Stock Broker Fraud Blog

UBS Financial Services Inc. and UBS Securities LLC, both units of UBS AG, have agreed to pay 19 Massachusetts public agencies and local governments over $35 million for their losses in the auction-rate securities market. The sum represents the return of principal payments by the municipalities.

The settlement agreement follows a probe by the Massachusetts Attorney General’s Office into accusations that the two UBS units misled the local entities by convincing them that the investments were low-risk enough that they were allowable for towns and cities under Massachusetts law.

According to a UBS spokesperson, the investment bank agrees that the auction-rate securities investments are not in fact permissible under this law. The spokesperson said that the repayment and agreement with the Massachusetts entities only apply because of this specific law.

Local US governments throughout the United States have invested over $300 billion in auction-rate securities markets. Auction-rate securities investments were once considered “safe.” These investments, however, have been frozen for months because of insufficient market liquidity—their value dropping as a result.

Many holders have been unable to get rid of their securities because of inevitable losses. The agreement between UBS and the Massachusetts entities allows the municipalities to recover their frozen funds.

UBS has had to note down over $37 billion in bad investments ever since the start of the subprime mortgage crisis.

Shepherd Smith and Edwards has helped thousands of US and international victims of investor fraud recover their losses.

Related Web Resources:

UBS to return $35M to Massachusetts governments, agencies in settlement over risky investments, International Herald Tribune, May 7, 2008

UBS to return $35 mln to US state over investments, AFP, May 8, 2008

UBS Financial to return $37M to cities, towns, MTA, Massachusetts Municipal Association, May 7, 2008

More than 80 days into the auction-rate securities crisis, about $300 billion
in investor funds continue to remain inaccessible. It is important to note that taxpayers, in addition to investors, are suffering in this frozen market because the municipal issuers (including schools, towns, highway authorities, and other entities) of auction notes are being asked to pay up to help restructure and redeem the debt.

$78 billion in auction-rate securities—many of them involving municipal notes that come with high interest penalty rates—are expected to be redeemed. Investors with remaining issues, however, aren’t us lucky.

According to Saber Partners Chief Executive Joseph S. Fichera, one option is for investors to try and sell on the Restricted Securities Trading Network, which would allow them to exit while letting municipal issuers repurchase securities at a savings. He also says that issuers might also want to renegotiate contracts to get rid of payments for failed auctions and unsold securities.

Meanwhile, Wall Street continues to generate money from this ongoing debacle. Investment firms continue to tell municipal issuers to repurchase their securities at par, because to recommend that they redeem at discounts could cause the firms’ own customers to record losses—and lead to potential arbitration cases.

The investment banks also continue to generate fees for their services in running these auctions even though 70% of these weekly securities auctions are failing. Investment companies also earn banking fees when municipal issuers redeem their securities and/or unwind derivative contracts tied to the securities.

On April 28, U.S. Representatives Deborah Price (Ohio) and Spencer Bachus (Ala) asked SEC Chairman Christopher Cox to grant “temporary relief” from current regulations so that closed-end fund investors with auction-market preferred stock (AMPS) could be afforded some protection.

They say the move could inject much needed liquidity into the marketplace that would benefit both preferred and common shareholders. They also noted that several affected funds might be interested in issuing a new kind of preferred stock with a “put” option that could restore auction market functioning for these kinds of securities.

The stockbroker fraud law firm of Shepherd Smith and Edwards represents investors that have lost money because of the negligence, carelessness, or misconduct of investment banks, brokers, and other securities industry members.

Related Web Resources:

Securities investors say they were misled, Chron.com, April 30, 2008

Restricted Securities Trading Network

The North American Securities Administrators Association announced that a number of its members are continuing to probe complaints about auction-rate securities (ARS). They are also coordinating efforts to help investors whose money was placed by brokers in these complex investment products get access to their funds.

