Auction Rate Securities Attorneys

Investment and Securities Fraud Lawyer - Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor


Still Frozen and Prices Declining

Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A. is accepting claims against broker-dealers who recommended auction rate securities to investors as an alternative to "cash equivalents." In fact, almost $330 billion of auction rate securities and other similar investments were recommended to investors as a place to hold cash for those who had short-term time horizons. Of course, these investors were not told that the liquidity for the auction rate securities came from the financial industry itself and they could walk away at any point. Nor were the investors told that the SEC had already fined several prominent broker-dealers almost $16 million over the lack of transparency in the auction markets just a few years before. Now, some auction rate securities, such as those backed by student loans, that were being pitched as "cash equivalents" just a few months ago, can not be liquidated without taking a 25% - 50% loss on the initial investment if they can be liquidated at all. Some of the more "liquid" ARS can not be liquidated in the secondary markets without taking a 10% - 15% loss.

Retail investors were not the only victims of the subprime and credit market debacle. Many institutions, including municipalities, school districts, labor unions, and pension funds, were also misled about purchasing products filled with subprime products and esoteric credit instruments. Similarly, taxpayers are hurt by the frozen market because municipal issuers - cities, hospitals, school districts - are forced to pay the fees and expenses associated with redemptions and restructuring.

Of course, the push to put retail investors into auction rate securities occurred in late 2007 and early 2008 when the broker-dealers themselves were liquidating their positions.  UBS company emails reveal that the company was focused on moving the securities from their own pockets to their client’s pockets.  In November 2007, the chief risk officer for the Americas asked: “why the continual increase in the inventory of auction-rate securities? What measures are being taken to reduce this exposure?”  In December, the global head of fixed income distribution wrote that he was “pushing every angle here to move product.”  While the UBS website was advertising auction rate securities as a highly liquid cash alternative, an executive wrote on February 12, 2008 that “we need to beat the bushes harder than ever to unload this paper.”

Only July 17, 2008, the nationwide inquiry into auction rate securities market deepened with another raid by government officials.  Wachovia's St. Louis headquarters were inspected by regulators seeking information on the company's marketing and sales of the securities.  The regulators, representing ongoing investigations into auction rate bonds from five states, served over a dozen subpoenas to Wachovia executives and agents.

To add to the insult, the broker-dealers who operate the now virtually non-existent auctions are still being paid 25 basis points for the securities total issue for each year of its life. The broker-dealers are also generating banking fees when the municipal issuers are forced to redeem the securities and yet again when they unwind the derivative contracts that are often intertwined with the securities. If you have a potential ARS claim, please contact Peter Mougey so we can help

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Related News

FINRA Orders UBS To Pay Kajeet $81M Over ARS

August 4, 2010

Law360, New York (August 4, 2010) -- UBS Financial Services Inc. must pay kids' cell phone maker Kajeet Inc. nearly $81 million in damages over student-loan auction rate securities it sold to the company, a Financial Industry Regulatory Authority arbitration panel has ruled.

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UBS General Counsel Resigns amid Probe

August 4, 2008

The General Counsel for UBS, David Aufhauser, quit his post at the Zurich-based investment bank. Aufhauser is one of seven executives mentioned by the lawsuit filed by the New York Attorney General on July 24. The suit alleges that the executives shed $21 million in personal auction rate security investments while the investment bank was promoting the products to individual investors.

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Citigroup Subpoenaed in Continuing ARS Probe

August 1, 2008

Citigroup Inc. announced in an SEC filing that it has received subpoenas from state, federal, and industry regulators relating to sales of auction rate debt. Citigroup acted as the primary dealer for about $72 billion in auction rate securities, often buying unsold securities, until the market froze in February. Regulators in several states, including Massachusetts, New York, and Texas, are responding to complaints from individual investors who were sold auction debt as a suitable cash alternative.

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House Financial Services Committee to Hold Auction Rate Security Hearing

July 31, 2008

House Financial Securities Committee chairman Barney Frank intends to ask auction rate security issuers, regulators, and investors to testify before his committee. The September 18 hearing will probe how the $330 billion auction rate securities market collapsed and how participating firms are compensating investors. UBS, Merrill Lynch, Bank of America, Wachovia, and Citigroup are all currently under investigation from state and federal regulators.

