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Archive for the ‘Auction Rate Securities’ Category


FINRA Fines SunTrust Robinson Humphrey, SunTrust Investment Services a Total of $5 Million for Auction Rate Securities Violations

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined SunTrust Robinson Humphrey, Inc. (SunTrust RH) and SunTrust Investment Services, Inc. (SunTrust IS) for violations related to the sale of auction rate securities (ARS). SunTrust RH, which underwrote the ARS, was fined $4.6 million for failing to adequately disclose the increased risk that auctions could fail, sharing material non-public information, using sales material that did not adequately disclose the risks associated with ARS, and having inadequate supervisory procedures and training concerning the sales and marketing of ARS. SunTrust IS was fined $400,000 for having deficient ARS sales material, procedures and training.

FINRA found that beginning in late summer 2007, SunTrust RH became aware of stresses in the ARS market that raised the risk that auctions might fail. At the same time, SunTrust RH was told by its parent, SunTrust Bank, to reduce its use of the bank’s capital and began to examine whether it had the financial capability in the event of a major market disruption to support all ARS in which it acted as the sole or lead broker-dealer. As these stresses increased, the firm failed to adequately disclose the increased risk to its sales representatives while encouraging them to sell SunTrust RH-led ARS issues in order to reduce the firm’s inventory. As a result, certain SunTrust RH sales representatives continued to sell these ARS as safe and liquid. In February 2008, SunTrust RH stopped supporting ARS auctions, knowing that those auctions would fail and the ARS would become illiquid.

Raymond James Settles ARS Case and Agrees to $300 million Buyback

As part of a settlement with eight states and the Securities and Exchange Commission, Raymond James Financial Inc. will buy back $300 million in auction-rate securities from clients and pay a fine of $1.7 million.

The states in charge of the settlement are Florida and Texas. Other states involved were Indiana, Missouri, New York, North Carolina, Pennsylvania and South Carolina.

Raymond James has 30 days to extend an offer to repurchase the securities, and the offer must be open for 75 days after that initial bid.

UBS Hit With $81 Million Auction Rate Securities Award By FINRA Arbitration Panel

A FINRA arbitration panel ordered UBS AG on Tuesday to pay $81 million in damages to a Bethesda, Maryland-based cellphone marketer that purchased auction-rate securities through the U.S. brokerage.

FINRA documents posted online showed a panel comprised of three public arbitrators ordered to pay the damages to Kajeet Inc, which purchased student-loan auction-rate securities that lost value during the credit crisis.

Kajeet, which sells pay-as-you-go cell phones aimed at children, had claimed $110 million in losses.

State and federal regulators have forced UBS to repurchase $22.7 billion of auction rates from individual investors. The Securities and Exchange Commission continues to investigate the role of individual executives at the firm.

In March, UBS agreed with a coalition of state securities regulators to purchase up to $200 million in auction-rates from investors not covered by the initial agreement.

Raymond James Loses $2.5 Million FINRA Arbitration

A FINRA panel ordered Raymond James to pay $2.5 million to investors who alleged that Raymond James failed to divulge ‘risk of illiquidity’ in auction-rate securities market

Raymond James Financial Inc., still carrying $600 million in auction rate securities. The firm is reportedly working to draw down its position in the ARS market, which seized up in February 2008, precipitating the credit crisis. When the market froze, Raymond James clients held $1.9 billion of the securities.

Looks Like a Loss for Credit Susse in Auction-Rate Securities Cases

Last month, a Financial Industry Regulatory Authority (FINRA) arbitration panel awarded $9.8 million to Catalyst Health Solutions in its auction-rate securities case against Credit Suisse Securities, meaning that more institutional investors are coming out on top in their cases involving auction-rate securities.

Catalyst Heath Solutions, which manages prescription drug benefits, is just one of many institutional investors to take legal action against Credit Suisse after the ARS market came to an abrupt standstill in February 2008. Following the market’s collapse, institutional and retail investors alike were left financially hammered, unable to liquidate their supposedly liquid investments.

Ultimately, regulatory settlements were reached with a number of broker/dealers that marketed and sold auction-rate securities to investors. Most of the agreements, however, benefited retail ARS holders, not institutional investors.

In 2009, another institutional investor, STMicroelectronics NV, also successfully won its case against Credit Suisse when a FINRA arbitration panel ordered the brokerage to pay STMicroelectronics NV more than $406 million to settle claims that it misled the semiconductor maker into buying auction-rate securities.

On May 27, 2010, FINRA again ruled in favor of an investor’s arbitration claim against Credit Suisse. This time, the panel found Credit Suisse liable to Luby’s Inc. Specifically, FINRA ordered Credit Suisse to buy back the auction-rate securities at par and to pay interest on them at the par purchase price of 6% per annum from and including May 29, 2010, through and including the date the award is paid in full. According to Luby’s Feb. 10, 2010, quarterly filing, the company held $7.1 million par value or $5.2 million fair value in auction-rate securities.

Credit Suisse Ordered to Pay FINRA Arbitration Award

Credit Suisse Group AG, the biggest bank in Switzerland by market value, was ordered by a U.S. judge to pay STMicroelectronics NV the remainder of a $431 million award over unauthorized investments in auction-rate securities.

The arbitration award, ordered in 2009 by the Financial Industry Regulatory Authority, was affirmed on March 19 by U.S. District Judge Deborah Batts in New York, who cited a “record replete with evidence of Credit Suisse’s fraud.”

“Credit Suisse has grasped unsuccessfully at straws to avoid payment of the arbitration award in this case,” Batts said in the ruling. The unpaid balance is about $354 million, including $23 million in interest, Geneva-based STMicroelectronics said today in a statement.