An ARS Task Force, comprised of state securities regulators from Massachusetts, Illinois, Florida, Missouri, Georgia, New Jersey, New Hampshire, Texas, and Washington all working in their individual jurisdictions, is investigating these ARS-related complaints.

NASAA President Karen Tyler, also North Dakota's securities commissioner, says that regulators will seek the proper remedies to any violation. Tyler says that task force members are focused on determining whether any broker violations, including omission and misrepresentation, took place during the point of sale. She also stressed the securities regulators’ commitment to making sure that investors can access their funds.

In the wake of the subprime mortgage, many investors that were told that ARS were similar to money market accounts or making cash deposits now cannot touch their money because of ARS trade failures.

ARS Task Force head Bryan Lantagne says that many investors are have complained that they did not know that brokers had placed their money in auction-rate securities or, if they were aware that they had invested in ARS, they were not notified of the liquidity risks.

In New York, Attorney General Andrew Cuomo has subpoenaed 18 securities firms and banks to determine how brokers market ARS to investors. The companies subpoenaed include UBS AG, Merrill Lynch, Citigroup, Inc., JP Morgan Chase and Co., and Goldman Sachs Group.

Shepherd Smith and Edwards represents victims of investor fraud. Your first consultation with us is free.

Related Web Resources:

Credit Crisis Backlash as States Probe Auction-Rate Securities, IBTimes.com, April 18, 2008

New Trouble in Auction-Rate Securities, NY Times, February 15, 2008

The Financial Industry Regulatory Authority (FINRA) conjures thoughts of jack-booted cops looking to “perp-walk” those who take advantage investors. Yet, FINRA is just the new name of the National Association of Securities Dealers. The NASD was, and FINRA is, a non-profit organization of all securities dealers, with a structure similar to a country club, which fines or expels those who embarrass its membership.

Yet, even FINRA is critical of its members for mishandling auction rate securities (ARS). For example, in a press release, FINRA acknowledges that “Investors who purchase ARS are typically seeking a cash-like investment that pays a higher yield than money market mutual funds or certificates of deposit.” This confirms, despite objections by firms, that investors believed they were getting liquid instruments, not 20 to 30 year obligations or even “no maturity” preferred shares

"If you need your money in a hurry, loss of liquidity is a financial hardship," states John Gannon, FINRA's Senior Vice President for Investor Education. "We want investors who have been affected by the recent auction failures to know what options are available to them."

FINRA then mentions alternatives for “ARS investors who cannot liquidate their holdings because of failed auctions,” including (1) continue to hold; (2) sell in the secondary market; (3) borrow on margin; and, (4) liquidate other investments.

After stating that most ARS investors sought liquidity, it is strange that FINRA would recommend holding the securities. Importantly, recommending the holding of such securities to one who needs liquidity, violates FINRA’s own Rules of Fair Practice regarding unsuitability! While investors can not sell until there is a market, liquidation when possible may indeed be the only option for victims.

Selling in the secondary market, when possible, is the second option and should strongly be considered by ARS holders! The law holds that victims can recover losses from those who misrepresent securities to them, but the law also says victims must “mitigate” losses as soon as possible. As with any other investment, if you would not buy an investment at a price, you should not hold it for the same reason. Also, When others think the market can only get better with time it is usually best to run for the hills!

FINRA is not enthusiastic about “borrowing on margin,” stating that “[s]ome firms are offering to lend customers money to help them meet their cash flow needs. Be aware that the interest rate charged on these loans may exceed the yield you're getting on the underlying security. Also, borrowing against a tax-exempt security may cause you to lose the ability to deduct some or all of the margin loan interest from your taxes.”

We also note that margining illiquid and troubled securities is in itself quite dangerous, and that firms are charging lucrative interest rates to those who are victims of that firm’s own bad acts concerning ARS securities.

FINRA adds: “You might also consider selling other securities in your portfolio. When weighing this option, be sure to consider factors such as the total transaction costs you would incur, whether the sale would trigger adverse tax consequences and how the liquidation would impact the balance of your portfolio.” FINRA fails to mention that selling other securities at depressed prices can create even greater damages than in the ARS which are the source of the problem.

