shares on the secondary market, but that generally means taking a sizeable loss. Investors may file an arbitration claim, and many have. But for those holding securities worth less than $1 million, it's difficult to justify the costs, which can run to $100,000.

"It's kind of a black hole now," Mr. Martin said. "We've got retail investors, small-timers, then big commercial investors who are in these things for tens of millions of dollars, and we don't know what's happening to them all."

Ed Dowling, the owner of a clothing maker in New York City, originally had about $2.6 million stuck in the securities and still has $1.175 million stranded, all of which were sold by Oppenheimer, a subsidiary of Oppenheimer Holdings Inc. "I think it's absolutely foul and disgusting. I think the whole system is either broken or corrupt."

For three big sellers of the auction-rate securities—Charles Schwab Corp., E*Trade Financial Corp. and BlackRock Inc.—accords were struck to unfreeze investors. While some securities remain outstanding at the firms, the terms of the wind-down have been set.

But investors who purchased shares from some firms, including Allianz SE 's Pacific Investment Management Co. or Oppenheimer, still have no explicit word on when or whether their investments will be redeemed.

Pimco and Nicholas-Applegate Capital Management—since rebranded Allianz Global Investors Capital—had $5.3 billion in auction-rate preferred shares outstanding in March 2008. About 44% of the shares issued by companies' closed-end funds have since been redeemed. Pimco said it hasn't made any redemptions since 2009.

Allianz told shareholders in a December letter that it's evaluating market alternatives. It isn't possible "to determine if and when a solution will be identified," Allianz said at the time. Pimco had no further comment.

The issues at play are perhaps most acute at Oppenheimer, one of the largest sellers of auction-rate securities to individuals. It had about $402.8 million stranded in auction-rate securities as of Sept. 30, according to a regulatory filing by the company. That amount excludes securities owned by qualified institutional buyers and those transferred to the company, purchased by clients or transferred from the company to other securities firms after February 2008, it said.

Oppenheimer stands out among the major brokerages because its settlement with regulators didn't result in a timely redemption for individual investors, said Todd Higgins, a managing partner at law firm Crosby & Higgins LLP in New York.

Oppenheimer reached settlements with the New York attorney general's office—then led by current New York Gov. Andrew Cuomo—and the Massachusetts Secretary of the Commonwealth's office in 2010, and purchased $69.3 million in auction-rate securities from clients. The settlement committed Oppenheimer to a financial review every six months to see if more funds are available buy additional auction-rate securities from holders. The company must report to the attorney general's office on those reviews.

"That's the only one that I'm aware of that's ended up in a repurchase process that has the potential to drag on for many, many years," said Mr. Higgins, who has represented about a dozen claims against Oppenheimer, five of which are pending.

Oppenheimer said it is purchasing the securities on a periodic basis in accordance with its settlements. The company noted that it is committed to purchase a total of $40.2 million in the securities from clients through 2016 and will pay about $2.5 million as a result of legal settlements with clients. Oppenheimer had no further comment.

Danny Kanner, a spokesman for New York State Attorney General Eric Schneiderman's office, said, "This office is routinely scrutinizing the expenditures of the firm, which is conducting buybacks periodically throughout the year."

Steve Cohen, former chief of staff to Mr. Cuomo, said, "The auction-rate-security settlements speak for themselves, putting billions of dollars back into the pockets of victims across the country who were misled into believing they were buying cash equivalent investments"

Investors say they fear Oppenheimer is waiting them out, hoping they will sell at a discount on the secondary market in desperation before any redemption comes their way.

Phillip Aidikoff, a partner in the law firm Aidikoff, Uhl & Bakhtiari, has represented investors in about 50 arbitration cases related to auction-rate securities since the market froze. Most have been resolved through regulatory settlements or settlements with broker-dealers, he said.

The settlement Oppenheimer reached with Mr. Cuomo's office was "stunningly inept," Mr. Aidikoff said. "It allows the broker-dealer to do whatever it wants to do."


October 25, 2011

E*TRADE finally settles
State Securities Regulators Announce Settlement with E*TRADE in Auction Rate Securities Investigations

WASHINGTON, D.C., October 19, 2011 — The North American Securities Administrators Association (NASAA) today announced that a settlement in principle has been reached between E*TRADE Securities LLC and state securities regulators to return approximately $100 million to the firm’s clients who have had their funds frozen in the auction rate securities (ARS) market since 2008. The firm also will pay a $5 million fine.

Since the ARS market collapsed three years ago, state securities regulators have secured settlements calling for firms to repurchase from investors more than $61 billion in auction rate securities, the largest return of funds to investors in history.

The settlement with E*TRADE is the result of a multi-state investigation led by the Colorado Division of Securities into allegations that the firm misled clients by falsely assuring them that auction rate securities were a safe, liquid alternative to cash, certificates of deposit and money market funds. The ARS markets froze in February 2008, triggering complaints from investors who could not withdraw money from their accounts.

The settlement requires the New York-based firm to extend offers to repurchase auction rate securities from its retail customers nationwide.

“Today’s settlement will provide relief to E*TRADE investors who suffered from the collapse of the auction rate securities markets,” said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance Bureau of Securities.

“This settlement reflects the collaborative and determined approach state securities regulators take to resolve a national problem. State securities regulators have not forgotten the hardships Main Street investors have faced and will continue to seek relief for those who suffered from the collapse of the ARS markets,” Herstein said.

Under the terms of the settlement, E*TRADE agreed to buy back at par value all outstanding auction rate securities purchased through the firm by individual investors before February 2008.

Other terms of the multi-state settlement require E*TRADE to:

Fully reimburse all individual investors who sold their auction rate securities at a discount after the auction market failed;
Consent to a special, public arbitration process to resolve claims of consequential damages suffered by individual investors who were unable to access their funds;
Maintain a dedicated toll-free telephone assistance line, website and email address to provide information about the terms of the final order and to answer questions from investors;
Reimburse certain investors for the cost of loans after the investor took out a loan from E*TRADE because the investor’s auction rate securities were frozen; and
Pay to the states monetary penalties of $5 million and reimburse certain costs of the investigation.

Herstein commended the work of state securities regulators in Colorado and Texas, who participated in the investigation and settlement negotiations, as well as those in North Carolina and Pennsylvania, who participated in the investigation.

The investigation into possible violations by E*TRADE is part of a larger, ongoing state-led effort to address problems in connection with the offer and sale of ARS investments. In 2008, state securities regulators began receiving hundreds of complaints from Main Street investors. As a result, in April 2008, NASAA announced the formation of a multi-state task force, comprised of securities regulators in 12 states, to investigate whether the nation’s prominent financial firms had systematically misled investors when placing them in ARS investments.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

For more information:
Bob Webster, Director of Communications

September 16, 2011

This sidebar and main story are from the Philadelphia Business Journal:

What is an auction-rate security?
Auction-rate securities (ARS) are long-term bonds, usually corporate or municipal, with interest rates that are periodically reset.

When Goldman Sachs introduced ARS to the tax-exempt market in the 1980s, they were primarily sold to institutional investors. ARS later became widely available when the initial minimum investment was reduced from $250,000 to $25,000. Over the next 20 years the market grew to more than $300 billion.

The most unique component of ARS is the auctions. The interest rates on the securities fluctuate because they are determined by periodic bidding that occurs in seven-, 28- or 35-day intervals. During these auctions, ARS holders were supposed to have the option of selling their bonds.

By early 2008, these auctions routinely failed to produce enough buyers. When the auctions failed, bondholders were stuck with the illiquid securities and interest rates were unfavorably adjusted.

In an attempt to prevent failed auctions, some Wall Street firms began buying back their unsold bonds. But when the financial crisis forced banks to preserve capital, they withdrew as buyers of last resort and the market collapsed. - Q.M.

ARS Investor Payback
by Queen Muse, the Philadelphia Business Journal

Investors are finally starting to see returns on money they thought they'd lost when their investments in auction-rate securities froze during the financial crisis.

For the past three years, state regulators have been working to recover $330 billion for investors through a national task force formed in April 2008 to negotiate with the banks that issued the securities.

To date, the Pennsylvania Securities Commission has reached settlements to return $1 billion to Pennsylvania investors and collect more than $12 million in assessments for the state (see chart on page 23). Similar results have been achieved in New Jersey, where banks have agreed to buy back more than $1.8 billion in ARS, though not all has been paid out yet.

When the auction-rate securities, or ARS, market froze in February 2008, thousands of investors were stuck with bonds they couldn't redeem. The Pennsylvania Securities Commission called the situation a classic Wall Street scam.

"Firms that underwrote and sold ARS were also buying them into their own inventory if auctions did not clear with third-party buyers. Buying ARS into inventory without disclosure is market manipulation and fraud," said Carolyn Mendelson, counsel at the Pennsylvania Securities Commission.

The ARS task force, which was formed by the investor protection group North American Securities Administrators Association, has had some success negotiating buy-back agreements with financial firms that sold ARS to investors, but the process has not always been easy.

"Some firms have indicated that they would like to do buy-backs, but that they do not have the capital available to do so on a broad-scale basis," Mendelson said.

When a firm cannot agree to universal settlements, it faces potential lawsuits from every state as well as civil suits from individual investors.

The Pennsylvania commission has about three settlements still pending, several other firms under investigation, and has responded to more than 50 complaints filed by Pennsylvania investors.

When the task force began investigating ARS sales practices in February 2008, it concluded that firms misrepresented and/or omitted key disclosures about risks associated with the investments.

The commission also found that sometimes the brokers selling ARS had not been properly trained to sell the product. "The clients couldn't understand the product because the representatives didn't fully understand the product," said the commission's Securities Compliance Examiner Richard Kiehl.

Albert Dandridge III, who serves as the chair of the securities practice group at Schnader Harrison Segal & Lewis in Philadelphia and formerly served as associate director of small business and international corporate finance for the Securities and Exchange Commission, said firms' lack of disclosure about the risk of failed auctions spelled the end of the ARS market.

"They were promoted as liquid … like cash. But the sales materials didn't stress that the banks themselves had to come in and bid to save some of these auctions," Dandridge said. "The unwillingness of the banks to come in and bid was the primary factor to this failure."

Phil Trupp, an investigative journalist and author of a book published last year on the ARS market collapse, advises investors to bite the bullet and take the time to do their homework.

"You may know your broker, your broker may even be your best friend, but you can never fully trust your broker," he said.

Trupp was himself "caught up in the ARS mess." While toying with the idea of retirement, he followed his brokers' advice to invest in ARS with little to no information on the risks involved. In 2008, he was stuck with useless bonds along with thousands of other ARS investors.

He channeled his anger over Wall Street sales practices into his book, "Ruthless: How Enraged Investors Reclaimed Their Investments and Beat Wall Street."

In the book he interviews investors who were harmed and provides resources for those still fighting to cash in their ARS.

"These weren't all big corporations," he said. "My book is full of stories from average people, retirees, hardworking citizens who trusted their brokers and lost everything they had. A lot of money was invested and I was lied to. So I decided, I'm gonna put pressure on regulators at every level… and I'm gonna get my money back."

He did eventually get all of his money back, but for some investors, the recovery process may not be as simple.

Investors who purchased ARS from second-hand ARS issuers may be forced to pursue litigation against parent companies if the firm they purchased from did not underwrite or directly manage ARS auctions.

The Pennsylvania commission has had some success getting restitution for clients from some of those downstream firms. For instance, it led an investigation against TD Ameritrade Inc., which did not serve as an underwriter or an auction manager, and got the brokerage firm to offer to buy back $456 million of ARS nationwide.

Although the recovery process is nearing completion, few ARS investors are willing to share their experience publicly. Five former ARS investors were invited to comment for this story but declined, citing privacy.

A spokesperson for the commission said complainants, many of whom are elderly, have said they were satisfied with the commission's recovery assistance and just grateful that the nightmare is over.

So what will become of the ARS market once the task force completes its goal to restore ARS investors' funds? Observers say its possible that ARS-like products, or even the ARS model itself, could resurface.

"In the short term I don't see any spike in that market because it's pretty much scarred right now," said Michael Fancher, an investment analyst with Kistler-Tiffany Advisors in Berwyn. "But in the investment world, people have short memories; they forget their wounds and go back to the same products. At any point and time if there's someone who sees value in [ARS] and thinks there's money to be made, it could revive."

"The business community will decide the future of ARS," said Mendelson, the commission's counsel. "And then, the firms can count on state regulators to regulate this product and

July 26, 2011

Auction-Rate Securities UPDATE: SEC Brief May Help ARS Investors
by Larry Doyle

37 months and counting and still thousands of Americans holding untold billions of dollars in frozen auction-rate securities await the return of THEIR money.

The question of whether the injustice of all that went on in the ARS scandal might ever truly see the light of day seems to have long since been dismissed. Regrettably that fact would seem to mitigate a full understanding of the ARS mess and minimize the lessons that may otherwise have been learned by future generations. What a shame!!

Despite these realities, the fight goes on supported by the billions of reasons that may appear to be frozen in those outstanding ARS but are very much alive.

I have always maintained that the ARS market was the greatest scam ever perpetrated on Wall Street. What is new on the ARS front? Let’s navigate as Bloomberg recently highlighted, SEC Brief in Auction-Rate Case May Help Investors Suing Banks, Lawyer Says,

Auction-rate securities holders seeking to win back part of the $330 billion they’ve invested, may get help from a U.S. Securities and Exchange Commission legal brief supporting claims that Merrill Lynch & Co. rigged the moribund market, a lawyer involved in the case said.

More than a few ARS investors have shared with me that it was not just Merrill Lynch that may have been involved in rigging the ARS market. Dare I say, I believe that virtually each and every dealer involved in the ARS market likely rigged the auction process.

Merrill Lynch, now part of Bank of America Corp. (BAC), failed to adequately inform investors of its alleged role in “propping up” auctions, the SEC said in the brief, filed in the U.S. Court of Appeals for the Second Circuit in New York.

“We think the SEC has come down on the side of investors,” Jonathan Levine, a lawyer with Girard Gibbs in San Francisco, said in a telephone interview. His firm represents investors in the appeal.

SEC Chairman Mary Schapiro moved to reinvigorate the enforcement unit after President Barack Obama appointed her in January 2009. Investigations surged by 32 percent and the agency went to court seeking emergency orders four times as often as it did a year earlier, Enforcement Director Robert Khuzami said at a congressional hearing in May 2009.

If the court agrees with the SEC’s argument, it may lead to the reversal of other dismissed auction-rate cases alleging brokers and dealers rigged the market, Levine said. “Now it depends on whether the court accepts the view of the SEC.”

Lawsuits by the agency and state regulators led to the return of at least $60 billion to individual investors. Other holders of the securities had their lawsuits dismissed. About $55 billion of the debt remains outstanding, the Municipal Securities Rulemaking Board said yesterday. Trading in the market has fallen about 59 percent, the industry regulator said.
To the best of my knowledge the total figure of outstanding ARS runs far higher than the $55 billion quoted here. I would believe this figure represents merely ARS backing municipal borrowings and not those funds borrowed by mutual funds or corporate entities.

After sanctioning Wall Street’s biggest dealers for manipulating the markets by using inside knowledge of bids to influence yields when they ran auctions in 2006, the agency let the practice continue as long as it was disclosed to investors.

I have not heard from even one ARS holder that he was ever informed of the practice used by dealers to prop the auctions. That disclosure would have highlighted that the ARS market did not have the supposed liquidity which dealers represented.

In February 2008, dealers, which had routinely bid to prevent auction failures, withdrew their capital and stopped bidding, leading to a market collapse that left investors with bonds they couldn’t sell and sticking some borrowers with high penalty rates, sometimes as much as 20 percent.

Merrill and the SEC reached a preliminary settlement in April 2008 that called for the firm to buy back $7 billion of the securities. The agency said at the time that the dealer had misrepresented them as “safe, highly liquid investments equivalent to money-market instruments and cash,” and that it didn’t make adequate disclosures to investors.

The SEC’s friend-of-the-court brief filed last month may affect the appeals panel, where the agency has “generally been fairly persuasive and deferred to,” said James Cox, a Duke University law professor in Durham, North Carolina. The agency’s argument may be persuasive if it provides sufficient analysis of the market and what should have been disclosed to investors so they’d understand how dependent it was on dealer participation.

After the market collapsed, investors who said they didn’t know about the risk of auction failures soon began to seek redress in the courts. Claimants in some cases said the securities had been sold as similar to money-market funds.

“This is uncharted territory before the most respected federal appeals court on securities law issues,” said Jacob S. Frenkel, a lawyer with Shulman, Rogers, Gandal, Pordy & Ecker PA in Potomac, Maryland, who focuses on securities law and white- collar crime. “Because the opinion potentially could impact SEC cases, logic dictated that the court gave the SEC an opportunity to weigh in.”

“The request for an amicus brief by no means indicates that it will follow the SEC,” Frenkel said by e-mail. “No game-changer here; rather, it’s just bringing a very interested stakeholder to the table to express its views.”

Let’s save the hooplas for the SEC as this brief is coming a full three plus years after the initial freezing of the ARS market. That said, better late than never.

Judgments have sometimes gone against investors, including some whose claims against Merrill have been consolidated in the case before the appeals court. Citigroup Inc. (C) in March won the dismissal of five consolidated lawsuits brought by investors who claimed the New York-based bank manipulated prices.

These judgments seemed to rest on the premise of ‘caveat emptor’, that is buyer beware. I personally believed that at the time the courts did not want to saddle the banks with another enormous financial burden while they were hanging on for dear life. Dare I say that justice seemed to take a back seat to restoring the financial health of the banks.

The SEC brief examines the adequacy of disclosure at the request of the court, said Kevin Callahan, an agency spokesman, in a prepared statement.

“We made clear our view that it is not sufficient to disclose the risk that an event may happen when according to the plaintiff’s allegations it is known for a certainty that the event has happened or will happen,” Callahan said.

Under Schapiro’s predecessor, Christopher Cox, the agency instituted policies that slowed enforcement cases and led prosecuting lawyers to conclude their commissioners opposed fining companies, the Government Accountability Office said in a May 2009 report. The GAO is the investigative arm of Congress.

The Securities Industry and Financial Markets Association, a New York-based trade group for securities dealers, called the agency’s argument “a flawed and unwarranted expansion of private civil liability,” in a brief it filed in the New York case July 8. The group asked that the court reject the appeal, according to the filing by William Sullivan, a lawyer at Paul, Hastings, Janofsky & Walker LLP in Los Angeles.

Broker-dealer participation in auctions “reflected a common industry practice that was widely known to investors,” Sullivan said in the brief. “A market manipulation claim cannot survive if the allegedly manipulative conduct was commonly known to market participants.”

Really? CHALLENGE!! I do not know from whom Mr. Sullivan gets his information but if he wants I can put him in touch with a LOT of ARS investors who certainly had no knowledge of market manipulation in the auction process. Write to me, Bill, at!!

In its response to the SEC brief, Merrill told the court July 8 that the agency was trying to turn the case into one of misrepresentation, instead of market manipulation, by focusing on the company’s duty to alert investors to negative market conditions in late 2007 and early 2008.

“The primary thrust of the SEC letter is that Merrill’s disclosure of its auction practices became insufficient in the fall of 2007,” company lawyers said in its response. The company said the SEC’s position conflicts with the agency’s concession in a different case last month that “essentially identical” disclosures by Morgan Keegan & Co. “adequately described the risks” associated with the securities.

Bill Halldin, a Merrill spokesman, declined to comment. Katrina Cavalli, a spokeswoman for the securities trade group, said that its brief “speaks for itself.”

The case is Colin Wilson v. Merrill Lynch & Co., Inc., et al., No. 10-1528, U.S. Court of Appeals for the Second Circuit, New York, New York.

We can only hope that the courts will properly adjudicate this case so the ARS nightmare for the multiple thousands of our fellow citizens can end and they can move forward with their lives.

May 23, 2011

Nuveen Fined $3 Million Over Marketing of Preferred Shares
By Christopher Condon at

Nuveen Investments Inc., the largest manager of closed-end funds, was fined $3 million by the Financial Industry Regulatory Authority for misleading customers on the safety of auction-rate securities before the market for those investments collapsed in February 2008.

The Chicago-based company “failed to adequately disclose liquidity risks” for auction-rate preferred shares issued by its closed-end funds in marketing material used by brokers to sell the securities, the self-regulatory body known as Finra said in a statement today.

“Nuveen was aware of the facts that raised significant red flags about the ability of investors to obtain liquidity for their Nuveen auction-rate securities yet failed to revise their marketing brochures,” Brad Bennett, Finra’s chief of enforcement, said in the statement.

Closed-end funds used to sell preferred shares on the auction-rate market to increase the amount of money they could invest by as much as 50 percent, boosting returns for common shareholders. Preferred-share investors treated the securities as a highly liquid alternative to money-market funds until the market collapsed during the early stages of the credit crisis. The events left preferred shareholders unable to sell.

Redeemed $14.2 Billion

Regulators forced eight broker-dealers, including Citigroup Inc. (C) and UBS AG (UBS), to buy back about $45 billion of auction-rate securities. Some auction-rate bonds and preferred shares remain frozen.

Nuveen’s funds had $15.4 billion in preferred shares outstanding when the market crumbled. The company has since redeemed $14.2 billion, freeing those investors by selling alternate forms of debt or preferred shares to replace leverage provided by the frozen shares.

“We are pleased to put this matter behind us so that we can continue to focus our efforts on refinancing the Nuveen closed-end funds’ remaining auction-rate preferred shares,” Kathleen Cardoza, a Nuveen spokeswoman, said in a separate statement.

The company, along with New York’s BlackRock Inc. (BLK) and Calamos Asset Management Inc. (CLMS) in Naperville, Illinois, was sued in 2010 by investors for allegedly harming common shareholders through those refinancing moves.

Nuveen, owned by Chicago-based private-equity firm Madison Dearborn Partners LLC, “neither admits to nor denies Finra’s allegations,” the company said its statement.

May 11, 2011

Raymond James Claims 'Meritorious Defenses'
by Larry Doyle, Business Insider.

Three plus years and counting and with little indication that a full blown settlement of the auction-rate securities nightmare is close to happening, the crowd at Raymond James asserts it has `meritorious defenses' against making its clients whole.

Really? How interesting.

Does Raymond James hold a trump card that nobody else is even aware is in the deck? Why is it that Raymond James provides such bluster at this time? Is the heat rising in Ray Ja's kitchen? Let's navigate as Investment News yesterday highlighted, ARS Mess Could Cost Raymond James Up to $50 Million,

Raymond James Financial Inc. said today it could face a loss of $25 million to $50 million if it immediately has to buy back distressed auction-rate securities from clients.

The Securities and Exchange Commission, the New York attorney general's office and the Florida Office of Financial Regulation have been investigating the firm, which has had negotiations with the regulators to resolve the matter.

"Were we to repurchase that ARS portfolio, the fair value could be less than the par value of such securities by an amount ranging from $25 million to $50 million," the company said in a filing with the SEC. "This estimate does not include any ARS held by our clients who transferred to another broker-dealer."

The company did not say if a settlement is pending.

At the end of March, Raymond James clients held about $370 million in auction-rate securities, the market for which seized up during the winter of 2008.

That `fair value' assessment implies a discount to par value of approximately 7-13%. If that is the entirety of the loss, then why isn't Raymond James eating it and ending this nightmare? What aren't they revealing? Would they be willing to pay even 85 cents on the dollar, let along 87-93 cents, for Jefferson County, Alabama auction-rate securities? Why Jefferson County ARS? Here's why. Last August an individual named Mark, who asserts to be a Raymond James client, offered the following here at Sense on Cents:

Mark wrote,

I have ARS tied up with Raymond James. Can we talk about the unbelievable stance they have taken with these. Mine are ARS backed by Jefferson County Alabama. I have what may be an unusual case in that my advisor is backing me 100% and actually left Raymond James over the ARS problems. He will work with us and provide any information we may need. Please contact me.