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Merrill Lynch Accused of Fraud by Massachusetts

July 31, 2008

Massachusetts Secretary of State William Galvin is suing Merrill Lynch & Co. over its auction rate security practices. In a statement, Galvin said that the investment bank aggressively marketed the securities while encouraging research analysts to downplay the known risks in the market. Galvin noted that Merrill’s auction rate investors were the last to know about the trouble in the market. Merrill joins a host of other major investment banks charged with violations in their marketing and sales of auction rate securities.

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UBS Adds $1 Million to Settlement to End AG Investigation

July 30, 2008

UBS will pay an additional $1 million to the State of Massachusetts on top of the $35 million it has already agreed to pay to municipalities and other authorities throughout the state. Massachusetts Attorney General Martha Coakley was pleased with the settlement noting that the primary goal was to refund cities and towns the money they had invested with UBS. The settlement closes the Massachusetts AG probe into whether UBS provided accurate guidance to municipal officials about whether auction rate securities were suitable.

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Texas to Consider Suspending UBS

July 24, 2008

Securities regulators for the state of Texas have scheduled a September hearing to decide whether to suspend UBS AG’s broker-dealer and financial services divisions. Officials cite complaints from investors that the investment bank misrepresented or omitted key information when marketing and selling auction rate securities. The Texas State Securities Board is also considering administrative fines and cease and desist orders.

NY Attorney General Files Suit Against UBS

July 24, 2008

NY Attorney General Andrew Cuomo brought charges against UBS relating to its marketing of auction rate securities. Similar to the suit filed against UBS in Massachusetts, Cuomo alleges that UBS undertook an ‘aggressive marketing campaign’ to push auction rate bonds onto individual investors. The firm’s promotion of auction rate securities was called ‘fraudulent.’ Cuomo notes that even as the auction market began to crumble, UBS continued to sell the investments, and bank executives managed to shed some $21 million in personal holdings. The Attorney General also mentioned that the investment bank’s July 16 offer to buy back $3.5 billion in auction-rate preferred shares is insufficient.

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Investors Sue Bank of America for Auction Rate Security Practices

July 18, 2008

A class action lawsuit was filed against Bank of America concerning the firm’s marketing of auction rate securities. The suit, pending in Illinois, alleges that Bank of America failed to disclose the true nature of auction rate securities. Among other omissions, Bank of America did not tell investors that auction securities were not suitable cash alternatives, that any apparent liquidity was maintained by firms like Bank of America, and that the firm was planning to withdraw its support of periodic auctions. Bank of America joins several other major investment firms who improperly marketed auction rate securities to investors.

Wachovia Raided in Ongoing Auction Rate Securities Investigations

July 17, 2008

Wachovia's St. Louis corporate headquarters were searched by government officials as part of an ongoing examination of the company's sales, marketing, and internal evaluations of auction rate securities. It is estimated that $218 billion remain frozen in the auction market and Missouri officials have received over 70 complaints concerning frozen funds and the resulting inability to run businesses or pay tuitions. The team of regulators represented investigations from five states and served over a dozen subpoenas to Wachovia executives and agents.

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UBS Charged with Fraud for Sales of Auction Rate Securities

July 06, 2008

William Galvin, the Massachusetts Secretary of the Commonwealth, brought charges against UBS Securities LLC and UBS Financial Services Inc. accusing fraud and dishonest conduct. The charges relate to the financial company’s selling of auction rate securities to individual investors. The complaint specifically notices that UBS was clearing its own auction rate securities at the same time that it ramped up sales to its customers. Mr. Galvin released a statement saying that: “The game was fixed; only the customers were in the dark.”

The Massachusetts investigation uncovered a series of emails among UBS insiders stressing the importance of shedding the securities before they became illiquid. The global head of fixed income distribution, David Shulman, wrote an email in mid-December saying that “we need to move this paper and have to explore all angles possible…. We need to do this as quickly as possible.” The emails betray the bank’s priorities, namely protecting its own pockets at the expense of its customers.