Moreover, FINRA fails to mention that anyone with legal problems should contact an attorney, before making statements to brokerage firms or regulators who share such information with brokerage firms. Ever heard this? “You have a right to an attorney” and “anything you say can and will he held against you in a court of law.” Did you wonder why the person then keeps talking? Sending a complaint to a firm or a regulator without an attorney is - well - exactly the same thing!

The securities law firm of Shepherd, Smith, Edwards and Kantas has for decades handled claims by investors worldwide against brokerage and other financial firms. We are currently working on claims for both institutional and individual investors whose funds are now locked into ARS securities. Contact us to arrange a free, no obligation consultation with one of our attorneys regarding your situation or if you wish to receive our weekly newsletter regarding ARS securities.

LINK TO ARTICLE ON ARS SECURITIES: (Our firm does not endorse the opinions or statements of of the article's author.)

ARC and ARP Securities: How Wall Street Brokerage Firms May Have Defrauded Their Clients Out of Billions Overnight Trading, February 24, 2008 (Author’s name withheld by request)

Massachusetts Secretary of the Commonwealth William Galvin is subpoenaing Merrill Lynch, Pierce, Fenner, & Smith Inc., UBS Securities, and Bank of America Investments because it wants information about the companies’ involvement in selling auction-rate market securities to retail investors. The companies are all registered Massachusetts broker dealers. Galvin issued the subpoenas on behalf of the Massachusetts Securities Division.

The division wants to determine whether the firms followed proper procedures in letting Massachusetts investors know of the possibilities that their investments could become illiquid. The state is also trying to determine what role big investment banks played in causing the auctions to fail and whether the investments sold to retail investors were suitable.

Many of the investors that bought auction market securities cannot get their money because the securities are frozen. Small business owners and individual investors have been especially hurt by the failures in the auction market because of the subprime mortgage collapse.

Galvin says he is not investigating why the securities are frozen but whether the investment firms were in compliance with their sales practices and in disclosing the necessary information to investors.

In February, Galvin subpoenaed Calamos Financial Services, Blackrock Financial Management, Pioneer Investment Management, Nuveen Asset Management, MFS Investment Management, John Hancock Advisers, Allianz Global Investors, Evergreen Investment Management, and Eaton Vance for information about the asset management companies’ dealings with closed-end funds following the auction failures in the auction-rate securities market.

The stockbroker fraud law firm of Shepherd Smith and Edwards is committed to helping investors recover losses brought about by securities fraud. Contact Shepherd Smith and Edwards today to request your free consultation.

Related Web Resources:

Galvin issues subpoenas in debt securities probe, Boston.com, March 28, 2008

Another Kick in the ARS, CFO.com, February 22, 2008

Massachusetts Securities Division

After weeks in limbo, some holding auction rate securities may gain some insight about their fate this weekend as UBS reports it will be “pricing” ARS securities in its customers' accounts.

Brokerage firms and other financial institutions sold many ARS securities as comparable to money market funds, commercial paper and other liquid investments. Investors were later shocked to learn that the auctions "failed," they were unable to sell securities and given little if any guidance in evaluating their situation. Many have been told their securities retain their "full value" but they would have to wait on their funds.

Perhaps realizing that this sham can go on no longer, using an internal model to value the securities, UBS will reportedly mark these down this afternoon and inform clients of such valuations via their online statements. Markdowns will apparently range from a few percentage points to more than 20%. Many believe that a portion of ARS securities are worth far less.

Yet, the UBS valuations will not actually reflect a true market because UBS states that it is not prepared to honor such prices or buy the securities at any price, leaving one to wonder what such prices will actually represent. It remains to be seen whether this move will comfort or exacerbate unrest among investors.

According to Moody's Investors Service, the currently seized–up ARS market, estimated at over $300 billion, includes investments issued by corporations, municipalities and other borrowers, including through the issuance of “preferred” shares by Nuveen and other mutual funds.