Who might that broker be? What might he be able to share? What do we know about Jefferson County, Alabama? That county is the poster child for municipal malfeasance and is on the brink of default. A little over a month ago, The Wall Street Journal highlighted, Bankruptcy Threatens County,

Officials of Alabama's Jefferson County are expected to meet with state lawmakers Wednesday to discuss how to avoid filing the largest municipal bankruptcy in U.S. history after a court disallowed a local tax.

The county, which has said its expenses will exceed its income by sometime in July, has been staving off bankruptcy for about three years, after absorbing $3.2 billion of debt resulting from a series of corrupt and disastrous decisions in financing a sewer-improvement project.

The debt is the product of several financing decisions in the 2000s, such as borrowing at variable interest rates and using bond insurers that were later weakened in the credit crisis. Compounding problems was Jefferson County's use of derivatives called interest-rate swaps, with which it bet the wrong way on the direction of interest rates.

Variable interest rates? Yes, those would certainly include the auction-rate securities issued by Jefferson County, Alabama. In addition to this specific situation, let's quickly review Sense on Cents commentary from August 27, 2010, Raymond James Taking Center Stage in ARS Tragedy, in which a Ray Ja client asserted,

Raymond James was still advising him to buy auction-rate securities into February 2008, when the auction market froze, and made one purchase the day after that occurred, Mr. Merdinger alleged. The market for auction-rate securities remains frozen, leaving many investors stranded.Copies of emails that were considered during the proceeding allegedly showed that Raymond James financial managers knew there were problems in the auction-rate market well before it failed, according to Lawrence Byrne, a securities lawyer in Chicago who represented the investor.

Against this backdrop, what do the powers at be at Raymond James have to say? As Investment News reported,

"We believe we have meritorious defenses, and therefore, any action by a regulatory authority to compel us to repurchase the outstanding ARS held by our clients would likely be vigorously contested by us," the firm said.

Well Raymond-you don't mind if I call you Raymond, do you-let's see those meritorious defenses!! What do you have to say to Mark and every other client? Why don't you publicly release the e-mails to which Mr. Byrne refers.

Three plus years and counting..meritorious defenses?


On behalf of all Raymond James ARS clients as well as all those who are still frozen in ARS, ...LET'S SEE YOUR MERITORIOUS DEFENSES!!

Are there any former Raymond James' brokers in the audience? Can you enlighten us?

April 29, 2011

Wallowing in Debt Limbo
By Steven Syre, Boston Globe Columnist

Three years is a long time to be stuck in limbo. It’s been about that long since Will Muggia bought a bunch of auction-rate securities issued by the state of Massachusetts, believing they were a safe place to park money for the short term. Big mistake.

The financial panic of 2008 left all kinds of markets temporarily frozen. The market for hundreds of billions of dollars of auction-rate securities became notorious. Investors found themselves locked into those securities paying very low interest rates and couldn’t get their money back.

Auction-rate securities were a clever idea for normal times. Issuers sold debt securities that would remain outstanding for decades, but weekly auctions run by brokers gave the investors regular opportunities to sell.

The issuers — governments and businesses — received long-term financing at relatively cheap rates and investors held securities that looked short term but paid better than money market. The catch: Those auctions failed in the panic of 2008 because buyers all ran for the hills.

Over time, the outlook improved for many auction-rate securities owners. Regulators pressured brokerages to buy out their clients. Some issuers refinanced those debts and repaid their investors. But the auctions themselves still don’t function to this day.

Muggia was not so fortunate. He says he is still stuck with more than $1 million of auction-rate securities and thinks the state should finally do something about it. “It’s just so wrong to do business this way,’’ says Muggia. “We were [promised] liquidity every seven days and it’s been three years. It’s embarrassing for the state of Massachusetts.’’

For the record, Muggia is no financial rube, and he’s not crying poverty. He is the chief executive of Westfield Capital Management, a Boston investment firm that manages $16 billion for clients. Muggia put his own money into the auction-rate securities.

It’s hard to determine how many people and how much money remain trapped in the state’s auction-rate securities. Those securities currently pay an interest rate of 0.24 percent, according to Muggia. Unless something changes, they will remain outstanding until Dec. 1, 2030.

Muggia isn’t the only person who believed, at one time or another, that the state should refinance its auction-rate securities and repay investors. Tim Cahill, who was the state’s treasurer in 2008, said exactly that at the time. “We certainly don’t want to be in them and tie people’s money up,’’ Cahill told the Globe’s Beth Healy in July 2008. “We’re not getting hurt. But we think it’s in everyone’s best interest if we refinance.’’ He said the state would do that within a month, though obviously it did not.

April 17, 2011

How Your Government Protects You

Gretchen Morgenson is a New York Times ace financial reporter. On April 14, 2011 she published a long article, "In Financial Crisis, No Prosecutions of Top Figures."

The article contained the following:

It is a question asked repeatedly across America: why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted? …

In July 2008, the staff of the S.E.C. received a phone call from Scott G. Alvarez, general counsel at the Federal Reserve in Washington.

The purpose: to discuss an S.E.C. investigation into improprieties by several of the nation’s largest brokerage firms. Their actions had hammered thousands of investors holding the short-term investments known as auction-rate securities.

These investments carry interest rates that reset regularly, usually weekly, in auctions overseen by the brokerage firms that sell them. They were popular among investors because the interest rates they received were slightly higher than what they could earn elsewhere.

For years, companies like UBS and Goldman Sachs operated auctions of these securities, promoting them as highly liquid investments. But by mid-February 2008, as the subprime mortgage crisis began to spread, investors holding hundreds of billions of dollars of these securities could no longer cash them in.

As the S.E.C. investigated these events, several of its officials argued that the banks should make all investors whole on the securities, according to three people with knowledge of the negotiations but who were not authorized to speak publicly, because banks had marketed them as safe investments.

But Mr. Alvarez suggested that the S.E.C. soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the S.E.C., cautioning that banks might run short on capital if they had to pay the many billions of dollars needed to make all auction-rate clients whole, the people briefed on the conversations said. The S.E.C. wound up requiring eight banks to pay back only individual investors. For institutional investors — like pension funds — that bought the securities, the S.E.C. told the banks to make only their “best efforts.”

This shift eased the pain significantly at some of the nation’s biggest banks. For Citigroup, the new terms meant it had to redeem $7 billion in the securities for individual investors — but it was off the hook for about $12 billion owned by institutions. …

You can read Ms. Morgenson's entire article at the New York Times.

April 3, 2011

Why this site hasn't been updated in months.
And what you can do if you're still stuck in ARPs.

Last week a reader emailed "Why haven't I updated this site since October?" He said he was still stuck with $350,000 of ARPs, mostly from PIMCO..

To answer his question: I haven't updated the site there's simply not much to write about. Some ARPs have redeemed. But there are still millions of unredeemed ARPs. People's savings. Retirement monies. That's sad.

But where's the anger? Where are the calls to action? Why are there no ARPs holders camped outside the doors of the nation's financial regulators? Where are all the class action suits? Why aren't I seeing anyting on CNBC, or reading about ARPs on the Dow Jones Newswires or the Wall Street Journal? Where's the anger? Where's the news?

Frankly, I was stunned at the email. The ARPs holder thanked me profusely for all the information in site, which he'd read (for free, I might add). But he'd ignored all he had read, apparently.

Let's sum up: Everything I've (and others) have written has been based on one fundamental premise:

The squeaky wheel gets the most attention.

So, three things:

1. Buy the book Ruthless. It's really good. See the right hand column.

2. Re-read this column from beginning to end and make a list of all the Aggressive Actions you should be doing to get your money back. One critical "action" you should be doing is to jump up and down before your local state agencies, like Colorado's excellent Division of Securities -- see immediately below.

3. Email me with news, Calls To Action, or whatever else you're doing. I'm happy to publish whatever information you send me that might be useful to others still stuck in ARPs. Don't forget, the Internet (including this column) is a solid to bring pressure on companies and people who should be redeeming.ARPs, not ducking for cover and ignoring the plight of the people they defrauded by selling them auction rate preferreds.

March 15, 2011

Morgan Stanley settles auction-rate securities case
By The Denver Post

Morgan Stanley & Co. Inc. has agreed to buy back $127 million worth of auction-rate securities from Colorado investors under terms of a settlement with the Colorado Division of Securities.

The settlement concludes an investigation led by state securities regulators, including the Colorado Division of Securities, into allegations that Morgan Stanley advised certain clients that the auction-rate securities were safe, liquid and short-term investments when in fact they are bonds with long-term maturities, and their short-term liquidity was dependent upon the success of the auction process.

The company will buy back the securities from investors who were unable to sell them after they had been frozen in the auction-rate securities market.

The settlement is the 10th that the securities division has finalized. Previous settlements include Goldman Sachs, Deutsche Bank Securities, Citigroup Global Markets, Bank of America Securities, Credit Suisse Securities, JP Morgan Chase, Merrill Lynch, RBC Capital Markets, UBS Securities and Wachovia Securities.

March 9, 2011

E*Trade to pay $25k fine as part of settlement over sale of auction rate securities
By David Bracken - Staff writer of

E*Trade Securities will pay a $25,000 civil penalty under a settlement reached with the state over auction rate securities it sold to North Carolina investors.

The settlement, announced by the Secretary of State’s Office today, required E*Trade to show the state that it had made investors "whole," meaning they had reached some form of satisfactory deal with them.

E*Trade will also reimburse the state $400,000 for investigation costs related to the case.

Auction rate securities were often marketed to investors as short-term investments that could easily be sold for cash on short notice. But market for the products disappeared in early 2008, leaving investors trapped holding products that could not be resold.

When the markets froze, E*Trade had at least 47 North Carolina investors holding roughly $8,375,000 in ARS products.

The state said its investigation had found that E*Trade regularly represented ARS products to customers as safe investments suitable for short-term cash management purposes.

It found that salesmen had not been properly trained by the company to sell the products and had failed to consistently failed to disclose the risk that, if the auctions failed, clients would not be able to sell their auction rate securities and could be stuck with illiquid investments.

“This is the first case in the country where E*Trade has signed a settlement concerning its role in selling auction rate securities to misled investors,” Secretary of State Elaine F. Marshall said today in a release. “We are incredibly pleased to be the first state where we were able to make sure the investors have been made whole, where a fine has been levied, and where the bad practices used have been made public."">E*Trade Securities will pay a $25,000 civil penalty under a settlement reached with the state over auction rate securities it sold to North Carolina investors.

The settlement, announced by the Secretary of State’s Office today, required E*Trade to show the state that it had made investors "whole," meaning they had reached some form of satisfactory deal with them.

E*Trade will also reimburse the state $400,000 for investigation costs related to the case.

Auction rate securities were often marketed to investors as short-term investments that could easily be sold for cash on short notice. But market for the products disappeared in early 2008, leaving investors trapped holding products that could not be resold.

When the markets froze, E*Trade had at least 47 North Carolina investors holding roughly $8,375,000 in ARS products.

The state said its investigation had found that E*Trade regularly represented ARS products to customers as safe investments suitable for short-term cash management purposes.

It found that salesmen had not been properly trained by the company to sell the products and had failed to consistently failed to disclose the risk that, if the auctions failed, clients would not be able to sell their auction rate securities and could be stuck with illiquid investments.

“This is the first case in the country where E*Trade has signed a settlement concerning its role in selling auction rate securities to misled investors,” Secretary of State Elaine F. Marshall said today in a release.

“We are incredibly pleased to be the first state where we were able to make sure the investors have been made whole, where a fine has been levied, and where the bad practices used have been made public."

October 29, 2010

Auction-Rate Holders Worry, Wait or Take Loss
by Daisy Maxey of The Wall Street Journal

Some investors holding auction-rate securities are still seeking a way out, more than two years after the $330 billion market dried up in 2008.

Joel Oppenheim says he'd now be considering retirement if not for the $2.5 million he has trapped in the securities. Instead, the Houston-based commercial real-estate consultant says he's watching his savings slowly erode as he pays interest on money he had to borrow to pay his taxes.

Jane Williamson, a social-services worker, invested $200,000 from the sale of her home in auction-rate preferred securities on the advice of her adviser and ended up stranded and living with a friend. In desperation, she finally sold at a loss.

Mr. Oppenheim and Ms. Williamson are but two of the individual investors who became victims. Cities, schools, hospitals and others issued these long-term debt instruments that are resold with updated interest rates in periodic auctions held by banks. Like Mr. Oppenheim and Ms. Williamson, many investors say they bought them on the advice of their brokers, who touted them as a safe, alternative to cash. Then, in early 2008, Wall Street dealers suddenly stopped buying the securities at auction.

In late 2007, Mr. Oppenheim invested $3.8 million in auction-rate securities on the advice of his broker at Oppenheimer & Co. (OPY: 25.45, -0.20, -0.77%), he says. He told his broker he'd need the money in April 2008 for taxes, and says he was told the money could be ready in a few days.

After the market froze in 2008, Mr. Oppenheim took out a $2 million loan to pay his taxes. Since then, he has been paying $5,500 per month in interest, while receiving only about $900 a month in interest from his auction-rate securities. Over time, some of his money has been redeemed, but he's continued to watch his savings dwindle.

"It's been devastating because I don't know what my future will look like," says Mr. Oppenheim, 67 years old. He says he's been unable to help his 25-year-old daughter, who has epilepsy, as much as he would otherwise, or to make the $25,000 annual donation to a foundation he created to benefit medical research.

A spokesman for Oppenheimer declined to comment, but Oppenheimer Holdings Inc., Oppenheimer's Toronto-based parent, said in its third-quarter earnings statement Friday that it had completed its first program to buy auction-rate securities back from clients in the third quarter, purchasing $25.6 million. "The company remains dedicated to assisting its clients who remain invested in these securities," it said.

Under a settlement with New York State Attorney General Andrew Cuomo, Oppenheimer—one of the largest sellers of auction-rate securities to individuals—agreed to buy back some of them from investors with accounts of less than $1 million, which meant Mr. Oppenheim was not eligible.

He filed a complaint with the Texas Attorney General Greg Abbott, and wrote to Mr. Cuomo after his office reached the settlement. He understands that he can get about 72 cents on the dollar for his securities on the secondary market, a loss he's reluctant to take.

Ms. Williamson, 56, of Seattle, also invested through Oppenheimer on the advice of her broker. She had just sold her home and sought a safe, temporary place for her money before purchasing another.

After Ms. Williamson obtained a sale agreement for a new home, she called her broker, and was stunned to hear that the market was frozen. She was a single mother who had worked in a civil service job for 30 years. "It was all I had," she says of the money. She moved in with a friend, where she remained for two years, she says.

Ms. Williamson later had $50,000 of her securities redeemed, and finally redeemed the rest on the secondary market for a loss of $34,500.

She's since purchased a new home, and has no seller's remorse. "I'm glad to have moved on," she says. "I don't know who made money. I don't know how this happened."

September 9, 2010

Raymond James auction-rate suit is first to be upheld
By Bloomberg, from InvestmentNews

Raymond James & Associates must face a lawsuit claiming it defrauded buyers of auction-rate securities, the first class-action complaint following the market’s 2008 collapse to survive a judge’s initial review.

At least 19 underwriters and broker-dealers were sued in class-action, or group, suits since the $330 billion market for auction-rate securities cratered in February 2008. At least eight financial firms, including Citigroup Inc. and Deutsche Bank AG, got complaints tossed when judges ruled they didn’t meet pleading requirements. In some cases, the investors were allowed to refile complaints with more detail.

U.S. District Judge Lewis A. Kaplan in New York upheld part of the complaint against the unit of St. Petersburg, Florida- based regional brokerage Raymond James Financial Inc., allowing the case to move to the discovery, or evidence-gathering, stage.

“A trier of fact would be entitled to find that it would have been important to a reasonable investor, in deciding whether to buy or sell ARS, that the ARS -- supposedly liquid investments -- were liquid only because auction brokers routinely intervened in the auctions to ensure their success,” Kaplan wrote in his Sept. 2 opinion. “RJA was under a duty to disclose this information.”

Kaplan threw out an earlier complaint in the case.

“Raymond James is pleased with the judge’s decision to dismiss most of the allegations completely and severely limit the scope of the remaining claims,” the firm said in a statement e-mailed by Anthea Penrose, a company spokeswoman, yesterday. “The firm intends to vigorously defend itself and expects to ultimately prevail on all counts.”

In the lawsuits, investors accused financial institutions of steering them to instruments promoted as safe as cash that turned out to be illiquid and couldn’t be redeemed. They also said the banks didn’t sufficiently disclose that they took part in the auctions to keep them from failing. The market froze when the financial firms ended that participation.

Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions.

Raymond James & Associates sold $2.3 billion of auction- rate securities, underwrote $1.2 billion and was the auction dealer for more than $725 million, according to Kaplan.

In deciding whether to dismiss a lawsuit or allow a case to go forward, judges rule on the sufficiency of the complaint rather than on the merits of the accusations. Investors have survived banks’ motions to dismiss in individual, rather than class-action, cases over auction-rate securities.

“The most important hurdle for plaintiffs’ lawyers to cross in securities class-action litigation is the motion to dismiss because they often do not have enough information to cross that threshold that opens the door to discovery,” Jacob Frenkel, a former U.S. Securities and Exchange Commission lawyer, said in a phone interview today. “Once they have access to discovery, the lay of the land changes.”

Frenkel is now in private practice at Shulman Rogers Gandal Pordy Ecker PA in Potomac, Maryland.

“We intend to pursue the case, pursue the litigation,” Jonathan K. Levine, a lawyer for the Raymond James investors at Girard Gibbs LLP in San Francisco, said in a phone interview yesterday.

A 1995 federal securities-fraud law designed to discourage frivolous stock-loss suits requires detailed pleading of elements such as the defendant’s intent to deceive, the investor’s reliance on the financial firm’s communications and the defendant causing the alleged loss.

Judges in the other auction-rate class actions said the complaints didn’t meet those burdens or the investors failed to prove they lost money. As private litigation moved forward, financial firms agreed to buy back at least $61 billion in auction-rate securities to end regulators’ probes of their treatment of customers.

Although the investors sued over auction-rate securities Raymond James underwrote or sold between April 2003 and February 2008, Kaplan said the allegation of an intent to deceive could stand only for the period beginning in November 2007. According to the investors, that’s when Raymond James saw the unraveling of the market and sought to unload its own auction-rate securities, thus giving it a possible motive to conceal their risk of illiquidity.

The judge also said the investors properly pled that their losses could have been caused by auction dealers halting their participation in auctions, revealing their securities’ illiquidity risk.

Raymond James’s warnings and disclosures to one lead plaintiff “did not disclose the risk” at the complaint’s “core -- that the ARS were liquid only because of extensive and sustained auction broker intervention,” which a “reasonable investor” may have wanted to know, Kaplan wrote.

The judge dismissed claims against the parent company and another broker-dealer unit.

He dismissed claims by one lead plaintiff who bought from the other unit because the investors failed to sufficiently plead any intent to deceive on its part.

The case is Defer LP v. Raymond James Financial Inc., 08- cv-3449, U.S. District Court, Southern District of New York (Manhattan).

September 2, 2010

John Hancock Advisers, LLC Provides Statement on Auction Rate Preferred Lawsuit and Related Matters
from the Sacramento Bee

BOSTON, Sept. 1 -- /PRNewswire/ -- John Hancock Advisers, LLC announced today that on August 30, 2010, a shareholder derivative complaint was filed in the Superior Court of The Commonwealth of Massachusetts, Suffolk County, with respect to John Hancock Tax-Advantaged Dividend Income Fund (NYSE: HTD), a leveraged John Hancock closed-end fund. The complaint is substantially similar to the one that was filed by the same law firm with respect to John Hancock Preferred Income Fund III (NYSE: HPS) on August 24, 2010, and was filed against John Hancock Advisers, LLC, HTD's adviser ("JHA"), JHA's parent company Manulife Financial Corporation, and certain of the Trustees, executive officers and portfolio managers of HTD in connection with the redemption of auction preferred shares of HTD ("APS"). The complaint alleges, among other things, that the named defendants breached their fiduciary duties to HTD and its common shareholders by redeeming APS at their liquidation preference and alleges that such redemptions caused losses to HTD and its common shareholders. The plaintiffs are seeking monetary damages for the alleged losses and certain other relief.

As previously announced, John Hancock Patriot Premium Dividend Fund II (NYSE: PDT), another leveraged John Hancock closed-end fund, received a demand letter from the same law firm that filed the complaints with respect to HTD and HPS on behalf of a putative common shareholder of PDT. That demand letter similarly alleged that JHA and certain of the Trustees, executive officers and portfolio managers of PDT breached their fiduciary duties to PDT by redeeming Dutch Auction Rate Transferable Securities Preferred Stock at their liquidation preference and demands that the Board of Trustees take action to remedy those alleged breaches. No shareholder derivative complaint has been filed with respect to PDT at this time.

The Boston-based mutual fund business unit of John Hancock Financial, John Hancock Funds, manages more than $54.7 billion in open-end funds, closed-end funds, private accounts, retirement plans and related party assets for individual and institutional investors at June 30, 2010.

John Hancock Financial is a unit of Manulife Financial Corporation, a leading Canadian-based financial services group serving millions of customers in 22 countries and territories worldwide. Operating as Manulife Financial in Canada and in most of Asia, and primarily as John Hancock in the United States, Manulife Financial Corporation offers clients a diverse range of financial protection products and wealth management services through its extensive network of employees, agents and distribution partners. Funds under management by Manulife Financial and its subsidiaries were Cdn$454 billion (US$428 billion) at June 30, 2010.

Manulife Financial Corporation trades as 'MFC' on the TSX, NYSE and PSE, and under '945' on the SEHK. Manulife Financial can be found on the Internet at

The John Hancock unit, through its insurance companies, comprises one of the largest life insurers in the United States. John Hancock offers a broad range of financial products and services, including life insurance, fixed and variable annuities, fixed products, mutual funds, 401(k) plans, long-term care insurance, college savings, and other forms of business insurance. Additional information about John Hancock may be found at

August 31, 2010

Funds Hold Billions in 'Auction' Paper
Total Outstanding Called 'Surprising'
By DAISY MAXEY of the Wall Street Journal

Nearly two years after the auction-rate securities market froze, U.S. closed-end funds still hold $26.4 billion in auction-rate preferred shares, according to a new report by credit-ratings firm Fitch Ratings.

The figure, while down 57% from the $61.9 billion trapped in those securities in January 2008, surprised the researchers with its size.

"A lot of redemptions have provided liquidity to ARPS holders, but it was surprising that there was this much outstanding," said Ian Rasmussen, a director in Fitch's U.S. fund and asset-managers group and an author of the report. Fitch is a unit of Fimalac SA of Paris.

About 61% of closed-end funds, or 250, are still leveraged with auction-rate preferred shares, or ARPS, down from 347 in January 2008, Fitch said in the report. It was based on a review of publicly available financial statements of 437 U.S. closed-end funds.

For years, some closed-end funds issued preferred shares as a way to leverage, boosting income for common shareholders. Many financial advisers represented the shares as liquid investments, but when the auction-rate securities market froze in February 2008, preferred shareholders suddenly were unable to sell.

Since then, some closed-end fund managers have redeemed shares at par value by reducing funds' leverage or through refinancing, and others have offered to buy the shares at below par value.

Of the funds Fitch reviewed, 22% fully redeemed an estimated $22.9 billion worth of auction-rate preferred shares, and 50% undertook partial redemptions of shares, which totaled $12.7 billion.

Funds that have maintained the leverage seek to capitalize on its low cost and permanent nature, Fitch said.

"Despite the fact that ARPS are currently paying a stepped-up dividend rate to compensate investors for failed auctions, the financing cost" may be "attractive compared to other leverage options," it said.