Europe’s biggest semiconductor maker, which hired Credit Suisse to make investments for the company, accused the bank of investing in risky securities after claiming it would only invest in student loans backed by the U.S. government. STMicroelectronics sued when the value of the securities fell and in February 2009 won an arbitration award before the Washington-based regulator, known as FINRA.

“We respectfully disagree with the court’s decision and are evaluating an appeal,” Alex Biscaro, a spokesman for Zurich-based Credit Suisse, said today in an e-mailed statement.

At least 19 underwriters and broker-dealers were sued in class-action, or group, lawsuits since the $330 billion market for auction-rate securities collapsed in February 2008. Some have been compelled by regulators to buy back billions of dollars of the securities.

Charges Settled for Former UBS Broker who Sold Auction-Rate Securities

David Shulman, the former UBS executive who was suspended by UBS in July 2008, has agreed to pay a $2.75 million fine over insider trading charges connected to auction-rate securities sales and be suspended from employment by a broker or dealer until next January.

“While thousands of UBS customers received no warning about the auction-rate securities market’s serious distress, David Shulman – one of the company’s top executives – used insider information to take the money and run,” said New York Attorney General Cuomo in a press statement. “From the start, our prime goal has been to get investors their money back. But let there be no mistake – when corporate executives unlawfully take advantage of their positions, we will hold them accountable.”

Cuomo announced the settlement with Shulman on Feb. 18, 2010 Shulman is the second UBS executive to settle with Cuomo’s office thus far. To date, Cuomo’s investigation into auction-rate securities has reached agreements with 13 broker/dealers and produced more than $60 billion in repurchases of investors’ ARS holdings.

Shulman was accused of selling off $1.45 million of his personal investments in auction-rate securities in December 2007 after he learned that UBS’ own auctions were hitting a snag. On Dec. 11, 2009 one of Shulman’s employees emailed him that the group was “very concerned” about certain issues related to UBS’ student loan auction-rate program and its continuing support for that program. In that e-mail, the employee stated that “the auction product is flawed.”

On Dec. 12, 2009 records show that one of Shulman’s employees forwarded an email to Shulman with a subject line of “stud loans,” and warned Shulman that “the auction product does not work … our options are to resign as remarketing agent or fail or ?” In another e-mail that same day, the employee advised Shulman in no uncertain terms that with respect to UBS’ student loan auctionrate securities, “the entire book needs to be restructured out of auctions.” Finally, on Dec. 13, Shulman instructed his broker to immediately sell his holdings in student loan auction-rate securities, before the upcoming auctions could occur. Later that day, Shulman’s ARS holdings were sold via inter-auction directly to the UBS Short Term Trading desk.

Coincidentally, the Short Term Trading desk was under Shulman’s supervision. Shulman’s broker mentioned Shulman by name when he called the desk to place the trades. This was the first and only time Shulman sold auction rate securities inter- auction.

TD Ameritrade Agrees To Repurchase ARS From Customers

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.

SEC Charges Morgan Keegan With Making Misrepresentations

The SEC alleges that Morgan Keegan misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money market funds. Morgan Keegan sold approximately $925 million of ARS to its customers between Nov. 1, 2007, and March 20, 2008, but failed to inform its customers about increased liquidity risks for ARS even after the firm decided to stop supporting the ARS market in February 2008.

“Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “As we’ve done in our enforcement actions against other firms, the SEC is firmly committed to restoring liquidity to Morgan Keegan customers who purchased ARS.”

The SEC’s complaint, filed in U.S. District Court for the Northern District of Georgia, alleges that Morgan Keegan ignored indications that the risk of auction failures had materially increased amid investor concerns about the creditworthiness of ARS insurers, auction failures in certain segments of the ARS market, increased clearing rates for auctions managed by Morgan Keegan and other broker-dealers, and higher than normal ARS inventories at Morgan Keegan.

The SEC is seeking an injunction against Morgan Keegan for violations of the antifraud provisions of the federal securities laws, as well as disgorgement, financial penalties, and other equitable relief for investors.

The SEC appreciates the assistance and cooperation of the Alabama Securities Commission and the New York Attorney General’s Office.

Institutional Investors Neglected in ARS Settlement

Settlement agreements that took place in the summer of 2008 when Wall Street banks and investment firms agreed to buy back billions of dollars worth of auction-rate securities from retail investors and small businesses neglected to include thousands of institutional investors corporate investors that bought auction-rate securities on the premise they were cash equivalents. The settlement agreements were negotiated as a way to settle state and federal charges alleging misrepresentation of the instruments.

Auction-rate securities are long-term bonds or preferred stocks that pay interest or dividends at rates determined through auctions held every seven, 14 or 28 days. In February 2008, the market for auction-rate securities essentially collapsed, leaving both retail and institutional investors holding a supposedly liquid investment now considered worthless.

Approximately $330 billion of auction-rate securities were outstanding when the auctions began collapsing in February. About $160 billion of auction rates remain outstanding following the settlements, according to a May 24, 2009, article in Investment News, with most paying very low “penalty” rates under the terms of the failed auctions.

The ARS buyback programs that were announced by brokerage firms in August 2008 failed to provide liquidity relief to institutional investors, offering instead only vague commitments to work with corporate investors on finding a solution for their ARS holdings. Even then, it could be years before institutional investors see any of their auction-rate securities redeemed for cash.

In the midst of this, the list of individual lawsuits from institutional investors against companies such as Citigroup, Wachovia, Merrill Lynch, and UBS Financial Services all seem to be growing. In February 2009 a decision by a Financial Industry Regulatory Authority (FINRA) arbitration panel awarded European chipmaker STMicroelectronics $406 million over a dispute with Swiss bank Credit Suisse Group for the unauthorized purchase of auction-rate securities, thereby setting a legal precedent for other investors who had money tied up in illiquid auction rate bonds.

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