Although many of the issuers are fairly creditworthy, “default” interest rates paid on many ARS securities will not be competitive as long term instruments. The further problem is that a huge amount of these now long term securities are in the hands of investors who seek liquidity. This, along with the stain of the present situation, will no doubt put further strain on any attempt to establish a market for ARS securities.

Auctions on ARS securities failed because, as buyers who were privy to the potential problems bailed out, less sophisticated investors could not absorb the volume. UBS, Goldman Sachs, Merrill Lynch, Citigroup and Wachovia, which conducted more than 100 ARS auctions per day, had taken up the slack in auctions they managed. While this feature was sold to many investors as a guarantee, in late February, these and other firms all balked on this practice almost in concert.

UBS’s planned pricing action may serve as the test for other brokerage firms, some of which have indicated that they may soon take similar action. Merrill Lynch priced its clients' ARS securities at full value or "par" in their February statements, but warned that the value these securities could fall based on illiquidity. There has been no further comment from the firm.

A broker at RBC Wealth Management said that auction-rate securities were still being carried at par value on his clients' electronic accounts. A spokesman at Oppenheimer said the firm had not decided whether to mark the securities to market. A Morgan Stanley spokesman declined any comment. However, it is rumored that other firms plan to follow UBS's lead in pricing.

UBS, Deutsche Bank AG, Merrill Lynch, Morgan Stanley and Citigroup have been named in a suit in U.S. District Court in Manhattan alleging deceptive marketing of ARS securities. As other lawsuits are anticipated, firms have denied any improper conduct and say they are working with clients on a case-by-case basis to address liquidity issues. Some firms have made loans to their clients - while charging lucrative rates on such loans.

The securities law firm of Shepherd Smith & Edwards, LLP has for decades handled claims by investors worldwide against brokerage and other financial firms. We are currently working on claims for both institutional and individual investors whose funds are now locked into ARS securities. Contact us to arrange a free, no obligation consultation with one of our attorneys regarding your situation or if you wish to receive our weekly newsletter regarding ARS securities.

LINK TO ARTICLE ON ARS SECURITIES: (Our firm does not endorse any opinions or allegations of the article's author but believes the information and opinions stated therein are helpful in understanding the nature of this debacle.)

ARC and ARP Securities: How Wall Street Brokerage Firms May Have Defrauded Their Clients Out of Billions Overnight Trading, February 24, 2008 (Author’s name withheld by request)

Some closed end funds which issued preferred shares in the auction rate market suggest they might obtain liquidity in Auction Rate Preferred Securities (ARPs) using leverage and Variable Rate Demand Preferred Securities. Such statements may give hope to those holding ARPs, yet we believe that these solutions unlikely create the liquidity sought.

This action by the closed-end fund companies is likely intended to benefit these companies and will not help the preferred share holders. If the goal were truly to benefit ARP holders, such action would have been initiated prior to the lock-up of the ARP market. As the broker-dealers actually increased sales to unwary investors, the fund companies were silent as risk to ARP investors grew and liquidity disappeared.

According to the Investment Company Institute, closed end fund companies manage a total of $314 billion dollars worth of assets for their common shareholder clients. Closed-end funds have borrowed about $60 billion of this total using preferred shares. The preferred shares were created to use a low rate paid to preferred holders in order to boost yield to common mutual fund shareholders. Risk to preferred shareholders could have been avoided by liquidating holdings within each respective fund when possible. This would have also greatly reduced risk to common fund shareholders by "getting them off margin."

Reading between the lines of the press releases and deciphering feedback on industry conferences calls with the closed-end fund companies, it appears there is little that can now be done. The current credit crisis has made liquidity difficult for all market participants and fund companies missed the window of opportunity to assist ARP shareholders.