That is likely to change if and when interest rates rise, said Nathan Flanders, regional head at Fitch's U.S. fund and asset-managers group and an author of the report.

Under those circumstances, "the step-up rate becomes increasingly more punitive to the fund relative to other sources of financing," he said.

A wave of ARPS redemptions came in the fall of 2008, but largely ceased during late 2008 and early 2009 as the asset values of closed-end funds came under pressure.

The funds are required to maintain asset coverage of at least 200% with respect to senior securities, such as preferred stocks, and at least 300% with respect to debt securities. That means that for each $1 of preferred stock issued, a fund must have at least $2 in assets. Refinancings resumed in the second half of 2009 and first half of 2010 as asset values recovered, Fitch said.

The most common form of alternate leverage has been senior, short-term financing, such as a revolving credit facility from a bank or new term-preferred securities that trade on a secondary market and have a fixed maturity date, the ratings firm said.

Some common shareholders in the funds have recently charged that fund boards breached their fiduciary duties by redeeming shares at par, favoring holders of ARPS.

The allegations slowed refinancings, but the redemptions are likely to resume this fall, Fitch said.

Some firms have elected to make tender offers to repurchase outstanding ARPS at below par. Those amounts have been small compared with at-par redemptions, Fitch said.

The ratings firm will continue to monitor redemption activity by the funds to understand what implications it may have on ratings as well as funds' strategies, leverage and investor composition, it said.

Write to Daisy Maxey at

August 27, 2010

Raymond James Taking Center Stage in ARS Tragedy
by Larry Doyle of Sense on Cents.

The play that has more acts and actors than the longest running shows on Broadway is regrettably anything but entertaining.

Although the entire financial industry would clearly hope it could wake up from the nightmare known as auction-rate securities, the fact is this ongoing saga is no bad dream but a very real tragedy. Which player seems to be taking center stage in this ongoing epic disaster? Enter stage right, Raymond James.

A month ago, we witnessed in a WSJ review, Raymond James Ordered to Buy Back Auction-Rate Securities:

An arbitration panel ordered two units of Raymond James Financial Inc. to buy back $2.5 million in auction-rate securities from an investor.

The Financial Industry Regulatory Authority panel ruled in favor of Greg Merdinger, who filed a claim in June 2009 alleging a breach of fiduciary duty and contract by Raymond James & Associates and Raymond James Financial Services Inc. The panel also awarded Mr. Merdinger an additional $86,000, plus 5% interest on the $2.5 million until Raymond James buys back the securities.

Aside from the award, the most interesting element of this ‘act’ is the fact that:

Raymond James was still advising him to buy auction-rate securities into February 2008, when the auction market froze, and made one purchase the day after that occurred, Mr. Merdinger alleged. The market for auction-rate securities remains frozen, leaving many investors stranded.

Copies of emails that were considered during the proceeding allegedly showed that Raymond James financial managers knew there were problems in the auction-rate market well before it failed, according to Lawrence Byrne, a securities lawyer in Chicago who represented the investor.

Smoking gun perhaps? What exactly are in those e-mails? Think a whole host of other auction-rate securities holders might like to know? You think? Did those e-mails play a role in another Raymond James led auction-rate performance? When the curtain rose yesterday, the WSJ “reviewed” a similar play but with a twist entitled, Raymond James Forced to Buy Back Securities:

Raymond James & Associates Inc. and one of its brokers must buy back $925,000 in auction-rate securities from a Texas-based couple, a securities arbitration panel has ruled.

Wow. How dramatic. The broker is taking a bullet here as well. This is the first time I am seeing that.

Rex and Sherese Glendenning, of the Celina area in Texas, originally sought $1.4 million in the case they filed in February 2009, against Raymond James & Associates, a unit of Raymond James Financial Inc. and Larry Milton, a broker associated with the firm in Fort Worth, Texas. They alleged breach of fiduciary duty, misrepresentation and civil fraud, among other things, according to a ruling by a Financial Industry Regulatory Authority arbitration panel.

The Finra panel ordered Raymond James and Mr. Milton to pay the Glendennings $925,000 in a ruling dated Aug. 20. The Glendennings must then sign the securities over to Raymond James, according to the ruling.

How many more ‘acts’ like this are waiting to play out featuring Raymond James? How many more brokers could be the understudy to Mr. Milton?

It is unusual, however, to find a broker liable in an auction-rate case, says Mr. Aidikoff. His firm typically doesn’t name brokers in auction-rate cases, he says, because many didn’t know the full story behind what they were selling, he says. The ruling against Mr. Milton could reflect possible actions that were revealed through testimony, he says.

Possible actions revealed through testimony? Sounds ominous. How about if we bring that testimony from backstage onto center stage? Think there are other ARS-holders who may want to compare notes?

What exactly was Raymond James management telling their brokers during those fateful days when the ARS market was freezing and ultimately totally froze?

Has anybody seen that play? Care to share?

August 13, 2010

The Colorado Complaint Form regarding Oppenheimer

The Division of Securities has received emails from each of you regarding Oppenheimer. The information sent via these emails has been sketchy at best. Out office is in need of further information to evaluate the situation you mention in your emails regarding Auction Rate securities and Oppenheimer. Toward that end, I am asking each of you to complete the attached complaint form and mail, fax or email the completed form to me.


Charles B. Reinhardt
Chief Investigator
Colorado Division of Securities
Department of Regulatory Agencies
1560 Broadway, Suite 900
Denver, CO 80202
(303) 894-2838 (Direct Line)
(303) 861-2126 (Fax)

August 12, 2010

Will Oppenheimer Get Another Pass?
The Answer Depends on N.Y. Attorney General Andrew Cuomo
By Phil Trupp (MVA News Service)

Oppenheimer Holdings is cruising along under full sail--expanding, hiring, raising its dividend, and seeking possible acquisitions. If there was any doubt of this new-found abundance, it was put to rest by the company's latest Form 10-Q filing, released August 3 .

The forward-looking portion of the filing, below, is full of glowing good news. We reproduce it here, in full:

The Company's long-term plan is to continue to expand existing offices by hiring experienced professionals as well as through the purchase of operating branch offices from other broker dealers or the opening of new branch offices in attractive locations, thus maximizing the potential of each office and the development of existing trading, investment banking, investment advisory and other activities. Equally important is the search for viable acquisition candidates. As opportunities are presented, it is the long-term intention of the Company to pursue growth by acquisition where a comfortable match can be found in terms of corporate goals and personnel at a price that would provide the Company's stockholders with incremental value. The Company may review additional potential acquisition opportunities, and will continue to focus its attention on the management of its existing business. In addition, the Company is committed to improving its technology capabilities to support client service and the expansion of its capital markets capabilities.

Let's hear it for Oppenheimer. But first let's take care of some serious unfinished business.

Oppenheimer management and New York Attorney General Andrew Cuomo worked out a partial "settlement" earlier this year in which the company agreed to redeem some of its nearly $1 billion in auction rate securities, sold as "completely liquid" cash investments. The ARS market froze on February 13, 2008, two months before Oppenheimer's top management quietly sold its own portfolio of auction paper without telling its clients anything -- like that top management had just sold out of the exact securities which the management was continuing to peddle to its customers.

With so much good news to report, it now remains for Mr. Cuomo to review the company's financial health and determine if Oppenheimer can pay back its auction rate clients who, for 2-1/2 years, have been left hanging with a partial settlement while the company pleaded abject poverty. It would seem from Oppenheimer's own statements that its poor-mouth days are over--at least for the time being.

The company still holds nearly $600 million in unredeemed auction rate securities in the portfolios of its unhappy clients.

Will Mr. Cuomo, who is running for the governor's post in New York, push for a full redemption? Or will he allow thousands of investors (many of whom are voters in New York State) to continue twisting in Oppenheimer's wind? This is the $1 billion question that Mr. Cuomo's office has refused to answer, to the great distress of Oppenheimer (OPY) clients.

Earlier this year, Massachusetts Secretary William V. Galvin pressed OPY for a full multimillion dollar redemption--and got it. The Galvin settlement confused New York residents. Why did Mr. Galvin succeed while Mr. Cuomo opted for a piecemeal settlement based on OPY's claim of relative poverty? The answer may never come. But, for OPY auction rate clients, the critical issue is full redemption of their frozen ARS investments.

It would seem the question of the company's financial health is now settled. According to OPY's Form 10-Q, the company appears to be sailing along as never before.

Mr. Cuomo isn't talking, and neither is OPY. The outcome will signal the possible outcome of Mr. Cuomo's political fortunes in November when New Yorkers go to the polls to elect a new governor.

August 4, 2010

UBS to Pay $80 Million in Auction-Rate Case
By RANDALL SMITH of the Wall Street Journal

UBS AG has been ordered to pay $80.8 million to reimburse Kajeet Inc., a fast-growing Maryland marketer of cellphones for kids, for lost business when Kajeet's cash was frozen in auction-rate securities in early 2008.

The arbitration award, disclosed late Tuesday, is an unusual example of how Wall Street's bills for the market meltdown are still adding up more than three years after the crisis first struck the credit markets in mid-2007.

In a statement, a spokesperson for UBS said, "We strongly disagree with the arbitration panel's decision on this legacy auction-rate matter, and we will file a motion to overturn that decision. We believe the outcome is unwarranted under both the facts and the law."

The $330 billion market for auction-rate securities froze in February 2008, when Wall Street dealers pulled back from the auctions held weekly and monthly to set their interest rates. Such securities offered rates that were higher than money-market funds, but lower than long-term debt.

UBS had 40,000 customer accounts with over $35 billion in such auction-rate investments who suddenly couldn't get access to their money, according to a Securities and Exchange Commission complaint filed in late 2008. The UBS total was the largest of any major brokerage on Wall Street.

The arbitration award represented 73% of the $110 million the company claimed. "Any company that had its war chest in auction-rate securities was potentially going to have catastrophic consequences," said Greg Lawrence, a partner of Conti Fenn & Lawrence LLC in Baltimore, which represented Kajeet in the arbitration case. "Liquidity crises can kill companies."

Write to Randall Smith at

July 21, 2010

Colorado securities regulators file complaint against E-Trade
Denver Business Journal

The Colorado Securities Division has filed a complaint against New York based broker-dealer E-Trade Securities LLC, alleging that E-Trade falsely represented auction rate securities as liquid, short-term investments to Colorado investors without discussing the risks, officials said on Wednesday.

The administrative complaint, which is before an administrative law judge, seeks to revoke, suspend or impose conditions on E-Trade’s Colorado broker dealer license. No hearing date has been scheduled yet.

Over the past two years, Colorado Securities Commissioner Fred Joseph and Securities Division staff have targeted a number of companies that marketed auction rate securities prior to 2008. Settlements have been reached with nearly a dozen, including TD Ameritrade Inc., Deutsche Bank Securities, Citigroup Global Markets, Bank of America Securities, Credit Suisse Securities, JP Morgan Chase, Merrill Lynch, RBC Capital Markets, Wachovia Securities, and UBS Securities LLC and UBS Financial Services Inc.

Auction rate securities are long-term bonds whose rates reset in periodic auctions. According to the complaint, E-Trade brokers repeatedly misrepresented the securities’ liquidity risks by comparing them to money market funds, selling auction rates securities as suitable for cash management purposes, or otherwise telling customers they would always be able to retrieve their cash.

In February 2008, the auction rate market failed, leaving many investors holding long-term bonds and tying up funds they needed in the short term.

In its complaint, the division alleges that E-Trade Securities violated the Colorado Securities Act by making false representations to investors, failed to adequately supervise its sales force, and engaged in unfair and dishonest dealings by making unsuitable recommendations to its customers.

Compiled by the DBJ's Renee McGaw |

June 23, 2010

This comes from the web site Sense on Cents.

June 7, 2010

Credit Suisse To Pay $9.8M In Auction Rate Case

NEW YORK (Dow Jones)--A Financial Industry Regulatory Authority arbitration panel has ordered Credit Suisse Securities (USA) LLC to pay an investor $9.8 million in a case related to auction-rate securities backed by student loan pools.

Credit Suisse Securities (USA) LLC is the U.S. broker dealer unit of Credit Suisse Group (CS, CSGN.VX).

The investor, Catalyst Health Solutions Inc. (CHSI), a Rockville, Md., company that manages prescription drug benefits, filed the case in 2009. It accused Credit Suisse of fraud, negligence, selling unsuitable investments, and other allegations, according to a Finra panel award dated May 27.

Catalyst Health Solutions originally sought $11.9 million in compensation, plus the return of all fees and commissions, another $25 million in punitive damages, and other relief.

The Final panel found Credit Suisse liable in the case, according to the award. The $9.8 million award represented the face value of the auction rate securities held by Catalyst Health Solutions, according to the panel. It also ordered Catalyst Health Solutions to transfer the securities to Credit Suisse.

May 13, 2010

I know fraud when I see it

Larry Doyle of senseoncents has posted the following:

ARS Investors Targeting Andrew Cuomo

I know fraud when I see it. I also know a miscarriage of justice when I see it. The manner in which auction-rate securities were distributed was a fraud. The manner in which this fraud has been largely adjudicated has been a massive miscarriage of justice. No miscarriage has been greater than that laid at the feet of those auction-rate securities investors who purchased ARS from Oppenheimer and Company.

In true American patriotic spirit, these ARS investors are not taking this injustice sitting down. I have never owned an auction-rate security, but I welcome joining their fight and highlighting their cause. On that note, Andrew Cuomo should watch out. A group of Oppeneheimer ARS investors just released the following statement:
As most of you know, in late February New York Attorney General Andrew Cuomo struck a deal with Oppenheimer & Company requiring the firm to pay back a small percentage of the auction rate securities they sold. About five percent of the total outstanding. This contrasts with the deals Cuomo and Mr. Galvin, Attorney General in Massachusetts, (LD’s edit: Galvin is actually MA Secretary of State. Martha Coakley is MA AG) made with every other firm requiring a 100 percent pay back. Oppenheimer clients are of the opinion that Mr. Cuomo’s “settlement” is woefully inadequate and was made for political purposes before his likely run for governor.

We feel that by agreeing to this “settlement” Mr. Cuomo shows that he’s willing to side with corrupt firms like Oppenheimer at the expense of the “little guy” working citizens whose money remains trapped. Oppenheimer also has many senior citizens who are stuck in auction rates. Thus one can reach the conclusion that Mr. Cuomo sides with big business over the elderly. We hope to get this message out to groups of seniors by virtue of an interview with AARP magazine among other avenues.

The money that is still frozen would be used to buy homes, automobiles and fund college educations in New York, Missouri, California and other states. This continues to be a great anchor on the financial recovery in this country. To allow Oppenheimer to not redeem ARPS is unpatriotic.

Who are we? A contingent of Oppenheimer clients, frozen in auction rates for two plus years. We’re mainly comprised of New York residents, although our members come from seven states. We’ve largely supported Mr. Cuomo in the past and feel let down by a man we looked up to.

Oppenheimer pleaded poverty to N.Y. regulators. That was the rationale for only requiring them to pay back five percent of what they owe. Yet, since the “settlement” in late February, Oppenheimer has been on a spending spree, in the past eight weeks announcing the following: expensive new hires for several offices, including Newport Beach, California; an announcement that the firm is expanding operations into Asia, in the hopes of soon becoming the biggest U.S. brokerage doing business there; paid a healthy dividend; announced a generous buy back (things that only healthy firms are able to do.); and, Oppenherimer CEO Al “Bud” Lowenthal announced last week that Oppenheimer made a profit for the first quarter this year, something many of those firms that agreed to pay back 100 percent of ARPS did not. Lowenthal also said that Oppenheimer’s future looks bright.

Per the “settlement” with New York, Oppenheimer is allegedly up for review every six months to see if its financial condition has improved. I think anyone with access to a newsstand or the Internet can clearly see that Oppenheimer is in solid financial shape.

Pre-settlement Oppenheimer updated frozen clients with regular mass emails on the frozen ARS market. Once the settlement was reached, those updates stopped abruptly. We feel strongly that these updates were for the benefit of regulators who were deciding Oppenheimer’s fate. Once that fate was decided, and Oppenheimer had erroneously convinced regulators that they cared about their clients, there was no need to keep clients informed. Indeed, Oppenheimer has shown a total disregard for clients throughout this ordeal. We’ve been subjected to hostility, anger, fabricated emails and veiled threats from those to whom we entrusted our money.

We consider the five percent “settlement” to be a joke. Whatever the reasons Cuomo struck such a sweetheart deal with Oppenheimer at the expense of citizens who work so hard for their money is beyond our grasp. Yet we will remain silent no longer.

Going forward, and accelerating as Mr. Cuomo announces his likely run for governor, we will attempt to do as many print, radio and television interviews as possible, explaining that we think the New York Attorney General’s office reached a deal with Oppenheimer that displayed a callous favoritism for Wall Street over Main Street, and for big business over working people. It’s David vs. Goliath, and Cuomo sided with Goliath.

Our attempts to discuss this matter with New York regulators, and to see if in fact things could change with the six month review, have gone unanswered. Our calls and emails to New York state regulators largely go unreturned. When they do respond, they usually say the office is backed up. Let me point out that auction rates remains a $150 billion problem. By comparison, Madoff is a $60 billion problem. Also, Madoff victims invested in the stock market where you must be prepared to lose all you invest. Oppenheimer victims were told we were investing in a CD-like certificate that was “as safe as safe can be.”

We feel that the financial media, with a few exceptions, has been largely neglectful in reporting the story. It’s our hope that as Mr. Cuomo perhaps campaigns for governor of New York and we bring the injustice that we’ve suffered to light, that this neglect will be rectified.

Perhaps the best way to rectify this situation would be for New York to follow through on the threat to invoke the Martin Act, when and if Oppenheimer is actually up for six month review.
Oppenheimer Auction Rate Clients

If you care about decency and fairness in our society, please share this commentary with friends, family, and colleagues. The auction-rate securities market remains the single greatest fraud ever perpetrated. Cuomo’s settlement with Oppenheimer is nothing more than a massive insult added to a debilitating injury. In agreeing to this settlement, Cuomo shows himself to be a fraud as well.

April 25, 2010

Finding value in the ARS wreckage

MuniFund Term Preferred Shares is one way to refinance collapsed auction-rate securities

By Patrick W. Galley, InvestmentNews

Many investors are all too familiar with auction-rate preferred securities. For those who aren't, auction-rate preferred shares are a senior class of stock issued by a closed-end fund. Closed-end funds issue primarily auction-rate securities to create leverage, with the goal of boosting the yield and total return to the common shares.

Auction-rate securities are typically rated triple-A and pay dividends at a floating rate that in most cases resets weekly, pursuant to a Dutch auction process. Although auction-rate securities often have a perpetual duration (stated clearly in the prospectus), many investors erroneously considered these securities to be weekly money market investments because the regular auctions provided them with liquidity to sell their shares.

Beginning in February 2008, the roughly $64 billion of auction-rate securities issued by closed-end funds began to experience widespread auction failures, and there hasn't been a successful auction since. As a result, investors in auction-rate securities have limited liquidity unless they sell at a discount to par, their brokerage firm agrees to purchase back the securities or the closed-end fund redeems the securities — most likely due to refinancing.

To date, almost 60% of the outstanding auction-rate securities have been redeemed.

With more than $25 billion still outstanding, some closed-end-fund sponsors have been refinancing the outstanding auction-rate securities aggressively to provide liquidity to the holders. One of the most aggressive firms is Nuveen Investments LLC, which has been on a tear recently — successfully launching MuniFund Term Preferred Shares to refinance auction-rate securities issued by their municipal bond closed-end funds.

The MTP is a fixed-rate form of preferred stock with a mandatory redemption period, in most cases five years. It offers investors an attractive tax-exempt yield, most recently near 2.65%, and liquidity within five years.

For the fund issuing the MTP, a low historic yield is locked in for about five years, taking advantage of current historically low interest rates.

The investment case for these newly issued MTPs is compelling for those investors seeking tax-exempt income.

For starters, the tax-exempt yield is attractive, relative to other tax-exempt options and Treasuries. Five-year triple-A-rated muni general-obligation bonds now yield about 1.9%, almost 30% less than the MTP yield.

On a tax-equivalent basis, the MTP yield is about 4.1%; five-year Treasury bonds yield 2.55%.

Each MTP is backed by a diversified pool of muni bonds and, per the Investment Company Act of 1940, the required asset coverage is 2-to-1, meaning for every $1 of outstanding MTPs, the fund must maintain $2 of assets.

This strong asset coverage results in a high-quality triple-A rating.

MTPs also have medium-term maturity. The mandatory redemption in five years gives investors a limited-duration security, ideal for those concerned about interest rates' increasing.

In addition, as an exchange-traded security on the New York Stock Exchange, MTPs offer daily liquidity to investors typically within 30 days of issuance, as well as the ability to sell the security above or below par, depending on secondary-market demand. To date, all Nuveen MTPs are trading above their $10 par value, an indication of strong secondary demand and contrary to the equity of a closed-end fund, which typically trades at a discount.

Why aren't all fund sponsors issuing MTPs or similar securities?

The MTP yield is about five to six times that of the ARS current yield. Because of this increase in cost of leverage, the equity holders of the closed-end fund bare the increased cost.

Long-term equity holders who believe that short-term rates will rise sharply in the near term should welcome the issuance of MTPs.

Obviously, some fund sponsors, such as BlackRock Inc. and Pacific Investment Management Co. LLC, don't share that view, as both firms have been reluctant to using alter- natives to refinance outstanding auction-rate securities. Their case is valid from the perspective that either the fund must take on increased-interest-rate risk or credit risk, or be in the position of earning a negative carry, until yields increase enough to out-earn the cost of leverage.

Patrick W. Galley is the chief investment officer of RiverNorth Capital Management LLC. The firm specializes in quantitative and qualitative closed-end-fund strategies, and is the investment adviser to the RiverNorth Funds.

April 11, 2010

Schwab continues to assert its innocence in ARS case

Firm seeks dismissal of charges; N.Y. attorney general Cuomo presses on
By Jed Horowitz of InvestmentNews

The Charles Schwab Corp. continues to dig in its heels over New York Attorney General Andrew Cuomo's claim that it sold auction-rate securities to investors fraudulently.

Although 14 securities firms have reached settlements with Mr. Cuomo and dozens have settled with other regulators over alleged sales abuses in the auction-rate market, Schwab is seeking dismissal of the complaint that New York filed last August, according to a person close to the case who was not authorized to discuss the issue.

Schwab lost an attempt earlier this year to move the case to federal court from New York State Supreme Court, where Mr. Cuomo has more leeway to press his claims.

Mr. Cuomo, a likely candidate for New York's 2010 Democratic gubernatorial nomination, has charged Schwab with misleading clients into thinking that auction-rate securities were as liquid as money market funds, even after the auction-rate market froze in February 2008, the person said.

Sarah Bulgatz, a spokeswoman for Schwab, declined to comment. A spokesman for Mr. Cuomo didn't return calls seeking comment.

Schwab, a so-called downstream seller of auction-rate securities, was less involved in the market than the organizers of the auctions, The Goldman Sachs Group Inc. and UBS AG.

Although other downstream firms, including Oppenheimer & Co. Inc., have reached multimillion- dollar ARS settlements with regulators, Schwab is taking an unusually aggressive stance in asserting its innocence.

The auction-rate market collapsed in February 2008, leaving thousands of investors unable to redeem billions of dollars of securities marketed as being highly liquid.

Lawyers and securities analysts contend that Schwab is less worried about the financial damages that it could suffer from lawsuits than about the consequences of allowing outsiders to dictate how it operates its business.

In a Wall Street Journal Op-Ed last summer, founder Charles R. Schwab waved the flag of investor choice and suggested that regulators and litigators trying to hold his firm responsible for those choices jeopardize the integrity of the discount-brokerage model.

Some 90% of Schwab clients who bought auction-rate securities, which paid slightly higher interest rates than money market funds, actively requested the instruments, he wrote.

“Unfortunately, we are now seeing a conscious effort to limit — if not eliminate — all risks for the individual investor, whether through consumer "protection,' fiduciary liability for brokers or the threat of litigation that attempts to make our firm, and others like us, more like an insurance company than a broker,” Mr. Schwab wrote. “The logical outcome would be that individual investors would be constrained to a small set of plain-vanilla investments — Treasuries for all — or would be forced to pay us a fee to manage their account.”

TD Ameritrade Holdings Inc., another discount firm that argued that it shouldn't be liable for selling auction-rate securities that it didn't help create, last year agreed to repurchase some $400 million of frozen securities.

“We decided to put this behind us and move the organization forward,” chief executive Fred Tomczyk said in an interview at the time. He cited a desire to stanch negative publicity and stem lawsuits.

TD Ameritrade recently said that investors have redeemed only about $300 million of the securities.

When Mr. Cuomo sued Schwab, some analysts estimated that its clients were holding less than $200 million of auction-rate securities, a relatively small amount by comparison with many competitors' exposure and with the company's $5.1 billion of equity capital. However, Schwab's tenacity could incrementally hurt its capital base, along with its reputation, at a time when it is facing other legal battles, lawyers and analysts said.

“Schwab's position may indeed be appropriate, given its discount model and its non-originating role for the ARS product,” said Bill Singer, a plaintiff's attorney at Stark & Stark. “But my caution to the Street is simple: You all need to rebuild the public's confidence in your integrity. Think carefully about when and where you choose to play hardball.”

Alex Neihaus, an individual investor who said that he is stuck with $75,000 of auction-rate securities purchased from Schwab after selling the bulk of his position, argued that the firm is “hiding behind principle” in refusing to settle.

“It's so minor that they could make people like me go away for almost nothing,” he said. “But their marketing and salespeople have no ethics.”

Mr. Neihaus said that Schwab forced him to close his account after he attacked the firm on his blog and in newspaper interviews.

Ms. Bulgatz declined to respond to Mr. Neihaus' comments.

Schwab's stance is “more about the principle” than the money, said Richard Repetto, an analyst at Sandler O'Neil & Partners LP. In an April 1 report, Sandler O'Neil warned of a potentially more serious capital issue stemming from Schwab's legal battles over its YieldPlus mutual funds.

The Securities and Exchange Commission is weighing a lawsuit over the marketing of the funds, which were heavily concentrated in uninsured mortgage-backed securities and which plummeted in value during the market collapse of 2008 and 2009.

A judge in the U.S. District Court for the Northern District of California ruled March 30 that Schwab illegally boosted YieldPlus' mortgage-backed holdings without getting shareholder approval. Schwab also faces arbitration claims and class actions from investors who allege that it marketed YieldPlus as a conservative investment.

The litigation could end up costing Schwab $400 million, resulting in a capital hole of $385 million to $635 million, Mr. Repetto wrote in his April 1 report.

“There are far too many variables and unknowns in the equation at this time to be able to draw these particular conclusions,” Greg Gable, a Schwab spokesman, wrote in an e-mail at the time.

Dan Jamieson contributed to this story.

E-mail Jed Horowitz at

February 25, 2010

Investors Say Auction-Rate Pacts Come Up Short

NEW YORK -- Two recent deals with regulators will ease the woes of some Oppenheimer & Co. clients stranded in illiquid securities, but offer little more than promises to some higher-net-worth investors more than two years after their troubles began.

Among those investors is Rick Polisky of Los Angeles, who's still holding between $12 million and $13 million in auction-rate securities he purchased through Oppenheimer. He's fuming that neither deal will help him.

A conversation with his broker's supervisor at Oppenheimer, a unit of Oppenheimer Holdings Inc. (OPY), left Polisky believing that it could take years before his shares are redeemed.

Oppenheimer clients have a total of $800 million to $950 million outstanding in auction-rate securities, which are debt instruments whose interest rates are meant to be reset periodically at auctions. The market seized up in February 2008 as the credit crisis spiraled, leaving investors locked into long-term investments that many brokers promoted as safe and liquid.

On Wednesday, Massachusetts announced an agreement with Oppenheimer to make redemptions over the next year to 60 of the 70 residents of that state with money tied up in auction-rate securities. Each of those benefiting from the agreement has less than $2 million invested, and the total settlement will be $4.3 million.

William Galvin

"This was the best arrangement we could get with Oppenheimer that gave the most people their money back," a spokesman for Secretary of the Commonwealth William Galvin's office said Thursday.

The office considers the matter settled, and a March 1 hearing on fraud charges against Oppenheimer is now off, a spokesman said. The agreement does stipulate that, should another regulator reach a better deal with Oppenheimer, those terms would also apply to Massachusetts residents.

A day before that settlement, Oppenheimer reached terms with New York Attorney General Andrew Cuomo, promising to provide $31 million in liquidity to some auction-rate shareholders. Cuomo's office called it a first step, noting that the face value of customers' frozen securities "exceeds the resources" Oppenheimer can pledge for a buy-back under regulatory requirements. Oppenheimer committed to additional buy-back offers if and when it obtains additional capital or access to credit, it said.

Under the Cuomo settlement, more than 1,246 accounts nationally and 230 accounts in New York can obtain an immediate buy back. All individuals, charities and small businesses with accounts of less than $1 million at Oppenheimer will be eligible for $25,000 in liquidity; that includes 43 of the Massachusetts accounts mentioned in the Galvin agreement.

That helps some smaller investors, but doesn't do much for those with more significant sums, says Todd Higgins, a managing partner at New York-based Crosby & Higgins LLP. He is counsel in five auction-rate-securities-related arbitration cases against Oppenheimer, all for clients with more than $1 million invested.

Higgins says he understands Oppenheimer's need to balance investors' needs with its own financial position. Still, "I can understand how a client would have a very bad taste in their mouth right now, when Oppenheimer doesn't stand up and take responsibility," he said.

As part of the New York settlement, Oppenheimer neither admitted nor denied allegations it misrepresented the securities during sales. However, Oppenheimer has previously denied the allegation. Cuomo's office agreed to suspend its probe of Oppenheimer for now, but could still bring charges if Oppenheimer doesn't make enough of an effort to help investors.

The attorney general's office said Thursday that its investigation of the auction-rate securities issue is still ongoing. It had no further comment.

An Oppenheimer spokesman said the settlement recognizes the importance of using its available funds. It "begins to remove a large issue for the company," which can continue to conduct its day-to-day business, he said.

That's little consolation for Barry Rosenbloom, a New York resident with seven figures stranded in auction-rate preferred securities at Oppenheimer. Rosenbloom expects nothing from the settlement, and has no idea how long he'll have to wait.

"From one side of its mouth, [Oppenheimer's] saying, "We're a rock solid company,'" Rosenbloom said. "Then you say, "Redeem my ARPS," and it says, "We don't have enough money to do that; that would put us under.'"

The settlement commits Oppenheimer to a financial review every six months to see if more funds are available, in light of financial and regulatory capital constraints, to make additional purchase offers to investors. The company must report to Cuomo's office on those reviews.

--(Daisy Maxey is a Getting Personal columnist who writes about personal finance. She covers topics including hedge funds, annuities, closed-end funds and new trends in mutual funds, and can be reached at 212-416-2237 or at

February 12, 2010

Financial Perversions Sold During Credit Boom

Would you buy a “XXX” security?

Those securities do exist, providing evidence of the perversion of finance during the credit boom that ended so abruptly in 2007 and 2008.

That perversion was not of the type you might associate with the label XXX. The letters instead refer to the number of a regulation that insurance companies found inconvenient, and wished to get around.

Here are some of the features that make XXX securities memorable:

¶ They were based on the assumption, endorsed by the bond rating agencies, that insurance regulators were requiring life insurers to retain too much capital.

¶ Therefore, investors could take on a large part of the risk of the insurance with complete safety. That would be only the “excess” part, as calculated by the insurance company

¶ The securities were sold as virtually risk-free cash equivalents, enabling the investor to get out, at par, once a month. Supposedly sophisticated investors sank more than $30 billion into them.

¶ The securities were explained in complex prospectuses that almost nobody even obtained, let alone read.

¶ They were guaranteed by bond insurers, like Ambac, further persuading people there was nothing to worry about.

There was, it turns out, plenty to worry about. Espen Robak, the president of Pluris Valuation Advisors, says some of the securities are trading from 5 to 28 cents on the dollar.

The continued existence of these securities provides a reminder that the auction-rate securities market, which collapsed two years ago, is not going to go away. Low-yielding securities remain on the books of unfortunate investors or the brokerage firms that were forced to buy back the securities from some, but often not all, of their customers. Some of these investments will be around for decades, offering a reminder of a time of financial folly.

To make it even more galling for the investors, the brokerage firms that sold the paper to them get additional payments from the issuer every time there is a failed auction.

Auction-rate securities were supposed to accomplish the magic of allowing borrowers to get long-term money at short-term rates. They accomplished that by holding Dutch auctions, usually every week or month, to set the yields for the next period. There were penalty rates to be imposed if auctions failed, which were supposed to assure that borrowers, if they remained creditworthy, would refinance the debt.

We now know that for months the auctions were becoming harder and harder to complete. The Wall Street firms that had underwritten the securities put in their own bids to prevent failure, while at the same time stepping up marketing of the securities. Finally, in the Valentine’s Week massacre of 2008, virtually all firms stopped supporting auctions. The market collapsed.

Since then, there has been a gradual shrinkage of the market. More than 80 percent of the $165 billion of municipal auction-rate securities have been redeemed, but just a quarter of the $85 billion in student loan paper has been redeemed. The other major market was auction-rate preferred securities, often issued by closed-end mutual funds. About half the $60 billion of those has been retired, according to Pluris figures.

Then there is the toxic part of the market. That includes the XXX debt.

Regulation XXX, as issued by insurance commissioners, required life insurers to use government mortality tables when they calculated how much they needed to keep in reserves. The insurers deemed that unreasonable because they did not insure just anyone. They excluded those who might be greater risks. So they should be able to hold lower reserves than the rules required.

Wall Street came up with a way to lay off the excess risk onto a nonrecourse company. That company would be financed by investors who bought an array of auction-rate securities that reset every month.

Unfortunately for the investors, if too many people died, and the reserves were not really excess, the original insurance company could grab the cash. That protected policyholders, but it made the investments risky.

After the auction-rate market froze, holders of securities began to try to find out what they owned, and what it was worth. That turned out to be difficult.

Most of the holders, Mr. Robak said, “could not produce prospectuses.” It had never occurred to them to get such documentation on what they thought was a cash equivalent investment. So they called the brokers who had sold the securities, and found they did not have them either. Finding them took time.

The prospectuses now provide an incredible and perplexing reading experience.

Take one of the larger issuances, for something called Ballantyne Re, an entity set up in Ireland by Scottish Re to spare it the need to hold those “excess” reserves. A 2006 offering underwritten by Lehman Brothers raised $1.65 billion in nine different classes of securities.

One tranche of that issue, originally rated AAA by Moody’s, Fitch and Standard & Poor’s, now has a CC rating from S.& P., which is about as low as you can go before default. The other agencies have withdrawn their ratings. Pluris values it at 14 cents on the dollar. It is making full payments only with help from the bond insurer Ambac, which itself is in trouble.

I have read a lot of prospectuses over the years, but I cannot recall any as baffling as this 240-page document. The purchasers of the securities may be just as well off for not having read it, although perhaps the sheer complexity would have led them to wonder whether they really wanted to invest money on terms that would yield no more than two percentage points over one-month Libor, a total now under 2.3 percent.

The prospectus includes complicated diagrams of how the cash would flow and page after page of sometimes opaque risk factors. But my favorite part is an analysis by Milliman, an actuarial firm. It was provided by Ballantyne to help investors weigh the likelihood that the insurance policies would perform as expected — that is, whether the “excess” reserves really were excess.

“In order to fully understand this report,” Milliman cautioned, “any user of the report should be advised by an actuary with a substantial level of expertise in areas relevant to this analysis to appreciate the significance of the underlying assumptions and the impact of those assumptions on the illustrated results.”

In other words, the expert tells you that you cannot hope to understand his work unless you hire your own expert. Would you need to hire another expert to understand that expert’s work?

Imagine some future doctoral student in financial history coming across this prospectus and trying to understand why anyone would have bought the securities.

He or she is likely to be puzzled. The potential upside was minimal; the potential downside was immense.

If the Ambac guaranty somehow turned out to be less than solid, there were a lot of things to be considered. Factors that would determine whether the securities would pay off, the prospectus helpfully said, “include, but are not limited to” whether assumptions were correct about mortality, future interest rates, investment performance and policyholder decisions to cancel or replace policies.

Why did the securities sell? Not because of anything in the prospectus. The securities promised a little better yield than other AAA-rated paper. That mattered to some money managers and corporate treasurers. Anyway, they were told by brokers, they could always sell at the next auction, for full face value. Why waste a lot of time evaluating a one-month investment?

Only after disaster struck did people start to find out what they had bought. The lucky ones had municipal paper that would be redeemed within a year of two. The unlucky ones had XXX securities.

It was an era of trust. Because that trust is not likely to return quickly, those who want to revive the securitization market have an uphill road ahead of them.

Floyd Norris comments on finance and economics in his blog at Copyright 2010 The New York Times Company


Oppenheimer did not issue auction rate preferreds securities, but it did sell a lot of them. It hasn't repaid any of them (or any we know of). And it probably never will. But it has been using repaying of ARPs to its long-suffering clients as an excuse. Read on.

February 11, 2010

Oppenheimer Frustrated At Elusive Auction-Rate Solution

NEW YORK (Dow Jones)--As many holders of auction-rate securities remain frustrated at their inability to find a way to sell the instruments, Oppenheimer & Co., which sold some of the shares, says it is frustrated, too.

The Federal Reserve Board's decision to close down the Primary Dealer Credit Facility appears to close off that facility as a potential liquidity pool, Oppenheimer said in a February update that some of its clients received.

Oppenheimer, a unit of Oppenheimer Holdings Inc. (OPY), had hoped that the facility, or a subsequent facility, would remain in place, it said in its update.

In an e-mail Thursday, the company said, "Oppenheimer is disappointed that the primary dealer credit facility, which may have provided liquidity to investors holding auction-rate securities, has been closed. We will continue to try and find a liquidity source for our clients holding auction-rate securities."

Oppenheimer previously said it spent time, effort and money to build a government-securities trading business to qualify as a primary dealer in the hopes of attaining a liquidity facility from the Federal Reserve Bank of New York.

In its update, Oppenheimer said it understands the frustration of its clients whose funds are trapped by the continued failure of the auction-rate securities market. "We remain equally frustrated at our inability to find a liquidity solution, or a means to compel issuers or underwriters to redeem or otherwise provide liquidity for these securities," it said.

The once $330-billion auction-rate market froze in February 2008 as market participants stopped buying the securities as the credit crisis intensified.

Oppenheimer has pursued "virtually every avenue we could to find a solution to the problem," and can't offer potential solutions other than the continued redemption by issuers and its continued efforts to convince legislators and other government officials of the need for a government-sanctioned solution to the liquidity issue, it said in its most recent update.

The company has been pressing issuers to redeem or otherwise liquidate
auction-rate securities and has made a claim against several of the lead underwriters, alleging that the underwriters should be required to make any required restitution "since they (along with the issuers) artificially supported the auctions," it said.

Some issuers of auction-rate preferred securities, such as Nuveen Investments (JNC), continue to actively pursue redemptions with the issuance of alternative securities to replace the shares, Oppenheimer noted.

In December, Nuveen announced that it had arranged up to $2.5 billion in liquidity support from three major financial institutions for its leveraged municipal closed-end funds to issue variable rate demand preferred shares, which include an unconditional "put" feature backed by a major financial nstitution.

Bill Adams, executive vice president at Nuveen, said Thursday that the asset manager continues to make progress and expects to issue the VRDPS through private offerings early this year.

Fifteen Nuveen funds have also issued MuniTerm Preferred shares, a fixed-rate form of preferred stock with a mandatory redemption period, totaling more than $600 million, which has permitted the funds to redeem 50% to 100% of their ARPS, Adams said. In addition, as many as 20 Nuveen funds have registered to issue MTPs, subject to market conditions, he said.

Nuveen's funds had $15.4 billion of ARPS outstanding when the markets seized up in 2008 and have redeemed $7.1 billion of that. The company remains committed to its goal of refinancing 100% of the APRS issued by its funds in a way that is to the long-term benefit of the funds' common shareholders, Adams said.

Oppenheimer also said it will continue to work with regulators to resolve outstanding issues and investigations, but added that any resolution will depend on acknowledgment of its financial and regulatory constraints and "the resulting limited amount of liquidity available" to it to address the issue. "At present, Oppenheimer does not have the financial capacity to repurchase, within [Securities and Exchange Commission] capital requirements, a significant amount of its clients' ARS without" a liquidity pool, it said.

Thursday, January 28, 2010

DJ Hearing Delayed On Oppenheimer's Auction-Rate Share Sales

NEW YORK (Dow Jones)--An administrative hearing on fraud charges filed in Massachusetts against Oppenheimer & Co. over the sale of auction-rate securities has been postponed until March 1.

To the exasperation of shareholders, it's at least the fourth time the hearing has been postponed. Once set for Nov. 4, it was pushed back to Nov. 16, then delayed again until Dec. 8, then postponed until Jan. 25.

The latest delay occurred because one of the parties requested it, according to a spokesman for the office of Secretary of the Commonwealth William Galvin. The spokesman declined to elaborate.

The Massachusetts complaint, filed in November 2008 by Galvin's office, charges that Oppenheimer "significantly misrepresented not only the nature of ARS, but also the overall stability and health of the ARS market when marketing the product to clients."

Oppenheimer did not immediately return a call seeking comment Thursday.

The company has previously said that the allegations have no basis in fact or law, and that it intends to vigorously defend itself.

Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction. Financial advisers promoted the securities as safe, liquid instruments, but the $330 billion market seized up in February 2008 as credit markets tightened and left investors stranded.

In a January update that some Oppenheimer clients received, it said it has been actively seeking a solution, including pressing issuers of the shares to redeem or otherwise liquidate the shares, which has met with limited success.

"We have made a claim against several of these lead underwriters in a legal proceeding in which we allege and believe, that the underwriter, as opposed to Oppenheimer, should be the entity required to make any restitution required since they (along with the issuers) artificially supported the auctions," Oppenheimer said in its update.

Oppenheimer has been subject to ongoing investigations in connection with the securities, with which it is fully cooperating, by the Financial Industry Regulatory Authority and various state regulators, it said.

At present, Oppenheimer does not have the financial capacity to repurchase, within Securities and Exchange Commission capital requirements, a significant amount of its clients' ARS without access to a lending facility or pool of liquidity, it said in its January update.

Oppenheimer began in June 2009 to build a government securities trading business to qualify as a primary dealer with the Federal Reserve Bank of New York in the hopes of attaining a liquidity facility from that institution, the company said. However, despite spending a significant amount of time, effort and money to build that business, it has not yet been successful in being appointed a primary dealer.

Two developments may affect its ability to become a dealer and access a liquidity pool to buy back the securities, it said. In December, the Federal Reserve Board said it will begin in February removing programs that were instituted to deal with the emergency conditions associated with the credit crisis, and mentioned the Term Asset-Backed Securities Loan Facility, the primary dealer credit facility and others, the company said.

In addition, on Jan. 11, the Federal Reserve Bank of New York published a revised policy for the administration of primary dealers. Foremost among the requirements for eligibility to be appointed a primary dealer are a minimum net capital standard, which was raised to $150 million from $50 million and a "seasoning" requirement that was increased to a minimum of one year, Oppenheimer said. Based on the fact that its participation in Treasury auctions began in June 2009, Oppenheimer believes the new requirements may mean that its application to be a primary dealer won't be considered until at least June 2010, it said.

Tuesday, January 20, 2010

Citi Settles $72 Million Lawsuit Involving Auction Rate Securities
Posted by Page Perry LLC on Investment Fraud, Lawyer Blog

Two months ago we reported that Citigroup Global Markets, Inc. had asked a New York court to dismiss a $72 million lawsuit filed against it by KV Pharmaceutical Co. Last week it was announced that Citi had agreed to settle with KV.

In its complaint, KV alleged that it was left holding $72 million in illiquid auction rate securities after the auction rate securities market collapsed in early 2008. While Citi has already agreed to regulatory settlements requiring it to pay hundreds of millions of dollars to redeem auction rate securities held by individual investors, most corporate and institutional investors were not covered by the regulatory settlements—although in an SEC consent order, Citi did agree to help all investors get liquidity on their securities whether they were subject to redemption under the settlement or not. While Citi has defended suits against it by claiming that investors were not defrauded by Citi’s representations and they did not suffer any economic harm from the loss of liquidity, they have settled cases.

Auction rate securities (ARS) are debt instruments – usually municipal bonds or preferred stock-- for which interest is regularly reset through a Dutch auction. Auction rate securities were once routinely marketed as safe, cash equivalents that were highly liquid, but the broker-dealers who sold them failed to disclose that liquidity was entirely dependent upon the success of the auction process, which was being artificially supported by the undisclosed participation of brokers bidding in auctions where they had an interest. Auctions were held every 7 to 35 days by the brokerage firms that dealt in auction rate securities, but because of the subprime lending crisis and its effect upon the financial markets, ARS auctions ground to a halt in February 2008 because they were no longer viable investments and broker-dealers who had previously propped up the market by bidding in their own auctions were no longer inclined to invest in them. The result has been that ARS holders have been unable to cash out even at a loss, and investors who were led to believe that they were purchasing cash equivalents have learned that they essentially have no liquidity at all.

According to Craig T. Jones, an attorney with the Atlanta law firm of Page Perry LLC who is representing several investors in auction rate securities cases, “Citigroup is not alone because this was a flawed product that was misrepresented by everyone involved in the auction rate market. But not everyone is settling these cases.” Jones points out that the statutes of limitations in some states are now beginning to bar claims relating to the sales of auction rate securities. “It is important that anyone who invested in a auction rate securities that are still illiquid get a lawyer and make a claim as soon as possible,” he says. “Once the legal deadlines expire, it will be too late.”

Most of Jones’ auction rate securities clients are filing arbitration claims due to mandatory arbitration clauses in brokerage contracts, which generally take less time to resolve than lawsuits filed in court. “Some of the cases we have filed have already settled,” says Jones, “while I know other investors who have not pursued claims that are still waiting for something to happen. You know what they say about the squeaky wheel getting the grease.”

There is a secondary market for failed auction rate securities, and Jones’ firm has advised several investors to sell their securities at a discount. If they are able to do so, they at least obtain partial liquidity and can take a loss for the difference. That loss enables them to fix the amount of their damages if they make a claim, plus they can seek consequential damages if they can show that they have incurred costs or lost business opportunities as a result of being unable to cash out sooner. Most investors are also claiming attorney’s fees and punitive damages, which are only awarded for willful and reckless misconduct. While punitive damages are rare in arbitration, which is where most claims against broker-dealers get decided, “the facts in these case cry out for a significant punitive award,” says Jones. “We are preparing each of our cases not just to win compensation for our clients, but to send a message to the financial industry that the types of abuses that occurred in the auction rate market will not be tolerated.” Jones’ firm, Page Perry, is based in Atlanta but represents investors in securities fraud cases all over the country.

Monday, January 5, 2010

Tom James apologizes for auction rate security purchases
Tampa Bay Business Journal - by Margie Manning Senior Staff Writer

Clients of Raymond James Financial Inc. have substantially reduced their holdings of auction rate securities.

The firm’s clients currently own about $1 billion in auction rate securities and auction rate preferred securities, less than half the $2.3 billion in securities they owned as of Feb. 12, Thomas James, chairman and chief executive, wrote in a Jan. 2 letter.

Auction rate securities are investment vehicles whose interest rates are reset through periodic auctions. In February, the auctions began failing en masse, meaning there were more sellers than buyers, and the securities became nearly impossible to trade.

It was the first time in almost 20 years that there was a significant number of failed auctions, James wrote in his letter, which was filed with the Securities and Exchange Commission Monday.

For clients who purchased the securities through Raymond James, “I apologize for being involved in your purchase of these securities,” said James.

Several firms, primarily underwriters of the securities, have begun to repurchase the securities, and James said he had hoped most of them would have been refinanced by now. However, the lack of liquidity and credit in the financial markets has yet to be alleviated in spite of regulatory efforts, James said.

James said Raymond James has not repurchased the securities it sold because it does not have access to the needed financing at this time to buy back anything near the $1 billion outstanding. However, he said the company might be able to get a bank loan to buy back the securities when it becomes a bank holding company, a process it expects to complete by June.

James also said that if the company could buy back the securities, regulators would not give Raymond James any “regulatory net capital” credit for the securities, because they are illiquid.

“The illiquidity of auction rate securities is one of the manifestations of the ‘perfect storm’ in the financial markets,” James wrote.

James also disclosed that he personally owned a large number of auction rate securities on Feb. 12, when the auctions failed, and still owns a large number. “We will redeem all customer holdings prior to redeeming the holdings of our employees,” he said.

Meanwhile, the securities are well-collateralized with plenty of coverage to pay their appropriate returns, and in most cases, clients are receiving a higher rate of interest than the contract rate, he said.

Raymond James Financial (NYSE: RJF) is a financial services firm headquartered in St. Petersburg.

December 29, 2009

Stifel reaches auction-rate securities settlement

ST. LOUIS (AP) - Financial services firm Stifel Nicolaus & Co. will complete the buyback of auction-rate securities from individual investors six months early under a settlement reached Monday with Missouri and other states.

The regional brokerage and financial services firm based in St. Louis will return up to $41 million to investors by the end of 2010, with everyone to be paid in full by the end of 2011.

Stifel had originally set a deadline of June 30, 2012, to buy back all auction-rate securities held by its retail investors who bought them prior to the February 2008 collapse of the market for the securities.

Missouri Secretary of State Robin Carnahan said 1,200 Stifel clients nationwide are owed a total of $180 million.

Partial payments will be made to investors as early as Jan. 15, said Carnahan, who oversees securities in the state.

"This is a win for investors, and we're pleased to have helped investors get their money back a lot sooner," she said.

The settlement resolves lawsuits or other complaints by Missouri, Indiana, Colorado and other state members of the North American Securities Administrators Association, a Stifel spokesman said.

The settlement announced Monday also requires Stifel to hire a securities-industry expert to oversee its employee training, marketing and selling of nonconventional financial products, so that customers can better understand their potential risks.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions, some as frequently as once a week.

Many investors bought the securities believing they were similar to a money market, a traditionally safe and liquid investment. But they found their funds frozen when the ARS market fell apart last year amid the downturn in the broader credit markets.

A dozen banks and investment firms have agreed to buy back the securities.

Stifel announced a voluntary plan in February to buy back all auction-rate securities held by individual investors. The firm called Monday's settlement a "significant enhancement" over the voluntary plan.

Under the settlement, Stifel also must work with a bank to loan money to affected investors who need immediate cash. The firm also must pay a $525,000 penalty that will be shared by states participating in the NASAA settlement. Stifel also must pay $250,000 to Missouri and $25,000 to Indiana for their costs to investigate the case.

Those eligible for a buyback are investors who bought ARS through Stifel before the securities' collapse and continue to hold them at Stifel.

December 17, 2009

Don't Believe Your Lawyers
by Harry Newton

Here's what we know about lawyers:

1. Most know nothing about auction rate preferreds. They're reluctant to get involved with them because:

2. Most think the legal process is stacked against them and their client -- the one stuck in ARPs. They're right. When you sign up with a broker, they get you to sign a sneaky little agreement that says if anything happens your problem will go to arbitration, not to the courts.

Arbitration is heavily stacked against , you and us, the common investor. You have a greater chance of getting away with killing your wife or husband than winning in investor arbitration.

Most lawyers don't like dealing with clients who are confused, gutless and intimidated by the brokerage firms -- as most are today.

Stop calling us with your woes. We've spent months filling this column with useful advice. Follow it.

By the way, we figure $160 billion of ARPs still have not been redeemed.

How big is that? That's 20% of the $787 billion TARP money. If that $160 billion were returned to its rightful owners and spent, it could create a heck of a lot of jobs.

Why hasn't Washington paid ARPs any attention? Because you -- the ARPs owners -- have done nothing. See above about being confused, gutless and intimated.

Sorry for the blunt language. We write it as we see it.

December 15, 2009

Karpus Flexes Muscle On Auction-Rate Shares
By Daisy Maxey

NEW YORK (Dow Jones)--Only months after pressuring one closed-end fund to buy back its outstanding auction-rate preferred shares, activist investor Karpus Investment Management is flexing its muscle with another fund.

Karpus, a Pittsford, N.Y.-based investment manager, has been buying up auction-rate preferred shares of Kayne Anderson MLP Investment Co. (KYN) and now holds 31.5% of its outstanding auction-rate preferred shares. Disappointed that the fund hasn't announced a plan to buy them back, Karpus recently told the fund that it plans to nominate Phillip Goldstein, activist and principal of Bulldog Investments, a Purchase, N.Y., hedge fund, to serve as a preferred-share director on the fund's board.

The term of the current preferred-share director expires at the fund's annual meeting in June. The position is elected by preferred shareholders, so Karpus, with its chunk of those shares, has a good chance of getting its candidate chosen.

According to regulatory filings, most of the remainder of the fund's outstanding auction-rate preferred shares are in the hands of big brokerages, with only about 9% in the hands of retail investors, said Cody Bartlett, managing director of investments at Karpus.

"We are disappointed that the fund has not publicly announced any intent to consider providing liquidity to its auction-rate preferred shareholders, despite having completed a private placement of $110 million of senior unsecured fixed- and floating-rate notes that the fund indicates will be used to repay 'certain of the company's current borrowings,'" Bartlett said in a letter Monday to David Shladovsky, chief compliance officer at Kayne Anderson MLP Investment Co.

In June, another closed-end fund, First Trust/Four Corners Senior Floating Rate Income Fund (FCM), made a tender offer to buy back its outstanding auction-rate preferred shares after Karpus notified the fund that it planned to nominate Goldstein and Brad Orvieto, president of Strategic Asset Management Group., to serve as preferred directors.

In an interview, Bartlett noted that Tortoise Energy Capital Corp. (TYY), another closed-end fund with an investment objective similar to that of Kayne Anderson MLP Investment, recently announced plans to redeem all of its outstanding auction-rate shares, using a credit facility and proceeds from the issuance of mandatory redeemable preferred shares.

"It's an option certainly that Kayne {Anderson} has at their disposal, or a tender offer is another option," Bartlett said.

KA Fund Advisors LLC, the fund's adviser, had no comment on Karpus's move or on any efforts to redeem the fund's auction-rate preferred shares.

For years, closed-end funds issued auction-rate preferred shares to boost income for common shareholders. In February 2008, buyers pulled back from the auctions, leaving many investors stranded.

Karpus nominated Goldstein because he was elected to the board of the Insured Municipal Income Fund (PIF) this summer and immediately redeemed that fund's auction-rate preferred shares, Bartlett said.

"He has a track record of addressing the ARPS problem quickly," said Bartlett.

Karpus, which has a track record of activist investing, has been buying up shares of Kayne Anderson MLP Investment on the secondary market for a little more than a year at between 65 cents and 87 cents on the dollar, and now holds about 946 shares worth $23.65 million at par value, Bartlett said. Kayne Anderson MLP Investment has $1 billion in net assets.

December 18, 2009

Buyers For Auction-Rate Shares Still Emerge,
By Daisy Maxey

NEW YORK (Dow Jones)--More hedge funds and other investors are gambling on the potential for profits in certain auction-rate securities, more than a year-and-a-half after the market failed en masse.

In some cases, activist investors are buying up the shares at discounts on secondary markets, then pressuring funds to buy them out at or near par. Investors are seeking advantange in a market where many investors feel trapped and are struggling to trade in or establish a value for their illiquid securities.

Financial advisory firm Duff & Phelps, which has been helping a variety of investors, mostly companies, value their auction-rate securities, is seeing increased interest in buying the shares at discounts, said Dwight Grant, managing director in the firm's San Francisco office and part of its financial engineering practice.

Auction-rate securities are bonds with interest rates meant to be reset periodically at auction. Many financial advisers promoted them as liquid, but the $330 billion market seized up in February 2008 as credit markets tightened and auctions attracted no bidders. That left investors stranded.

Some investors can afford to hold their auction-rate shares until a solution, and those aren't likely to sell for much less than 90 cents on the dollar, Grant said. Others need the money more urgently. Potential buyers are examining those holdings and, in some instances, offering 70 cents on the dollar with the expectation that they will have to hold the shares for two to three years before selling them.

"There clearly is an acquisition market," and purchases are happening even more frequently now, he said. Some hedge funds are carefully "identifying securities that they believe have particularly desirable characteristics," Grant said.

"There's a great uncertainty around exit and it's going to vary a great deal by issuer, but it is occurring," he added. As shares are redeemed, more of the securities will be concentrated in the hands of large institutions, which have an interest in getting the issue resolved, and can go directly to the issuer and try to work out solutions, he said.

Maury Fertig, chief investment officer at Northbrook, Ill.-based Relative Value Partners, which oversees $400 million in customized accounts for wealthy families and small institutions, has purchased about $55 million in auction-rate securities issued by closed-end funds, mostly Nuveen Investments, some at 70 cents on the dollar. He has made purchases as recently as last week, and has had about $15 million of the shares redeemed at par. He's confident there'll be more redemptions in 2010.

"It's going to be a slow, steady climb in terms of redemptions," he said.

A key factor in valuing auction-rate securities is the formula that determines the maximum rate its issuer will have to pay shareholders when auctions fail. Some are tied to the London Interbank Offered Rate, an interest rate at which banks can borrow, and others have multiple indexes, Grant said.

After getting a handle on the formula, Duff & Phelps attempts to determine the spreads on illiquid auction-rate shares by looking at trading in the comparable securities. The most challenging piece of the valuation puzzle, though, is determining how long the shares will be outstanding, Grant said. Perpetual preferred shares, for example, have no fixed maturity date.

"Early on, we were trying to gauge what the response was likely to be from various issuers," he said. "We did not think these things would be outstanding forever, but at this point, you might say we got it closer for BlackRock [Inc.] (BLK) than we did for Oppenheimer [& Co.]. You have to have some sort of life expectancy in order to come up with some sort of value."

BlackRock has redeemed many of its clients' auction-rate shares using tender option bonds and other vehicles. Oppenheimer said recently that it's continuing to explore options to help its clients liquidate their holdings.

(Daisy Maxey is a Getting Personal columnist who writes about personal finance. She covers topics including hedge funds, annuities, closed-end funds and new trends in mutual funds, and can be reached at 212-416-2237 or at

November 19, 2009

DJ Hearing On Oppenheimer's Sale Of Auction-Rate Securities Delayed
By Daisy Maxey,, Dow Jones Newswires

NEW YORK (Dow Jones)--An administrative hearing on fraud charges filed in Massachusetts against Oppenheimer & Co. over the sale of auction-rate securities has been postponed until Dec. 8.

The hearing, set for Nov. 16, was pushed back due to various motions in the case. The hearing, which had been previously set for Nov. 4, has now been postponed at least twice.

"Oppenheimer continues to explore a range of options in helping its clients liquefy their holdings of auction-rate securities, and has been doing so since the market-makers ceased their intervention in this market last spring, sending the clients of downstream brokers, such as Oppenheimer and Raymond James, intoilliquid positions," a spokesman for Oppenheimer said Thursday.

The Massachusetts complaint, filed in November 2008 by Secretary of the Commonwealth William Galvin, charges that Oppenheimer "significantly misrepresented not only the nature of ARS, but also the overall stability and health of the ARS market when marketing the product to clients." It also alleges Oppenheimer executives and ARS department personnel sold their own ARS as they learned that the market was in danger, but failed to disclose that information to investors.

The charges were brought by the Enforcement Section of the Massachusetts Securities Division of the secretary's office.

Oppenheimer has said that the allegations have no basis in fact or law, and that it intends to vigorously defend itself. The firm sold auction-rate securities in the same manner as the entire brokerage industry -- "as a cash management tool similar to a money-market fund," it said earlier in an emailed statement.

"Oppenheimer and its executives, like dozens of other 'downstream' brokerages nationwide, had no knowledge of the conduct of the major institutions which caused the entire auction-rate securities market to collapse," the statement said.

Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction. Financial advisers promoted the securities as safe, liquid instruments, but the $330 billion market seized up in February 2008 as credit markets tightened and left investors stranded.

Oppenheimer also said previously that "while there were sales by executives of auction-rate securities, there were also executive purchases during this period, and these same executives continue to hold millions of dollars of auction-rate securities (a fact oddly omitted from the complaint)."

Big banks that underwrote the offerings came under pressure from regulators and bought back the auction-rate securities. However, many of the banks and brokerages that resold the securities, but didn't do the underwriting, fell through the cracks in those buyback deals, and billions in auction-rate securities remain in the hands of investors.

November 19, 2009

Wells Fargo to return $1.3B to auction-rate investors
By Sara Hansard, InvestmentNews

Wells Fargo Investments LLC has agreed to return approximately $1.3 billion to investors who suffered losses in the auction-rate securities market, according to a statement released by the North American Securities Administrators Association this morning.

Well Fargo will also pay individual states a combined $1.9 million in penalties, according to the terms of the settlement the San Francisco-based banking company reached with NASAA.

The company allegedly misled clients by assuring them that auction-rate securities were a safe, liquid alternative to cash, certificates of deposit or money market funds, NASAA said in its statement.

Under the terms of the settlement, Wells Fargo agreed to buy back, at par value, all of the auction rate securities investors purchased through its brokerage before Feb. 13, 2008.

Wells has agreed to repurchase these securities by approximately April 18, 2010.

The company is also to reimburse some investors who sold their auction rate securities at a discount after the market failed, and consent to a special public arbitration procedure to resolve claims.

The auction rate securities markets froze in Feb. 2008, triggering complaints to state securities regulators from hundreds of investors who could not withdraw money from their accounts. At the time of the market failures, customers of Wells Fargo Investments held an estimated $2.95 billion in the products, NASAA said.

“Today's settlement demonstrates the value of states working in concert to benefit investors nationwide,” NASAA President and Texas Securities Commissioner Denise Voigt Crawford said in a statement. “State securities regulators continue to lead the effort to ensure that investors receive redemptions for their frozen auction rate securities, which were marketed as safe and liquid investments, and we will continue to seek much needed relief for investors who have suffered from the collapse of the ARS markets,” she said.

November 8, 2009

A Way Out of the Deep Freeze

FOR many holders of auction-rate securities — investments that Wall Street once peddled as safe, sound and as fully liquid as cash — life in the frozen zone drags on.

Not only are some brokerage firms still refusing to let customers redeem their securities — Oppenheimer and Raymond James are two examples — but also investors’ efforts to be repaid through class-action lawsuits are being stymied. Judges overseeing at least 23 auction-rate class actions have dismissed them in recent months, leaving investors who were hoping for some relief out of luck again. In September, one judge said the plaintiff was not specific enough in his allegations.

Municipalities, student loan companies, closed-end funds and tax-exempt institutions like hospitals and museums all issued auction-rate securities as either preferred shares or debt instruments to companies and individual investors. The interest rates that issuers paid investors were supposed to reset periodically, usually every week, in auctions overseen by the brokerage firms that sold the securities.

Problems in the market emerged in early 2008, when weekly auctions that allow investors to cash in their holdings simply stopped functioning. Wall Street firms sponsoring the auctions could no longer match buyers with sellers, and the machinery supporting the $330 billion auction-rate trade ground to a halt.

State securities regulators have forced some of the larger brokerage firms in the market to redeem their customers’ holdings, but not all investors have been so fortunate.

So what is an investor to do?

On the corporate side, a coalition of executives from 25 companies holding $8 billion in frozen auction-rate securities backed by student loans is arguing that if companies and individual investors could cash in those securities, jobs would be created, investments would be made and money would be spent.

The overall market for auction-rate securities backed by student loans is sizable: about $70 billion.

James Butkiewicz and William Latham, economics professors at the University of Delaware, estimated in research conducted for the coalition that 15,000 jobs and $2.3 billion in spending would be created for every $1 billion redeemed in auction-rate securities backed by student loans.

Michael J. Beyer, chief executive of Foresight Energy, a privately held company in Palm Beach Gardens, Fla., and a member of the coalition, says his company is stuck with $146 million in auction-rate securities. He has struggled to finance three mining projects his company has already begun in Illinois.

Foresight raised capital for the projects in late 2007 and parked the money in auction-rate securities in early 2008, just as the market was starting to shut down. Since then, it has tried to get the securities redeemed by Citigroup, the bank that recommended them. Citigroup refused, but gave Foresight a $100 million line of credit against the securities.

“We have been scrambling to find other alternative sources of cash,” Mr. Beyer said. “But at some point next year, we will end up short.”

Citigroup said in a statement that it had “worked diligently with issuers, investors and regulatory authorities” on the frozen auction-rate securities, adding that “We have made progress on our efforts to help provide liquidity to our clients and remain committed to continuing our work on these initiatives.”

Mr. Beyer says his coalition is trying to educate the Obama administration about the impact that this Wall Street failure has had on Main Street.

“Our goal is to show the administration that this is money that could be creating jobs in a high-unemployment area,” he said.

INDIVIDUAL investors, of course, don’t have the resources or reach of corporate coalitions, and their plight seems even more intractable given the host of recent court rejections.

Still, one promising road remains open to them: filing an arbitration case against the brokerage firm that sold them their securities. For a variety of reasons, such cases have been much more successful than the class-action matters have been. (An arbitration is a closed-door hearing overseen by a small panel of officials appointed by the securities industry itself.)

According to the Financial Industry Regulatory Authority, the large regulator that oversees investor arbitrations, almost 500 auction-rate claims have been filed by investors since the market seized up. A total of 253 are pending; 242 have been closed.

Only 17 claims went all the way through the process. Of those, investors won in four cases; a $400 million award was handed down by a panel in one matter.

But 146 of the 242 closed cases were settled by the parties involved in the dispute. Although the settlement terms aren’t public, lawyers who have handled these cases say that such deals typically involve refunding much, if not all, of investors’ money.

Some settlements also involved “consequential damages” — extra money awarded to cover investors’ costs or opportunities they missed because they didn’t have access to their funds. According to Finra, investors have filed 32 claims seeking additional damages in auction-rate cases that were settled through regulatory enforcement actions. Of those, 14 remain open and 9 were settled. Five cases that went through arbitration produced three victories for the plaintiffs.

It isn’t particularly surprising, legal experts said, that judges have rejected so many class-action suits. The legal hurdles that investors must clear under the Private Securities Litigation Reform Act of 1995 are far greater than those in arbitration, where the less arduous standard of “just and equitable principles of trade” is the guiding benchmark.

For example, investors in a class action must convince the judge that the brokers who sold them the auction-rate securities knew they were problematic — not an easy task. And investors filing a class action cannot begin to conduct discovery until their case has survived a defendant’s motion to dismiss. This makes it hard to plead the specifics of their case early on.

Protracted battles over who will be the lead plaintiff and the lead counsel can also arise in a class action, eating up time and money. And sometimes there are time-consuming disputes over the proper venue for the case.

Arbitrations are likely to move along much more speedily and at lower cost.

Of course, arbitration does have its costs and risks. But for so many investors still stranded with these securities almost two years after the market failed, taking matters into their own hands may be the only approach that holds any promise.

October 21, 2009

Frozen Auction-Rate Bonds Cost U.S. $63.5 Billion, Study Says
By Dunstan McNichol

Oct. 21 (Bloomberg) -- The U.S. economy would get a $63.5 billion boost if businesses were able to free up their funds trapped in the auction-rate debt market based on student loans, a study prepared for holders of the securities shows.

Businesses haven’t had access to about $25 billion in the auction-rate bonds since February 2008, when trading collapsed after the investment banks that managed the sales quit serving as buyers of last resort. Including student-loan securities held by banks, a total of $75 billion of the debt is outstanding, according to Mark Murphy, a spokesman for SecondMarket Inc., a New York-based clearinghouse for illiquid securities.

Cash from the government to restructure the auction-rate market would let businesses create as many as 441,000 jobs and begin expansion projects that have been delayed for lack of credit, according to the report by University of Delaware economics professors James Butkiewicz and William Latham.

“People need to consider the fact that reducing the access of these firms to these funds is producing more of a drag on the economy,” Butkiewicz said in a telephone interview before today’s release of the study. “If there’s some way to get this money unfrozen, that money’s going to be put to work doing things.”

The report was commissioned by a coalition of about 25 nonbank holders of auction-rate securities that are pressing for federal funding to reopen the market. The coalition members hold a total of $8 billion in frozen student-loan auction-rate securities.

Members of the coalition include retailers Abercrombie & Fitch Co. of New Albany, Ohio, and Family Dollar Stores Inc. of Charlotte, North Carolina; technology companies Digital River Inc. of Eden Prairie, Minnesota, Texas Instruments Inc. of Dallas, Standard Microsystems Corp. of Hauppauge, New York, and Ariba Inc. of Sunnyvale, California; Duke Energy Corp. of Charlotte; Ash Grove Cement Co. of Overland Park, Kansas; and short-haul trucker Heartland Express Inc. of North Liberty, Iowa.

Auction-rate securities were designed to offer borrowers short-term interest rates on long-term bonds by putting the debt up for resale at auctions typically held daily, weekly or every 35 days. Investors believed they would have ready access to their holdings through the auctions.

The market collapsed last year when banks that had kept the auctions functioning by buying any securities that were not otherwise bid on stopped providing that support.

Since then, 26 banks involved in the sale of auction-rate bonds have negotiated settlements with state and federal regulators, paying $575 million in penalties and agreeing to buy back more than $61 billion of securities.

Texas Instruments in April sued New York-based Citigroup Inc., Morgan Stanley and BNY Capital Markets, now part of Bank of New York Mellon Corp., claiming the banks misled the company about the liquidity of auction-rate securities.

During the first quarter of 2008, Texas Instruments reclassified its $533 million portfolio of the securities as a long-term asset and reported losses of $41 million on the holdings as of June 30, according to regulatory filings.

Of 205 publicly traded companies that reported holding student-loan auction-rate securities, 96 percent had marked down their value by an average of about 12 percent, according to a study of regulatory filings by Pluris Valuation Advisors LLC, a New York firm that specializes in illiquid securities.

To contact the reporter on this story: Dunstan McNichol in Trenton, New Jersey, at

October 20, 2009

Wachovia Settles $50 Million ARS Claim in D.C.
What Are Other State AGs Waiting For-A Taxpayer Bailout?

By Phil Trupp (MVA News Service)

Washington, October 20-If America's most dysfunctional local government, the District of Columbia, can reach a multimillion dollar ARS settlement with a major bank, it may be time to ask why more of the nation's attorneys-general are still dragging their feet while their citizens face financial hard times.

Nearly two years after the ARS market collapse, District officials have signed an agreement with Wachovia Securities to settle its lawsuit against the company. D.C. residents have been pressing the slow-motion local government to pursue allegations that Wachovia used deceptive practices, misleading investors about the safety of auction rate securities.

Gennet Purcell, acting commissioner of the District's Department of Insurance, Securities and Banking, said Wachovia pitched the auction rate paper to clients in the usual fashion- "safe as money" markets, "good as cash", and "better interest rates than Treasuries." You've heard it all before. Virtually every financial institution who sold auction rate securities used the same lies.

Anyone who has ever visited this website is more than familiar with these allegations. Readers with cash still frozen in the ARS-ARPS market are not only familiar with the charges, they are livid over the inaction of many state regulators to take on the issuers of auction rate debt.

A Wells Fargo spokesperson forwarded a statement from Wachovia Securities President and C.E.O. Daniel J. Luderman, dated August 2008, when the negotiations were first being worked out.

"Since the issue arose in February (2008) when auctions first started to fail, we have played a leading role in encouraging ARS issuers to restore liquidity to all our clients," Mr. Luderman said. At the time of the statement, Wells Fargo and Wachovia had worked out a merger deal, which went into effect last January.

The statement, made public today by The Washington Post, is hardly the reflection of Wachovia's position at the time. It is a public relations ploy. The facts are depressingly different.

Mr. Luderman said Wachovia's agreement in principle "underscores our desire to ensure that clients who purchased ARS at Wachovia receive the liquidity they need." He apparently did not mention that the liquidity would be in the form of interest-bearing margin loans. Oh, the inhumanity of borrowing against your own money!

Mr. Luderman did not mention the troubling fact that many, if not all, Wachovia brokers in the District were under orders not to discuss the ARS market breakdown with clients. This is not a way to win and keep clients. But it's par for most financial instiutions whose interest in clients stretches as far as securing their money, but not protecting it.

I was a Wachovia client in February 2008. When I learned of the market failures, I called my brokers (I had two of them at Wachovia) and asked pointed questions. What had happened? How did this supposedly "safe investment" suddenly become toxic and illiquid? I was told repeatedly that the matter was not to be discussed with clients. My complaints were forwarded to Wachovia headquarters in St. Louis, where the charade was being played out on a different level.

A protracted and contentious series of exchanges took place with the St. Louis office, none of which were informative or even vaguely helpful. I received bland, poorly written boiler plate cover-up replies. My allegations that deceptive practices pulled me into the market, and that my broker failed the test of due diligence, was met, in the end, with a letter informing me that Wachovia simply "disagreed" with my claims.

It was the equivalent of "so sue us!"

The allegations that Wachovia settled today in the District case, and in other cases successfully pursued by New York Attorney General Andrew Cuomo and Missouri State Secretary Robin Carnahan, were the very ones I had made to my brokers and Wachovia officials in St. Louis-all of whom flatly denied my claims and refused to discuss details.

At one point in this gut-wrenching squabble, one of my brokers threatened to hang up on me if I called his office looking for answers.

My money was returned November 2008 in a global settlement reached by Attorney General Cuomo after Wachovia was "raided" by Robin Carnahan's securities inspectors.

In today's District of Columbia settlement, Wachovia is required to repurchase $50 million in auction paper from D.C. residents and pay a $311,765 fine to the city.

The D.C. case has been long in coming to a conclusion. Yet approximately half of the $336 billion in ARS-ARPS nationwide remains outstanding. Major state AGs have yet to go to bat for their citizens, a lag time which makes the cumbersome, slow-moving government of the District of Columbia look like white collar crime hawk.

Raymond James, Charles Schwab, and Oppenheimer, among others, are collectively holding more than $2 billion in illiquid auction market paper. Class-action suits are seeking multimillion dollar settlements are piling up, and many cases await the tender mercies of FINRA arbitration.

Is it any wonder the financial-services industry is witnessing an outflow of clients and the loss of trust?

The bottom line: If slow poke D.C. can win a settlement from Wachovia, which imposed a cone of silence on its brokers during the height of the ARS scandal, what are other state regulators waiting for? Those AGs who still refuse to relieve the multiple hardships faced by their resident ARS victims should be ashamed.

October 13, 2009

Massachusetts Hearing On Oppenheimer's ARS Sales Reset For Nov. 16

NEW YORK (Dow Jones)--An administrative hearing on Massachusetts Secretary of the Commonwealth William Galvin's fraud charges against Oppenheimer & Co. in the sales of auction-rate securities has been reset to Nov. 16.

The hearing, originally set for Nov. 4, was pushed back due to various motions in the case.

The Massachusetts complaint, filed in November 2008, charges that Oppenheimer "significantly misrepresented not only the nature of ARS, but also the overall stability and health of the ARS market when marketing the product to clients."

It also alleges Oppenheimer executives and ARS department personnel sold their own ARS as they learned that the market was in danger, but failed to disclose that information to investors."

The charges were brought by the Enforcement Section of the Massachusetts Securities Division of the secretary's office.

Oppenheimer did not immediately return calls seeking comment.

Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction. Financial advisers promoted the securities as safe, liquid instruments, but the $330 billion market seized up in February 2008 as credit markets tightened and left investors stranded.

Big banks that underwrote the offerings came under pressure from regulators and bought back the auction-rate securities. However, many of the banks and brokerages that resold the securities, but didn't do the underwriting, fell through the cracks in those buyback deals, and billions in auction-rate securities remain in the hands of investors.

October 9, 2009

Closed-End Funds Still Feel the Pinch
Auction-Rate Woes Crimp New Offerings

By Daisy Maxey, Wall Street Journal

Lingering issues with auction-rate preferred shares, which many investors are stuck with a year and a half after the auction system froze, are seen as hindering the closed-end fund industry's ability to launch offerings.

Banks and brokerages redeemed many investors' shares in settlements with regulators. "Nevertheless, the ARPs process is still 'broken' and the lingering problem has, in many ways, held back growth in the industry," said a report from Thomas J. Herzfeld Advisors, a Miami investment-advisory firm.

Income-seeking investors are buying closed-end funds at historically narrow discounts, many with leverage. Some unleveraged funds are trading at discounts and may be a better value for investors willing to give up some current income in exchange for less downside risk, said Cecilia Gondor, vice president at Herzfeld.

Closed-end fund providers have been shedding some leverage and shifting to other forms such as tender-option bonds and new types of securities, but the credit crisis has hamstrung those efforts. About 70% of closed-end funds are using some form of leverage, and 67% of those still have some auction-rate preferred shares outstanding, according to Herzfeld.

Tender-option bonds, which are derivative securities created from fixed-rate bonds through a trust arrangement, have been one popular substitute, but use is limited because bonds must be of high quality. New types of preferred shares, with alternative forms of financing, also are being used.

Nuveen Investments, which used about $1.8 billion in tender-option bonds to replace auction-rate securities, issued another $500 million in variable-rate demand-preferred shares for four of its funds in August 2008. It said that move was successful.

While it is less challenging now than six to nine months ago to find refinancing partners, the cost of funding relative to the cost of leverage is an issue. Replacing auction-rate shares with new securities, such as the liquidity-enhanced adjustable-rate securities that BlackRock has proposed, would cost significantly more. So fund companies continue to use tender-option bonds to refinance at the margins.

Fixed-rate preferreds and the new floating-rate preferreds represent less than 5% of the leveraged closed-end fund market, according to Herzfeld.

BlackRock has redeemed $2.1 billion of the $8.2 billion in auction-rate securities issued by its municipal funds, replacing most of them using tender-option bonds. It has redeemed $1.09 billion of the $1.6 billion in auction-rate securities issued by its taxable closed-end funds.

Allianz's Pacific Investment Management has redeemed $1.9 billion of the $4.28 billion in auction-rate securities its closed-end funds had outstanding, the company said. It declined to comment further.

Of the $5 billion Eaton Vance had outstanding when auctions failed in February 2008, it had redeemed $3.8 billion by the end of that year. Progress has been slowed by difficulties finding alternative financing and the low rates at which the outstanding shares are resetting in failed auctions, a spokeswoman said.

Nuveen plans to have all of the auction-rate preferred shares issued by its taxable funds refinanced by Friday. But it still has about $8.7 billion in auction-rate preferred shares outstanding.

October 9, 2009

When Law Obscures the Facts
by Floyd Norris, New York Times

The collapse of the auction-rate securities market is a largely forgotten part of the financial crisis, a disaster that was soon overwhelmed by bigger ones — except for the investors who were caught up in it, The New York Times’s Floyd Norris writes in his latest High & Low Finance column.

The investors thought they were buying safe short-term securities — sort of like a money market fund but with an expectation of a slightly higher return. The securities were supposed to be easy to sell for face value.

Now, Mr. Norris says, many of the investors are stuck with securities that pay ridiculously low yields. In some cases, the securities will never mature, so the investors will never get their money back unless they sell them for a fraction of what they paid. Those who thought they were being safe and cautious in fact were taking huge risks.

The biggest losers so far are corporations that bought the paper but now find they are not covered by settlements some Wall Street firms made to reimburse individual investors. But there are still individuals who are stuck with the securities, either because their brokerage firm refused to settle or because they moved from one firm to another and found that neither firm was willing to reimburse them, Mr. Norris notes.

Some of those corporate purchasers may recall the old saying, “Be careful what you ask for. You might get it.” Those buyers of this paper are finding they cannot successfully sue because of a 1995 law that was strongly backed by corporate America as a way to curb frivolous lawsuits.

That law, the Private Securities Litigation Reform Act, says that a case, when filed, must be very specific about the fraud that is alleged, or it will be immediately dismissed, Mr. Norris argues. In many cases, a plaintiff would need access to inside information to make such a claim with enough detail, he says. Such information could be there in company files, but the plaintiff has no way to get at it before the case is thrown out.

The latest reversal for investors came late last month when a federal judge in Manhattan dismissed a case filed against Raymond James, a brokerage firm that underwrote and sold auction-rate securities and has refused to settle with regulators.

In that case, a customer claimed that a broker at Raymond James had misled her about the safety of auction-rate securities, and argued that Raymond James, as an underwriter and as a firm that conducted auctions, was involved in a fraud to dump securities before the market for them collapsed.

Judge Lewis A. Kaplan of Federal District Court said that was not enough. The broker, he said, worked for one Raymond James company. The underwriting was done by a different Raymond James company. “There is no evidence in the complaint,” the judge wrote, “from which the court can infer that the Raymond James entities had even the most basic understanding of the others’ business.”

To a nonlawyer, all this sounds like the corporate veil being used to obscure reality, Mr. Norris says. If the plaintiff could prove that one Raymond James subsidiary lied about the securities while another one profited from selling them, that would sound like enough, Mr. Norris argues.

Proving such a thing might be impossible; Raymond James argues there was no fraud, and that this case relies on “a classic fraud-by-hindsight theory”: since the market failed, there must have been fraud. But if there is no discovery of evidence allowed, we will never know whether such a claim could be proved.

Judge Kaplan gave the plaintiff until Oct. 16 to file an amended complaint that can pass muster under the 1995 law. Jonathan K. Levine, a partner in Girard Gibbs, the San Francisco firm representing the Raymond James customer, says a new complaint will be filed.

Whether or not investors ever get their money back, the auction-rate securities debacle is an example of a good product gone bad, according to Mr. Norris.

This could not have happened in the auction-rate market as originally conceived. In the beginning, back in 1984, the first auction-rate securities were preferred shares issued by major companies whose credit was reasonably easy to evaluate. Virtually the only risk for investors was that the issuing company would be unable to meet its obligations, Mr. Norris notes. In that regard, it was similar to commercial paper.

What made it different, he says, was that auction-rate securities offered companies a way to raise money at short-term interest rates, but to treat it on their balance sheets as long-term capital. There was to be an auction every seven weeks at which a holder could sell the paper at par. That auction would determine the interest rate over the next seven weeks. The rate presumably would rise or fall with market interest rates and with the creditworthiness of the company.

But what if auctions failed? What if there were not enough buyers for the paper?

Then the current holders were stuck with it until the next auction. But the issuer would have to pay a penalty interest rate that was well above the rate it would normally have to pay. Any issuer that could borrow money — that is, any issuer whose credit had not vanished — presumably would redeem the paper instead of paying that punitive rate for more than one or two auction cycles, Mr. Norris says.

But as the market grew, things changed, he notes. The first deals had minimum investments of $500,000. By the end, the standard was $25,000. Differing types of auction-rate securities were issued, often by issuers whose credit was not as easy to evaluate, and auctions came as frequently as weekly.

Most important, Mr. Norris says, those “penalty rates” were set by formulas that became less and less generous to investors. In some cases, involving paper backed by student loans, the penalty rate can fall to zero for a month or two.

One allegation in the Raymond James suit is that underwriters reduced those rates to attract issuers, and investors did not understand what was happening. The early auction-rate issues required that prospectuses be given to all buyers, including those in subsequent auctions, but that provision was later dropped.

Providing prospectuses might not have done much good anyway, Mr. Norris suggests. The documents were confusing when it came to explaining how penalty rates would be set, and sometimes did not even mention as a risk the possibility of an auction failure.

By the summer of 2007, many people knew that auctions were succeeding only because underwriters were taking paper no one else wanted, Mr. Norris says. What we don’t know, he remarks, is how much paper ended up in Wall Street vaults, and how much was sold to corporate investors before the whole market collapsed in February 2008.

The auction-rate securities that did have good penalty rates have been redeemed. But in some cases investors are stuck with tax-exempt securities that are perpetual and currently pay less than 1 percent a year. Those securities may never be redeemed.

Ron Gallatin is a retired partner of Lehman Brothers and the man who invented auction-rate securities. He is critical of changes in the product, including the withering of penalty rates.

“I cannot comprehend how any broker could have had any client bid at an auction by October 2007,” he said this week, pointing to the talk of auction problems that had spread around Wall Street and been reported.

Actually, Mr. Norris says, Mr. Gallatin says he thinks he does comprehend what was going on: “The reason is that the salesmen did not understand it. They thought it was a cash equivalent that paid them a fee. And in most cases, firms did not do anything to educate them.”

If there ever is a wide-ranging trial, we might get to see which issues of auction-rate securities were owned by Wall Street firms in the summer and fall of 2007, and how much they sold before the collapse, Mr. Norris says. We might, he suggests, learn if the firms understood risks they did not mention to customers.

But that will not happen if judges continue to prevent such cases from proceeding even to the discovery process, Mr. Norris argues. Corporations that cheered the 1995 law, he says, may discover it keeps them from having a chance to recover their own losses.

September 21, 2009

Thank God for Missouri's Secretary of State!!!!!!

JP Morgan returns $28M to Mo. investors
St. Louis Business Journal

JP Morgan Chase & Co. returned more than $28 million in frozen auction rate securities to Missouri investors, under a finalized consent order with Secretary of State Robin Carnahan.

JP Morgan is the seventh major firm to sign an agreement with Carnahan’s office regarding auction rate securities, bringing the total amount returned to Missourians to more than $2 billion.

The consent order signed Monday covers Missouri individual and small business clients and was completed by JP Morgan earlier this year.

The Missouri Investor Education and Protection Fund, used for educational initiatives across the state, will also receive an $86,000 payment from the firm.

In the coming months, the Securities Division in Carnahan’s office will finalize settlements and repurchases with several other firms.

The division also has active investigations into the auction rate securities activities of several other brokers and expects to announce more formal actions before the end of the year.

The $330 billion auction rate securities market collapsed in February 2008, leaving investors unable to access the illiquid investments.

September 18, 2009

Calling all Raymond James victims

On September 17, 2009, a federal judge dismissed the complaint in a class action on behalf of investors who bought auction rate securities from Raymond James. The judge allowed the plaintiff to file an amended complaint. To read the judge's words, click here.

Now, to keep this class action going, the amended complaint will need to provide more detail about the specific knowledge and conduct of each of the Raymond James corporate entities over the auction rate securities scheme, including the roles that they played in that scheme. The relevant entities are:

Raymond James Financial, Inc. (the parent company)
Raymond James & Associates, Inc. (the underwriter and auction manager)
Raymond James Financial Services, Inc. (the retail brokerage)

If you have any information that might be helpful, or if you know of any present or former Raymond James brokers or traders that may be willing to provide information, please contact us as soon as possible.

Raymond James sold $800 million of auction rate securities that are still illiquid, and the regulators don’t appear to have made much progress. The CEO of Raymond James has said, “When it comes to auction rates, I am not worried about class action lawsuits or the government. The regulators are engaging in extortion, pure and simple.”

This case may be the only way for investors to recover their principal. Please help if you can.

Please send an email to .

September 16, 2009

"I'm stuck in ARPs. What do I do now?"
by Harry Newton

Frankly, I'm sick of hearing this question. Dear Folks Who are Stuck, I am NOT your wet nurse, your baby sitter or your unpaid slave. I put this web site up to help get myself out of $4 million plus of ARPs. I did. I got redeemed at 100%. I didn't lose a nickel.

But many of you are sitting today stuck in ARPs, earning a miserable 30 to 50 basis points (i.e. less than 1% a year). You're sitting with your thumbs up your ass waiting for the Messiah or some other mythical creature to descend from the sky and save your sorry asses.

I contemplated shutting this web site down when I got my money back. But Phil Trupp and others said, "Help these poor innocent souls who are stuck. Keep the site open a bit longer." So I did.

Let me be clear. I pay money to keep this site alive. The pennies I earn on the advertising on the right or the Google ads on the left don't food on my family's table. And I don't see any of you readers -- with one exception -- sending me a Thank You bottle of wine. I'm not begging. Trust me. I'm simply commenting on the sorry state of America's apathetic investors.

So before I do shut this time-waster web site down, I'll answer your question, "I'm stuck in ARPs. What do I do now?"

You have two basic solutions:

1. Sell your ARPs on the secondary market. You'll lose 10% to 15% or so. But you'll get cash for the rest and you can get on with your miserable live. I say "miserable" because the vast bulk of you have done nothing to get your money back. I'm sure you've made the mandatory two or three phone calls to your broker, who, like Schwab, has fobbed you off with bullshit. But basically you've done nothing else. So go sell your ARPs. Lose some money and get on with your life.

2. Hire a lawyer. Figure $50,000. There are some good lawyers out there. They'll make a stink. That "stink" has a greater chance of getting your money back than what you're doing now -- nothing. If you're not prepared to blow the $50,000, don't even think of calling a lawyer.

There is a third solution -- namely, do nothing. Be my guest. Do nothing. But don't bitch to me or any financial advisor you met through some nice friend.

And, if you think this doesn't happen? Well, go figure what caused me to write this column today. A friend called a friend, who called a friend, who knew me and then promptly wasted 30 minutes of mine and his time discussing the idiocy and laziness of the man who has $2 million in Blackrock ARPs, is being paid 30 basis a year -- less than he can earn at the savings bank or his friendly money market fund -- and is too lazy (or too rich) to take care of his own money.

September 3, 2009

Merrill Lynch to cough up $8.5M to Florida over auction-rate securities
from InvestmentNews

Merrill Lynch & Co. Inc. will pay Florida $8.5 million to settle claims that the brokerage firm's financial advisers misled their clients about auction-rate securities, according to a report in the Orlando Sentinel.
The agreement will settle allegations that Merrill's adviser positioned auction-rate securities as secure investment vehicles that were essentially as safe as cash.

In February 2008, the auction-rate market collapsed, and investors were left with illiquid holdings.

Merrill's agreement with Florida is the state's portion of a $125 million settlement reached with the North American Securities Administrators Association Inc. last August to resolve a national investigation into the sales of such securities.

September 2, 2009

Finra settles with Northwestern, two others, on auction-rate securities
By Associated Press

The Financial Industry Regulatory Authority said today it has settled with three more firms over the failed sales of auction-rate securities.

So far, FINRA has settled with 12 firms for total fines of $3.2 million. The settlements guarantee the return of $1.3 billion to investors, Finra said in a statement.

The latest settlements are with Northwestern Mutual Investment Services LLC of Milwaukee, which was fined $200,000; City Securities Corp. of Indianapolis, which was fined $250,000; and Fifth Third Securities Inc. of Cincinnati, which was fined $150,000.

The three firms agreed to buy back auction-rate securities that were part of failed auctions that had been frozen. The firms were accused of not properly disclosing the risk associated with the securities.

September 1, 2009

Bill banning mandatory arbitration picks up support
from InvestmentNews

A House bill that would ban mandatory arbitration has been gaining support from lawmakers. HR 1020, which now has 89 co-sponsors, revives past efforts to nullify pre-dispute mandatory arbitration agreements that apply to employment, consumer, franchise or civil rights disputes. While HR 1020 does not include language that specifically pertains to the securities industry, the related Senate bill (S 931) does. Additionally, draft legislation recently sent by the Department of the Treasury to Congress includes a provision that would give the Securities and Exchange Commission authority to prohibit or limit the use of mandatory-arbitration clauses in customer agreements. For more information on the congressional bills, visit To see the draft legislation, go to here.

August 28, 2009

Nuveen, Merrill and Citi slapped with suit over auction rate losses
By Darla Mercado

A 77-year-old retired securities attorney and his wife are taking Nuveen Investments Inc., Merrill Lynch & Co. Inc., Citigroup and others to court over $2 million in losses they claim to have suffered from investing in auction rate securities.

Joan and Howard Kastel, who works part-time as a consultant, arbitrator and mediator, filed a suit last Friday in the U.S. District Court for the Middle District of North Carolina against Nuveen of Chicago; Merrill of New York; Mesirow Financial Inc. in Chicago; Deutsche Bank AG of Frankfurt, Germany; New York-based Citigroup Global Markets and Robert P. Bremner, chairman of Nuveen's North Carolina Funds.

According to the suit, in August and September 2007, Mesirow bought 88 shares of auction rate preferred securities for the Kastels' accounts, paying $25,000 per share.

Those shares were issued by three Nuveen North Carolina funds through Nuveen Investments LLC, the Chicago-based broker-dealer, at auctions that were held by Deutsche Bank.

Merrill and Citigroup were also auction participants, according to the suit.

Auction rate securities, debt instruments whose interest rates were periodically reset at auctions, had been widely marketed as safe and liquid investments.

However, when the $330 billion auction rate securities market froze in February 2008, investors were unable to get their cash.

The Kastels say they are now stuck with 85 shares of Nuveen North Carolina ARPS, which pay “unconscionably inadequate” interest that “does not fairly compensate” the couple, according to the suit.

They are suing for at least three times the amount withheld from them — about $6 million — from Mesirow, Nuveen and Nuveen North Carolina funds, and also want to be compensated for their emotional distress.

Rather than take the case into arbitration, the couple has decided to sue, arguing in their complaint that the case would be too complex for arbitration.

Nuances include the fact that Mesirow may have cross claims against other named defendants in the suit.

Also, they allege theft by deception and obtaining property under false pretenses, which are violations of North Carolina's criminal laws and are not subject to arbitration.

The defendants also violated securities laws in North Carolina and Illinois, according to the suit.

Mesirow spokeswoman Julie Liedtke said that the firm does not comment on pending litigation.

Nuveen spokeswoman Kristyna Sujata said the firm had no comment on the lawsuit.

Calls to Citigroup, Merrill Lynch and Deutsche Bank were not immediately returned.

For a copy of the Kastel suit, click here. -- Harry Newton

August 26, 2009

Hedge Funds Gamble on ARPs
by Harry Newton

Here is this week's story by Larry Light of the Wall Street Journal:

Auction-Rate Yard Sale
Seymour Lowell was trapped in auction-rate securities from Nuveen Investments Inc., rendered untradable since 2008 and paying low interest rates. Then in early August, a company called SecondMarket Inc. found him a buyer, at 13% less than the $1.7 million he had paid.

Getting into auction-rate securities, mortgage-backed bonds and hedge funds was a lot easier for investors than getting out. Such investments became illiquid in the financial crisis, and can be almost impossible to unload through regular markets.

So SecondMarket and others like it are thriving, as a last-ditch alternative for investors like Mr. Lowell, a 78-year-old from West Palm Beach, Fla., who owns a maker of scientific instruments.

These firms match the investors and the firms' own rosters of buyers eager to snap up illiquid assets at bargain prices. Holders can get back anywhere from a few cents on the dollar for the most poisonous mortgage-backed securities to 90 cents for the best auction-rate securities.

SecondMarket, based in the old Standard Oil building overlooking Lower Manhattan's famed bronze bull statue, said it arranged $750 million in sales of unloved assets in 2009's first half. That equals its sales volume for all of last year. Typically, it holds auctions among investors culled from the 3,500 in its database. While SecondMarket is a broker-dealer, it doesn't take positions in any of these transactions.

Now to some questions which the Wall Street Journal's article didn't answer. I called SecondMarket and asked them these questions:

Question: Who typically buys auction rate securities?
Answer: Hedge funds.

Q: Why?
A. Because they think that Nuveen (or the other issuers) will redeem the securities soon.

Q: How does the hedge fund profit?
A: It gets redeemed at par. If it gets redeemed in a year, it makes 13%+. If six months, it makes 26%+, etc.

Q: What are the fees?
A: The buyer pays 1%. The seller pays 1%. The 13% above is net to the buyer.

Q: How much ARPs have SecondMarket sold?
A: About $1 1/2 billion.

Q; Who should I call?
A: Martin Garcia on 212-668-6673.

Q: Harry, do you recommend these people?
A: I have not dealt with them. I cannot vouch for them. I did not speak with Seymour Lowell. I'm guessing the Wall Street Journal did. I spoke with Mr. Garcia, who's on ARPs trading desk.

August 25, 2009

Retired Securities Attorney Sues Nuveen
Over Auction-Rate Shares

By DAISY MAXEY of Dow Jones Newswires (part of the Wall Street Journal)

NEW YORK -- A retired securities attorney is suing Nuveen Investments and others in federal court over a $2 million investment in now-frozen auction-rate securities, contending that his case is too complex for arbitration.

Howard Kastel, 77, and his wife, Joan, filed suit Friday in the U.S. District Court for the Middle District of North Carolina against Deutsche Bank AG (DB), Nuveen Investments Inc. (JNC), Merrill Lynch & Co. and others. It alleges the couple were victims of a "fraudulent scheme" in which markets for the securities were manipulated.

Investor complaints are generally handled in arbitration, but Kastel, who has been an arbitrator for years and still does some arbitration work, said that as a complex fraud case, his complaint is inappropriate for arbitration. As a former securities attorney, Kastel said, he would also be an inappropriate plaintiff in a class-action lawsuit.

The Kastels are seeking the return of more than $2 million, which was invested in auction-rate preferred securities issued by three Nuveen North Carolina Funds in August and September 2007, as well as damages and attorney's fees. They currently cannot redeem the shares, and the interest paid on them is "unconscionably inadequate and low," the lawsuit says.

Kastel said Tuesday in an interview that he is disappointed that the Securities and Exchange Commission has not taken action against Nuveen, which sold auction-rate securities to retail investors.

Nuveen Investments and Deutsche Bank had no comment on the lawsuit.

A spokesman said the SEC declined to comment, but noted that it continues to monitor settlements it has made with six firms involving auction-rate securities.

The suit also names Robert Bremner, chairman of the board of Nuveen North Carolina Funds; CitiGroup Global Markets; and Mesirow Financial Inc. of Delaware, which acted as Kastel's broker-dealer.

Deutsche Bank acted as the auction agent in concert with Merrill Lynch and CitiGroup, according to Kastel. Merrill Lynch was one of the underwriters for the funds, and, as an underwriter, was an authorized broker-dealer to participate in the auctions, he said.

CitiGroup Global Markets, the legal entity for Citigroup Inc.'s (C) broker-dealer, and Mesirow Financial declined to comment.

In addition to a return of principal and damages, the lawsuit seeks a preliminary injunction that would prohibit Nuveen North Carolina Funds from paying fees to Nuveen, Mesirow and other defendants, from paying interest or dividends to the common shareholders and from using money held by the funds to purchase or make investments in new securities until the funds have redeemed the Kastel's auction-rate preferred shares and the auction-rate preferred shares held by other investors.

Auction-rate securities are debt instruments with interest rates that are meant to be reset periodically at auction. Financial advisers promoted the securities as safe, liquid instruments, but the $330 billion market seized up in February 2008 as credit markets tightened and left investors stranded.

Big banks that underwrote the offerings came under pressure from regulators and bought back auction-rate debt. However, many of the firms that resold the securities, but didn't do the underwriting, have fallen through the cracks in these buy-back deals.

---By Daisy Maxey; Dow Jones Newswires; 212-416-2237;

August 24, 1009

Multi-Million Dollar Law Suit Alleges
Nuveen and Deutsche Bank Operated
"Unlawful Exchange" for ARS
Complaint by N.C. Securities Attorney Says
Companies Created "Fiction" of Dutch Auctions
By Phil Trupp
(MVA News Service)

Washington, August 24--A multi-million dollar law suit was filed August 21 by a retired securities attorney and his wife alleging that Nuveen Investments and Deutsche Bank operated an "unlawful and unregistered" exchange involving auction rate securities "right under the noses of the SEC."

Auction Rate has learned that the suit cites allegedly unpublished statements by Nuveen, the largest issuer of closed end fund auction rate securities, stating that Nuveen considers ARS to be "perpetual" and that the company has no need to redeem the securities.

The complaint alleges that the "fiction" of a Dutch Auction "was part of a sophisticated Ponzi scheme."

The suit was filed in the U.S. District Court for the Middle District of North Carolina by Howard Kastel, 77, and his wife Joan on behalf Mr. Kastel's trust fund. In addition to Nuveen and Deutsche Bank, the Kastels have also named Merrill Lynch, Citigroup, and Chicago regional broker-dealer Mesirow Financial.

Mr. Kastel's complaint alleges that statements were issued by a "top" SEC official that the ARS auctions were deliberately misrepresented and never "were real auctions." The complaint seeks a preliminary injunction barring Nuveen from making further dividend payments to common shareholders until Mr. Kastel's allegations are investigated and resolved.

The complaint cites alleged meetings between Merrill Lynch and Nuveen in January 2008 "that anticipated the then-undisclosed Lehman Brothers February withdrawal of market support for Auction Rate Securities following an unreported Nuveen Fund auction failure in mid-January 2008."

In addition, the suit references similar allegations now under investigation by the SEC Inspector General and pending a request for hearing before the agency.

Mr. Kastel, who has been in touch with Auction Rate for months while compiling data to back his complaint noted that Nuveen issued more than $11 billion tax exempt ARPs. "Less than 20 percent have been redeemed and Nuveen has no plan to redeem the remainder," Mr. Kastel said.

It is understood that Mr. Kastel's trust fund is holding about $2 million in frozen auction rate paper. Like many investors, Mr. Kastel signed arbitration agreements with his broker-dealers. He is fearful that his status as a former securities attorney would prejudice an arbitration panel hearing his case.

"They're not about to be even-handed with a pro, a retired securities attorney," he told a reporter.

Mr. Kastel has filed a separate complaint with the SEC alleging that the commission's current director of enforcement's former association with Deutsche Bank as its general counsel "should be investigated in light of the fact that the SEC has not commenced enforcement against Nuveen for its central role in the auction rate security liquidity mess."

August 17, 2009

Cuomo sues defiant Schwab over ARS sales
N.Y. attorney general claims Schwab misled customers about the safety of auction rate securities
By Jeff Benjamin of Investment News

New York Attorney General Andrew Cuomo filed a lawsuit today against The Charles Schwab Corp., claiming the brokerage firm misled customers about the safety of auction rate securities — and the firm is digging in for a fight.

“The [attorney general’s] lawsuit casts blame for a bad situation in the wrong direction. Clients who purchased these products, and companies like Schwab that filled client orders, were misled by the major Wall Street underwriters who concealed the degree to which the auction rate securities market was so dependent on their support, Schwab spokeswoman Sarah Bulgatz wrote in an e-mail.

“Up until the time the auction rate securities market collapsed, there was an uninterrupted 20-plus year period where there was no indication the market for these securities was at risk of collapse and that the underwriters would simply abandon them. We’re confident that we will prevail when we have the chance to expose the workings of this market completely rather than just through selective sound bites in the press,” she wrote.

“We believe the NYAG ought to focus its efforts on the firms that underwrote these products, failed to disclose the key risks and then abandoned the products, rather than damaging the reputation and harming the shareholders of other companies that acted in good faith,” Ms. Bulgatz wrote.

The battle became public a month ago when TD Ameritrade Holding Corp. of Omaha, Neb., agreed to buy back $456 million of auction rate securities from individual investors, charities and small-business clients.

On the day of the TD Ameritrade settlement involving the Securities and Exchange Commission as well as state regulators in New York and Pennsylvania was reached, Mr. Cuomo's office accused Schwab of misleading investors about ARS and threatened prosecution.

This morning, Schwab of San Francisco responded to reports that a lawsuit was imminent by posting a letter on its website from last month responding to the AG office's allegations.

Representatives for Mr. Cuomo's office did not immediately respond to a request for comment.

August 12, 2009

Wachovia to buy back $325M in auction rate securities it sold in Pennsylvania
by Jeff Blumenthal Philadelphia Business Journal

The securities division of Wachovia Corp. will be required to repurchase $324.6 million of auction rate securities it sold to investors in Pennsylvania, state regulators said Tuesday, as part of a nationwide settlement reached last year.

Wachovia, now part of Wells Fargo (NYSE:WFC) will also pay a $2.52 million assessment to the state for its role in the auction rate securities market.

The Pennsylvania Securities Commission said it approved the agreement following an investigation into Wachovia’s marketing and sales of auction rate securities to Pennsylvania residents.

The settlement was part of a multi-state investigation by state regulators formed by the North American Securities Administrators Association. Under the deal, Wachovia will pay a $50 million penalty split among affected states and will buy back $8.5 billion in auction rate securities nationwide from investors who were left holding the investments when the market collapsed earlier this year.

“The Pennsylvania Securities Commission found that Wachovia engaged in unethical or dishonest business practices and failed to supervise its agents for its sale of auction rate securities to investors,” Chairman Robert Lam said.

Commissioner Steven Irwin said Wachovia “marketed and sold these securities as safe, liquid and cash-like investments when, in fact, they were long-term investments subject to a complex auction process that failed in early 2008, leading to illiquidity and lower interest rates for investors.”

The commission estimated that more than 1,300 Pennsylvania retail investors held auction rate securities from Wachovia as of February 2008, shortly before the market collapse.

“From the day these auctions failed in February 2008, the Pennsylvania Securities Commission has been seeking much-needed relief and liquidity for investors stuck with these securities,” Lam said. “I am pleased that Wachovia has agreed to repurchase their retail clients’ positions and I expect other firms that sold these securities in Pennsylvania to do the same.”

Auction rate securities are investments that were considered almost as liquid as cash, often in the form of preferred shares or debt instruments like corporate municipal bonds. But when the auctions stopped being held last year, investors were stuck without a way to sell their holdings.

Michlovic said that the securities commission is continuing its investigation of other firms. In July, it ordered TD Ameritrade to repurchase $26.5 million of auction rate securities, and Citigroup Global Markets was ordered to repurchase “hundreds of millions of dollars” of auction rate securities from an estimated 1,000 Pennsylvania investors and pay a $2.31 million assessment to the state.

August 2, 2009

Investors Without a Lifeline

IT’S time again to revisit the auction-rate securities mess, a nightmare that began 18 months ago but that still hasn’t ended for some unfortunate investors.

Recall that once upon a time, Wall Street promoted auction-rate securities as just as good as cash, a liquid investment you could unwind in a flash. But when the $330 billion auction-rate market froze in February 2008, investors were suddenly unable to sell their holdings. Money they had set aside in a “safe” place for college bills, retirement plans and down payments on homes was inaccessible. In hardship cases when they could sell, they took significant losses.

The debacle hit individual investors especially hard. When state regulators investigated the circumstances surrounding auction-rate failures, they found that some of the firms selling the securities had turned their aggressive sales pitches on small investors even when astute institutional buyers had already seen trouble and stopped buying.

Regulators have since forced many brokerage firms that underwrote or sold the securities to buy back their clients’ holdings. Eight large and small firms have already settled, or agreed to settle, auction-rate cases with the Securities and Exchange Commission.

Still, there are holdouts refusing to make their clients whole by either redeeming their securities or paying to recoup investors’ losses. Raymond James Financial, one of the nation’s last independent investment banks and brokerage firms, is among the holdouts.

Unlike larger Wall Street firms that both underwrote and sold auction-rate securities, Raymond James simply sold the shares and notes to its customers. Last week, it said its clients currently held some $800 million of illiquid auction-rate securities, down from $1 billion earlier this year.

That decline is largely a result of redemptions by issuers of the securities, like closed-end funds and municipalities. Raymond James has shown no interest in redeeming customers’ holdings.

“We are fully cooperating with the pending regulatory investigations that have been ongoing for over a year,” said Anthea Penrose, a Raymond James spokeswoman. “We have a very sound capital position and don’t expect the situation to change other than to reduce the outstanding ARS holdings. We continue to work with issuers to redeem their auction-rate securities and with clients to meet their needs for liquidity.”

The problem for Raymond James is that redeeming the $800 million in auction-rate securities would be tough. That figure is equal to 4.4 percent of the company’s total assets and 42 percent of its shareholder equity, according to the March 31 quarterly filing.

In that filing with regulators — its most recent — the company said that if it were to “consider resolving pending claims, inquiries or investigations by offering to repurchase all or some portion of these ARS from certain clients, it would have to have sufficient regulatory capital and cash or borrowing power to do so, and at present it does not have such capacity.” The filing added that if it had to buy back securities at 100 cents on the dollar, the potential loss “could adversely affect the results of operations.”

And so Raymond James’s long-suffering clients remain frozen in auction-rate securities hell. They can be forgiven if they resent some outlays their firm willingly makes to others.

Last year, for example, amid the market collapse, auction-rate mess and credit crisis, the company raised its dividend 10 percent. That’s nice for its shareholders, of course, but it is especially bountiful for Thomas James, its C.E.O. He owns 12.2 percent of its shares outstanding, according to its most recent proxy filing.

Dividends on those shares generated roughly $6 million to Mr. James last year and will total another $6.5 million this year if the company continues to pay the current rate of 44 cents a share.

These payments are in addition, of course, to Mr. James’s pay package, valued at $3.55 million last year. Give the Raymond James board at least some credit: Mr. James’s package last year was 13.5 percent less than the previous year’s, when earnings were 6.5 percent higher.

Ms. Penrose, the company spokeswoman, said Mr. James was unavailable for comment. She said she couldn’t talk about whether Mr. James had considered setting aside some of his money as a goodwill gesture toward clients who suffered losses on auction-rate investments.

Then there is the $6.3 million that the company will have spent during 2008 and 2009 for naming rights to the stadium where the Tampa Bay Buccaneers play. Known as the Ray Jay, it hosted the Super Bowl this year. As part of an effort to increase brand awareness, the company said, it entered into the naming rights contract in 1998. The contract runs until 2016, and its costs rise 4 percent a year.

Nothing wrong with spending money to build a brand, of course. But shouldn’t treating your customers well come ahead of keeping your name on a stadium?

In recent weeks, Raymond James’s auction-rate securities problem has come into focus again as securities regulators brought several new cases against other firms.

On July 20, TD Ameritrade announced a settlement with the S.E.C., saying it would repurchase $465 million worth from its clients. Like Raymond James, TD Ameritrade only sold the securities; it did not underwrite them.

Then, on July 21, Morgan Keegan, a regional brokerage firm owned by the Regions Financial Corporation, was sued by the S.E.C., accused of misleading clients about risks in $925 million in auction-rate securities it sold.

The auction-rate securities debacle has been one of the most painful events for individual investors in the credit crisis. The fact that it is still unresolved at some firms gives credence to that age-old Wall Street question: But, where are the customers’ yachts?

P.S. She forgot a bunch of others, e.g. Oppenheimer. -- ARPS editors.

July 29, 2009

FINRA Puts Brokers in ARS Hall of Shame;
Permanent Rebuke Slams Brokers’ Profile;
SIFMA Says FINRA Makes ARS Sales “a Sin.”

By Phil Trupp
(MVA News Service)

Washington, July 28—When your auction-rate “cash” went into deep freeze did you complain to your broker? Did you write a hot letter to supervisors or upper management? Did you file complaints with FINRA and the SEC?
If so, you may be in for a taste of revenge.

FINRA wants to “ding” your broker’s personal records, and not for the usual two years. This time, it’s forever--even if your money was redeemed in a global settlement by state regulators.

Is this fair? Do brokers deserve the hit?

The Securities Industry and Financial Markets Association (SIFMA) doesn’t think so.

SIFMA says FINRA wants to hang a financial Scarlet Letter around your broker’s neck, to be worn as long as he or she remains active in the industry.

Outraged, SIFMA has asked the Securities and Exchange Commission to intercede and has called for a public rulemaking.

SIFMA represents more than 600 securities firms, banks and asset managers. It has yet to get a response on its request from the SEC. Organization official are more than a little frustrated.

“They’ve (FINRA) made it a sin to sell ARS,” complains Andrew DeSouza, SIFMA’s manager of global communications. He says FINRA wants “a rule change without a public debate.” That’s just not cricket, he insists.

He believes investors will be in SIFMA’s corner if—or when—SEC takes action on the request for a hearing.

But FINRA C.E.O. Richard G. Ketchum apparently has dug in his heels. He is sticking with the Scarlet Letter option.
SIFMA’s objections to this mass punishment are outlined in a letter to Mr. Ketchum, dated March 24, 2009. The FINRA rule, Regulatory Notice 09-12, issued in February, is titled “Auction Rate Securities—Reporting Requirements for Settlement of Customer Disputes Involving Auction Rate Securities.”

“What is really at stake,” says Mr. DeSouza, “is that FINRA wants to emblazon a permanent mark” on the Central Registration Depository records of brokers who sold ARS and whose customers later cried foul.

Mr. DeSouza believes FINRA’s new rule will require financial firms to “alter and distort” accurate disclosures and replace them “with a fiction--the fiction that the customer ‘settled’ with the individual representative for the par amount that the firm paid the customer for the ARS.”

This fiction does not serve the interest of disclosure or investor protection, he says. “It is merely a device to convert a two-year disclosure penalty into a permanent mar on a representative’s record.”

If implemented retroactively, the FINRA rule would require SIFMA’s members to make thousands of new, “inaccurate filings” on U-4, U-5 and RE-3 forms. They also would be required to amend an equal number of existing filings which “represent the most accurate and complete slate of disclosure,” according to Mr. DeSouza.

Individual investors and brokers were not parties to global regulatory actions and settlements. However, brokers remain exposed to potential arbitrations and other claims.

One SIFMA official insists that ARS “are just like any other financial product.” Investors, he says, should have been aware of the risks. Regulators, on the other hand, have asserted that ARS were sold deceptively as “cash equivalents,” as “better than cash,” “completely safe and liquid.” Tens of thousands of investors were not made aware of auction failures or other inherent risks.

One SIFMA official tells Auction Rate Preferreds. org he does not agree with charges of fraud made by state regulators. He is convinced that ARS risk was equal to that of common stock.

Contacted later, many brokers expressed frustration and anger. They were aware that the National Association of Securities Dealers (NASD) had ruled three years ago that auction-rate paper could not be reported as cash equivalents because, in reality, the bonds carry maturities of 20-30 years, were supported by Dutch auctions, and propped up by the broker-dealers.

One broker cited a Financial Accounting Standards Board (FASB) ruling which echoes NASD’s findings. Another noted that FINRA sold-off its entire portfolio of $647 million in ARS in 2007, well ahead of the freeze, yet failed to notify the public until it released its annual report.

“The individual broker most of the time wants to do the right thing,” one securities dealer complained. “But because of bad information or pressure or lack of options in investments, the broker is the easy fall guy when the system fails.”
He added: “The cover is always the same. When something goes wrong, and it will, blame the broker. It’s like ‘The Sopranos’. If you break rules, you’re a made guy. You’re in the club. Think I’m exaggerating? How does this stuff continue to percolate in the system without a culture like this?”

July 26, 2009

TD Ameritrade's ARS settlement excludes RIAs
Pact could be precedent for future deals

By Jed Horowitz of Investment News

TD Ameritrade Holding Corp.'s agreement with regulators last week to buy back $456 million of auction rate securities from individual investors, charities and small- business clients leaves registered investment advisers out in the cold.

The pact with the Securities and Exchange Commission and state regulators in New York and Pennsylvania doesn't extend to clients who bought the securities through independent RIAs or who transferred auction rate securities to TD Ameritrade for custody after buying them from another firm.

That is because regulators focused on sales practice violations committed directly by TD Ameritrade brokers, who marketed the securities as liquid alternatives to money markets funds, with slightly higher yields, according to regulators.

“At the end of the day, our view— and all the federal and state regulators agreed with us — was that it applies to the retail clients only, because there was no intermediary between us and them,” said Fred Tomczyk, president and chief executive of the Omaha, Neb.-based firm. “The regulators realize that the independent RIAs were themselves acting as fiduciaries, and we were acting as custodians.”

TD Ameritrade's settlement is being closely monitored because it could be a precedent for future settlements as regulators press auction rate cases against other brokers, including some RIA custodians, whose clients are stuck with the flawed securities. When Boston-based Fidelity Investments last year agreed to repurchase some ARS, it similarly excluded clients of RIAs from the offer.

Mr. Tomczyk conceded that the distinction might irritate RIAs who keep their customers' assets with TD Ameritrade and who conduct much of their trading through the firm. The advisers may be especially irked because the firm has been pushing hard in recent years to develop its institutional arm for RIAs as part of its plan to diversify from a largely commission-based revenue model.

Advisers who purchased ARS for clients are in some ways in the same boat as TD Ameritrade and other “downstream” brokers who initially argued that they were so far removed from the underwriting of the securities and the operations of the auctions that they weren't responsible for failing to anticipate the market's collapse.

That collapse left investors stuck with more than $300 billion of the long-term debt, which was sold with promises that it could be redeemed at weekly or, approximately, monthly intervals.

“We totally understand those points, and in our hearts we agree with them,” Mr. Tomczyk said of aggrieved advisers. “But as an organization you have to stand back and do what's right for the organization.”

TD Ameritrade, which was not assessed fines or penalties by regulators, likely expects that its settlement will make private class actions over its auction rate sales moot, several lawyers said. The firm in April moved for dismissal of a class complaint, but the court has not yet ruled, a company spokeswoman said. A federal court dismissed a similar suit against Zurich, Switzerland-based UBS AG, one of several big banks that underwrote and structured ARS, after UBS repurchased ARS as part of a regulatory settlement.

As of May 1, clients of TD Ameritrade held about $690 million of ARS, including $190 million placed by independent RIAs, the company said in a regulatory filing. In a conference call with investors last week, TD Ameritrade chief financial officer William Gerber estimated that the firm will repurchase between $400 million and $500 million of the securities, since some have already been redeemed by their issuers. He declined in an interview to discuss how much is still held by RIAs and their clients.

The buyback, which TD Ameritrade expects to initiate next month for investors with $250,000 or less of the securities and by next June for larger holders, applies to “self-directed investors” as well as those who worked with the firm's brokers, the company said in a Q&A about the settlement on its website. But, according to the message, clients of independent RIAs “relied on those advisers to manage their assets and used TD Ameritrade only to custody their assets.”

The firm said it will continue a program of extending loans to clients of RIAs with ARS who are in need of cash, though it didn't specify rates for the loans. Mr. Tomczyk said few clients of RIAs, or of the firm directly, have made use of the loan offer since it was made available last year.

The settlement requires TD Ameritrade to reimburse borrowing costs that exceeded the amount clients earned in interest or dividends on the securities frozen in their accounts, and to cover losses eligible clients may have incurred by selling the securities on or before Feb. 13, 2008.

Many advisers who use TD Ameritrade as their custodian said they understand the firm's position. Unless a fixed-income desk at their custodian actually recommended the security, they said, advisers must bear the responsibility for their clients' investments.

“If TD had to bail out every bad investment, they'd be out of business,” agreed Ray Mignone, founder of an eponymous RIA in Little Neck, N.Y., which keeps about $170 million of client assets in custody with TD Ameritrade.

Paul Baumbach, managing partner of Mallard Advisors LLC, keeps his Newark, Del.-based firm's approximately $110 million of client assets with TD but absolves the firm of all responsibility in the auction rate crisis. Mr. Baumbach has been trying to help a client sell his auction rate securities back to a large bank-owned brokerage that made the original sale. “The sin was committed there,” he said.

In short, says Michael Hecht, an analyst of discount brokerage stocks at JMP Securities in New York, independent advisers are stuck.

“The RIA is on the hook to do due diligence,” he said. “In this model, you can't turn around and say "make me whole.'”

The same day that TD Ameritrade's settlement was unveiled, New York Attorney General Andrew Cuomo accused San Francisco-based Charles Schwab & Co. of misleading investors about the safety of ARS and gave the firm five days to resolve his investigation or face prosecution.

The SEC and the Alabama Securities Commission last week sued Morgan Keegan & Co. of Memphis, Tenn., over the same issue, prompting the firm to say it was “surprised and disappointed” at the action.

In a statement, Schwab denied responsibility.

“Schwab brokers, while trained to levels beyond industry standards, could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee, or that were intentionally veiled by the underwriters,” the firm said.

July 22, 2009

Julian Tzolov, arrested last week in Spain and wanted by the FBI, back in America

Julian Tzolov, who fled U.S. prosecution on securities-fraud charges, has been taken from Spain to New York in the custody of the FBI to face trial in Brooklyn federal court.

Julian Tzolov, arrested last week in Spain and wanted by the FBI, is back in America

Julian Tzolov, who fled U.S. prosecution on securities-fraud charges, has been taken from Spain to New York in the custody of the FBI to face trial in Brooklyn federal court.

The U.S. prosecutors have wasted no time in preparing for the case to come to court swiftly and have asked the judge presiding over the case to delay jury selection, scheduled to begin today, until his arrival this afternoon.

It has been well reported that Tzolov escaped house arrest in May and was declared a fugitive in June. He was apprehended last week near Malaga, Spain.

Tzolov, 36, and his co-defendant, Eric Butler 37, ran Credit Suisse’s Corporate Cash Management Group, and are accused of falsely telling clients their financial products were backed by federally guaranteed student loans while they were actually linked to auction-rate securities.

According to prosecutors the men face about 34 years in prison if convicted.

July 22, 2009 (an earlier story)

Tzolov, Ex-Credit Suisse Broker, Said to Be Arrested in Spain
By Patricia Hurtado

July 15 (Bloomberg) -- Julian Tzolov, the former Credit Suisse Group AG broker who fled prosecution in May, was arrested in Spain on charges of securities fraud and bail jumping after an international manhunt.

Assistant U.S. Attorney Daniel Spector disclosed the arrest today in a letter to a federal judge in Brooklyn, New York, where Tzolov faces charges of fraudulently selling subprime mortgages linked to auction-rate securities.

Tzolov, 36, was taken into custody without incident today in Marbella, located in Spain’s Costa del Sol region on the Mediterranean Sea, by the Spanish National Police’s fugitive unit, two persons with knowledge of the case said.

“The government writes to inform the court that the defendant (and fugitive) Julian Tzolov has been apprehended,” Spector wrote.

Tzolov, a Bulgarian national, was declared a fugitive in June after disappearing while under house arrest in May and initially telling the court through his lawyer that he intended to plead guilty and avoid a trial.

“Julian made a huge mistake when he fled,” said Tzolov’s lawyer, Benjamin Brafman. “All he has succeeded in doing is further complicate his legal position.”

The arrest came as U.S. prosecutors in Manhattan filed new wire-fraud charges against Tzolov and Eric Butler, 37, a former Credit Suisse broker. Butler is scheduled to go to trial in federal court in Brooklyn next week.

Butler and Tzolov were charged together in an indictment unsealed originally last September by prosecutors in the office of Brooklyn U.S. Attorney Benton Campbell. That case accused the two of falsely telling clients their products were backed by federally guaranteed student loans.

They were accused yesterday in a separate 14-count indictment in federal court in Manhattan of operating a wire- fraud scheme to sell auction-rate securities. Manhattan and Brooklyn are separate judicial districts.

“It appears that the government has brought an identical case in a different district to try to give themselves two chances to win a case that they should have not brought once,” Paul Weinstein, a lawyer for Butler, said today in an interview of the latest federal charges.

Federal prosecutors in Brooklyn today also announced the unsealing of additional charges against Tzolov for failing to appear at his trial and for visa fraud after making false statements on his permanent-resident card.

Tzolov faces as long as 15 years in prison if convicted of failing to appear in court, said Robert Nardoza, a spokesman for Campbell.

U.S. District Judge Jack B. Weinstein, who is presiding over the case and isn’t related to Butler’s lawyer, declined government requests to delay Butler’s June 20 trial because of Tzolov’s disappearance.

Judge Weinstein asked the government in a hearing two days ago if Tzolov was still missing.

“If you pick him up before Monday, drag him here,” he said. “I want him here on trial.”

Tzolov was free on $3 million bond and was subject to home confinement at his Manhattan apartment with electronic monitoring. He left his residence May 9 without permission from court officials and prosecutors, the government said at the time.

The U.S. has an extradition treaty with Spain that recognizes securities-fraud crimes such as those leveled against Tzolov, said a person who has knowledge of the case.

After Tzolov was declared a fugitive in June, prosecutors moved to seize $3 million worth of property belonging to two men who had signed Tzolov’s bond, Dimitre Ivanov and Kamen Kiriakov.

The government seized Tzolov’s ninth-floor apartment at 225 Fifth Ave. in Manhattan, Ivanov’s 18th-floor apartment at 325 Fifth Ave. in Manhattan and Kiriakov’s residence in North Miami Beach, Florida. Both men identified themselves on court papers as Tzolov’s friends.

Paul Weinstein said he and Tzolov’s lawyer, Brafman, objected to some charges being filed in Brooklyn because the alleged crimes occurred in Manhattan.

Until September 2007, Tzolov and Butler ran Credit Suisse’s Corporate Cash Management Group, a division that helped clients manage excess corporate cash holdings, prosecutors said.

Beginning in November 2004, the two approached companies that had banking relationships with Credit Suisse and pitched the benefits of investing cash in “low risk” auction-rate securities backed by student loans from the Federal Family Education Loan Program, according to the government.

Without telling customers, the defendants used client funds to purchase higher-yield mortgage-backed collateralized debt obligations, according to the Brooklyn indictment.

The men face as long as 33 years and 9 months in prison if convicted, prosecutors have said. Each could be fined as much as $5 million, Nardoza said.

The Brooklyn case is U.S. v. Tzolov, 08-cr-370, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Patricia Hurtado in New York at

July 22, 2009

Regions’ Morgan Keegan Sued Over Auction-Rate Bonds (Update1)
By David Scheer and Laurence Viele Davidson of Bloomberg

July 21 (Bloomberg) -- Regions Financial Corp.’s Morgan Keegan brokerage unit was sued by U.S. regulators on claims it stranded clients with $1.2 billion in auction-rate securities when the market for the instruments collapsed last year.

The U.S. Securities and Exchange Commission wants Morgan Keegan to pay unspecified fines and buy back instruments sold to customers before March 20, 2008, according to a complaint filed today at federal court in Atlanta. The SEC also asked that the Memphis, Tennessee-based firm forfeit proceeds from underwriting and distributing the securities and managing auctions. Morgan Keegan earned $4.3 million from underwriting, brokerage and distribution fees from June 2007 to February 2008, the SEC said.

More than a dozen firms including Citigroup Inc., UBS AG, and Goldman Sachs Group Inc. agreed to repurchase more than $50 billion in auction-rate debt to settle claims they improperly touted the securities as safe, cash-like investments. Banks managing frequent auctions abandoned the $330 billion market in February 2008, leaving thousands of investors unable to sell.

“From late 2007 through February 2008 Morgan Keegan continued to push its brokers to sell ARS and downplayed the emerging liquidity risks,” the SEC wrote in its complaint.

Morgan Keegan spokeswoman Kathy Ridley didn’t immediately respond to messages seeking comment.

TD Ameritrade Inc. yesterday resolved U.S. and state claims it misrepresented auction-rate securities, agreeing to return to investors what New York Attorney General Andrew Cuomo said amounts to $456 million. Charles Schwab & Co. said it will fight a settlement demand Cuomo issued along with a threat to sue.

To contact the reporters on this story: David Scheer in New York at; Laurence Viele Davidson in Atlanta at

July 21, 2009

TD Ameritrade to Return Money
Firm to Buy Back $456 Million of Securities From Clients in Settlement
By LIZ RAPPAPORT of the Wall Street Journal

TD Ameritrade Inc. agreed to buy back $456 million of auction-rate securities from about 4,000 clients as part of a settlement with New York Attorney General Andrew Cuomo, the Securities and Exchange Commission and Pennsylvania securities regulators.

The online brokerage firm intends to return the money to customers, including individuals, charities, nonprofit entities and businesses, by March 2010 but could need until June 30 to complete the buybacks. TD Ameritrade said it will buy back the debt from clients with accounts of under $250,000 within 75 days.

Auction-rate securities, short-term debt instruments whose prices reset in periodic auctions, caused billions of dollars in losses for investors after the $330 billion market collapsed in early 2008.

"It's the best news I've had since the account was frozen 18 months ago," said Steve Lutz, a marketing executive from Wenatchee, Wash., who purchased more than $100,000 of auction-rate securities -- nearly one-third of his total investments for retirement -- through TD Ameritrade in January of 2008.

Over the past year, regulators have reached settlement agreements with several Wall Street firms and brokerage houses, which have agreed to buy back more than $60 billion of the securities from investors.

TD Ameritrade was among the few firms that hadn't settled. Thousands of investors bought auction-rate securities believing they were as safe and liquid as cash, but they wound up unable to sell them when Wall Street firms stopped supporting the market.

"Given our financial strength and the ongoing illiquidity in the auction-rate securities market, initiating a buyback program of this nature is the right thing to do for our clients," said President and Chief Executive Fred Tomczyk.

TD Ameritrade will repurchase securities bought before Feb. 13, 2008, that are still held by customers and will also reimburse eligible investors who sold their securities at a discount after the market failed. TD Ameritrade consented to a special arbitration process to resolve claims of damages experienced by eligible investors as a result of being unable to access their funds.

The settlement comes as the New York attorney general warned discount brokerage firm Charles Schwab & Co. that it plans to sue the company for civil fraud if it doesn't reach an agreement in a few days to buy back the securities from clients.

"It is disturbing that Charles Schwab, who had been holding itself out as an industry expert, has stonewalled its customers," Mr. Cuomo said on Monday. "Today's notice should send a signal that if Charles Schwab will not stand by its customers, this office will."

Schwab has said Mr. Cuomo's allegations are without merit and its brokers "could not be expected to foresee and disclose market risks that even regulators and market experts didn't foresee."

Write to Liz Rappaport at

July 20, 2009


TD Ameritrade Joins Largest Consumer Recovery in History - Now Totaling Over $61 Billion

Cuomo Also Announces Imminent Legal Action Against Charles Schwab & Co. for Deceptively Selling Auction-Rate Securities as Safe, Short-Term Investments

NEW YORK, NY (July 20, 2009) - Attorney General Andrew M. Cuomo today announced a settlement with TD Ameritrade, Inc. (“TD Ameritrade”), under which the company has agreed to return $456 million to investors across New York State and the nation holding illiquid auction-rate securities. Attorney General Cuomo also announced imminent legal action against Charles Schwab & Co. (“Schwab”) for deceptively selling auction-rate securities as safe, liquid, short-term investments that were similar to money market instruments. These are Attorney General Cuomo’s latest steps in his ongoing effort to restore liquidity to investors caught in the collapse of the auction-rate securities market.

“I commend TD Ameritrade for working with regulators to restore investor confidence, and for joining what has become the single largest consumer recovery in history,”said Attorney General Cuomo. “But given a record replete with misrepresentations, it is disturbing that Charles Schwab, who had been holding itself out as an industry expert, has stonewalled its customers. Today’s notice should send a signal that if Charles Schwab will not stand by its customers, this Office will.”

With the $456 million settlement today, TD Ameritrade joins eleven underwriting securities firms and another downstream broker, Fidelity Investments, in resolving allegations that they misrepresented auction-rate securities as liquid, short-term investments and agreeing to provide liquidity to their customers. As a result of these settlements and settlements with other regulators, over 20 firms have recognized widespread problems in the sale of auction-rate securities and agreed to buy-back billions of these illiquid securities from investors. To date, regulatory settlements called for over $61 billion in investor buy-backs, representing the largest return on behalf of investors ever.

Under Cuomo’s settlement, TD Ameritrade has agreed to purchase illiquid auction-rate securities from individuals, charities, non-profits and small businesses and institutions purchased from TD Ameritrade before February 13, 2008 (collectively “retail investors”). TD Ameritrade will purchase such illiquid auction-rate securities from retail investors with accounts of $250,000 or less within seventy-five (75) days; by March, 2010, for all other eligible TD Ameritrade customers. TD Ameritrade will also:

Fully reimburse all eligible investors who sold their auction-rate securities at a discount after the market failed; and
Consent to a special arbitration procedure to resolve claims of consequential damages suffered by eligible investors as a result of not being able to access their funds.
TD Ameritrade customers who purchased auction-rate securities at TD Ameritrade or its predecessor entities, but who transferred their securities away before January 24, 2006, should contact TD Ameritrade directly to request to participate in the buyback. Investors should take note that they need to provide appropriate notice to TD Ameritrade in order to participate in the settlement, and could lose their rights to sell their auction-rate securities if they fail to do so.

Cuomo also announced today that his Office intends to file fraud charges against Charles Schwab based on their unlawful and deceptive misrepresentation of auction-rate securities. An imminent action letter sent Friday to the company allows Schwab five business days to resolve the Attorney General’s investigation or show the Attorney General why action should not be taken. The Attorney General’s legal actions seek to stop Schwab’s illegal practices, and obtain injunctive relief, restitution, damages, civil penalties, costs, and other relief.

Attorney General Cuomo’s ongoing investigation into the collapse of the auction-rate securities market revealed that Schwab brokers consistently misrepresented auction-rate securities as safe, liquid, short-term investments suitable for cash management purposes or as good investments in which to temporarily “park” cash. Such misrepresentation was the result of Schwab’s failure to train or otherwise ensure that its brokers had a basic understanding of auction-rate securities before they sold millions of dollars of these securities to Schwab’s customers.

Audio recordings obtained during the investigation confirm that Schwab brokers repeatedly misled investors about the risks of investing in auction-rate securities. One Schwab broker described preferred auction-rate securities to a customer as a “short-term institutional holding instrument” that was particularly suitable for managing the customer’s cash balances: “If you need to have that access to them at any time, that’s a good place for those to be. You know if you think you might need to get into that money, that’s probably as good a place if not better than anywhere to leave them.”

The Attorney General thanked the North American Securities Administrators Association (NASAA) and its multi-state ARS Task Force, who joined the Attorney General in announcing the agreements, for their efforts in achieving today’s settlement. He also thanked specifically the Pennsylvania Securities Division for its assistance. In addition, the Attorney General thanked the Securities and Exchange Commission and its enforcement staff for their cooperation in the ongoing auction-rate securities investigation.

Assistant Attorneys General Peter Dean, Pamela Mahon and Armen Morian conducted the investigation under the supervision of David A. Markowitz, Chief of the Investor Protection Bureau, and Eric Corngold, Executive Deputy Attorney General for Economic Justice.

A copy of the five-day letter to Schwab and the agreement with TD Ameritrade is available at the Attorney General's website: Cuomo’s auction-rate securities investigation is continuing.

July 20, 2009

SEC Charges TD Ameritrade For Auction Rate Securities Sales Practices - Settlement Enables ARS Customers To Receive All Of Their Money Back

he Securities and Exchange Commission today announced settled charges against TD Ameritrade, Inc. for making inaccurate statements when selling auction rate securities (ARS) to customers. The settlement reached with the online brokerage will provide its customers the opportunity to sell back to TD Ameritrade any ARS that they bought prior to the collapse of ARS market in February 2008.

According to the SEC's administrative order, TD Ameritrade's registered representatives told customers that ARS were an alternative to certificates of deposit and money market accounts, when in fact ARS were very different types of investments. Among other things, TD Ameritrade representatives did not tell customers about the complexity and risks of ARS, including their dependence on successful auctions for liquidity.

The SEC previously announced finalized ARS settlements with Citigroup and UBS, Wachovia, Bank of America, RBC Capital Markets, and Deutsche Bank. The SEC's Division of Enforcement previously announced a settlement in principle with Merrill Lynch.

"TD Ameritrade is the latest in a series of landmark ARS settlements that bring unprecedented relief to tens of thousands of investors," said Robert Khuzami, Director of the SEC's Division of Enforcement. "ARS customers of numerous firms can get back all of the money they invested in auction rate securities as more than $50 billion in liquidity is being made available to them through these historic settlements."

TD Ameritrade's ARS customers include individual investors, small businesses, small non-profit organizations, charities and religious organizations.

"TD Ameritrade improperly marketed ARS to retail customers as short-term investments without telling them about the special risks of the ARS market," said Donald M. Hoerl, Regional Director of the SEC's Denver Regional Office. "This settlement provides hundreds of millions of dollars to thousands of TD Ameritrade customers who hold ARS that are now illiquid."

The SEC's order finds that TD Ameritrade willfully violated Section 17(a)(2) of the Securities Act of 1933. The Commission censured TD Ameritrade, ordered it to cease and desist from future violations, and reserved the right to seek a financial penalty against the firm.

Without admitting or denying the SEC's allegations, TD Ameritrade consented to the SEC's order and agreed to:

+ Offer to purchase eligible ARS from individuals, charities, and those small businesses and institutions with assets at TD Ameritrade of $10 million or less.

+ Compensate eligible customers who sold their ARS below par by paying the difference between par and the sale price of the ARS, plus reasonable interest.

+ Reimburse excess interest costs to eligible ARS customers who took out loans from TD Ameritrade after Feb. 13, 2008.

+ At the customer's election, participate in a special arbitration process with those eligible customers who claim additional damages.

+ Establish a toll-free telephone assistance line and a public Internet page to respond to questions concerning the terms of the settlement.

The Commission wishes to alert investors that, in most instances, they will receive correspondence from TD Ameritrade and must advise TD Ameritrade that they elect to participate in the settlement. If they do not do so, they could lose their rights to sell their ARS to TD Ameritrade. Investors should review the full text of the SEC's order, which includes the terms of the settlement.

The SEC appreciates the assistance and cooperation of the New York Attorney General's Office, the Pennsylvania Securities Commission, and the North American Securities Administrators Association.

Additional Materials: Administrative Proceeding Release No. 33-9053

The above story came from a site called MondoVisione. Click here.

July 20, 2009

Today's Outrage: Schwab's ARS Victimhood
From by Glenn Hall
(see comment below)

Charles Schwab is claiming to be the victim in the collapse of the market for auction-rate securities, the now-maligned variable-rate debt instruments that were once considered as safe as cash.

Victimhood is basically Schwab's defense against charges by New York Attorney General Andrew Cuomo that the brokerage over hyped the ARS products to its clients and failed to warn them about the pending collapse of the market that would make the securities nearly impossible to unload.

Brokerages like Schwab like to point out that they are just the middlemen, connecting buyers to sellers. From Schwab's perspective, it neither created the ARS market nor contributed to its collapse.

Can any single company be blamed for the collapse of the ARS market, invented by Lehman Brothers, enhanced by Goldman Sachs and eventually joined by Citigroup, JPMorgan Chase, Morgan Stanley and others? Can you blame the sales person when the product is faulty? I guess it depends on the sales pitch, which is what this case is about.

Cuomo is claiming that Schwab brokers didn't understand what they were selling. I don't know exactly what Schwab clients were told or whether the phrase "safe as cash" was ever uttered by a Schwab broker. Even if they did say such things, they weren't alone. That was industry parlance back in the day.

Auction-rate securities are typically derived from corporate and municipal debt, so it's easy to understand why they were considered safe bets. They are also expensive to buy, often denominated at a minimum of $25,000 and sold to institutional investors and the wealthy.

You'd hope that anyone throwing that kind of money around would do a little of their own due diligence.

Schwab is playing it smart and isn't building its defense by pointing the finger at its clients, who should have known better themselves (that's my opinion, Schwab can't afford to say it).

But the New York Attorney General doesn't seem to believe in caveat emptor. Nor does he believe that the extraordinary circumstances in the financial markets since 2008 -- which befuddled regulators as much as anyone -- provide a legitimate defense.

Cuomo thinks Schwab needs to essentially issue refunds and buy back all the auction-rate securities it sold.

No doubt Schwab is in the cross hairs because it is the largest U.S. online brokerage. New York attorneys general have a long and storied history of making an example of companies like Schwab. It's a political right of passage.

It will be interesting to see whether Schwab caves in and agrees to a settlement or whether the brokerage decides to defend its honor and try to prove Cuomo wrong.

Whether anyone wants to say it or not, this case boils down to how much individual responsibility an investor should bear for the choices they make with their money.

July 20, 2009

Schwab refusing to pay off clients in 'auction-rate' issues
by Tom Petruno, Los Angeles Times

Instead of the carrot-and-stick approach, New York Atty. Gen. Andrew Cuomo on Monday used two sticks in his campaign to force Charles Schwab Corp. to pay off clients in those notorious auction-rate preferred securities.

For stick No. 1, Cuomo threatened Schwab with a lawsuit if the discount brokerage fails to agree to buy back the offending securities.

For stick No. 2 , Cuomo resorted to peer pressure: He announced that Schwab rival TD Ameritrade Inc. settled a similar case and will repurchase $456 million of the securities. The Securities and Exchange Commission also announced a settlement with TD Ameritrade, which won’t pay any fines as part of the deals.

So far, Schwab isn’t budging. It issued a long statement defending itself and chastising Cuomo for deciding to "try cases in the press."

Auction-rate securities, popular with many individual investors before the credit markets collapsed in 2008, were essentially long-term debt instruments masquerading as short-term securities.

They were pitched by brokers to yield-hungry small investors as safe and easily redeemable -- which they were, until demand for all such engineered securities dried up. That left investors stranded in about $330 billion of auction-rate issues, unable to sell (although still earning interest).

Cuomo, the SEC and other securities regulators have since negotiated buy-back settlements with 20 brokerages and other financial firms that were selling auction-rate preferred debt, including Goldman Sachs, Merrill Lynch and Deutsche Bank.

To compel settlements, regulators have asserted that the brokerages misrepresented the safety of the securities.

In a letter to Schwab warning of a lawsuit, Cuomo excerpted from interviews his office did with Schwab brokers as part of his probe and from audio recordings of Schwab sales pitches. One broker allegedly told a client that getting into the securities "is the tough part. Getting out of it is easy as just selling."

In its rebuttal, Schwab said that its brokers, "While trained to levels beyond industry standards, could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee."

Schwab asserts that the big brokerages that created the securities should have been forced to buy them back from all investors who purchased them, including investors who bought the issues from third parties such as Schwab.

But Cuomo’s settlement with TD Ameritrade, following a settlement last year with Fidelity Investments’ brokerage unit, stands to put more pressure on Schwab. TD Ameritrade CEO Fred Tomczyk said the buyback was "the right thing to do for our clients."

A person familiar with Schwab’s exposure said its clients still own about $100 million of auction-rate securities, much less than what TD Ameritrade will repurchase.

That begs the question: Is it really worth a game of hardball with Cuomo -- and a potential fat fine -- or better to just settle up and move on?

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