Perhaps the primary reason for funds companies to attempt to provide liquidity to ARP holders is to bale out brokerage firms who may otherwise never again sell the funds' products. Or, it could be that it is no longer profitable to closed-end fund’s common shareholders to pay the interest rates to preferred shareholders.

Last week, Eaton Vance announced plans to redeem the preferred shares of three of its thirty closed end funds. All three are equity based funds. With the stock market performing poorly, it may no longer be profitable to continue the payments. Unlike municipal bond funds, there is no spread, or difference between what the funds were earning and what was paid to the preferred shareholders.

Eaton Vance is not alone. Of the fund companies who have discussed a solution, all have stated that the initial focus of their remedial efforts will be on the taxable closed end funds. Why? According to the Investment Company Institute (www.ici.org) the vast majority of taxable closed end funds are equity based. The figures for year end 2006 indicate there is about $203 billion in taxable closed end funds, about $122 billion of which are in equity funds. It should also be noted that a majority of funds that issued preferred shares were bond funds.

A third reason that a closed-end fund company may act is to issue a new product in furtherance of their business. At least one firm has suggested a new product called a Variable Rate Demand Preferred (VRDP). To date, this is the only solution suggested for tax free (bond) closed end funds. According to the industry, a VRDP is a “new financial instrument” which could potentially be sold to money market funds. Yet, on March 12, 2008, Nuveen issued a press release stating “we cannot be certain that VRDP will be a viable form of financing for our funds.”

The problem is that VRDP is yet another "contrived” product being floated, and at the worst possible time in a market understandably leery of anything associated with the terms “variable rate” and “preferred”. While money market funds could absorb a portion of this product, if news leaked that a particular money market fund held a product associated with the tainted ARS market it could hurt its standing as a cash equivalent. Further, before VRDP could be marketed to any money market fund, it would have to find third parties willing to provide “put commitments at a reasonable cost” or in other words, take on risk without charging an undue premium - a tall order in this economic environment.

We are of the belief that a credible solution is not yet in sight for holders of ARS securities, including ARPs, although limited liquidity may emerge in the near future.

The securities law firm of Shepherd Smith & Edwards, LLP has for decades handled claims by investors worldwide against brokerage and other financial firms. We are currently working on claims by investors whose funds now locked into ARS and ARP securities. Contact us to arrange a free, no obligation consultation with one of our attorneys regarding your situation or if you wish to receive our weekly newsletter regarding ARS securities.

LINK TO ARTICLE ON ARS SECURITIES: (Our firm does not endorse any opinions or allegations of the article's author but believes the information and opinions stated therein are helpful in understanding the nature of this debacle.)

ARC and ARP Securities: How Wall Street Brokerage Firms May Have Defrauded Their Clients Out of Billions Overnight Trading, February 24, 2008 (Author’s name withheld by request)
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An SSE Exclusive: Provided below is a link to a comprehensive expose explaining how Wall Street firms and banks may have convinced investors it was safe to place over $300 billion into “auction rate securities” by promising that these were safe and liquid investments.

During the week of February 11, 2008 the $330 billion market for “Auction Rate Securities” market virtually collapsed overnight as the liquidity of many of these investments disappeared and their safety was reportedly in jeopardy. What had been described to many as safe AAA credits, comparable to money market funds, were instead exposed in a nightmare for investors.

The article states that the result was “mass confusion” which caused by one of the most “convoluted structures ever devised by Wall Street.” The writer, who demonstrates special insight into the situation but desires to remain anonymous, laments that since the problem emerged “[e]veryone has a piece of the puzzle but no one to date put it together in one document.” The article is a MUST READ for all those seeking to understand the nature of this problem, including investors, law enforcement, regulators, attorneys and journalists.

Beginning with a description of the “Time value of Money Concept,” the article then provides a primer titled the “Introduction of the ARS Market,” followed by another describing “Auction Rate Preferred Securities (ARPS),” which are described as “not market based” and which will likely lead to a far worse problem than other ARS securities.

The author alleges widespread deception and non-disclosure by individuals marketing these securities, many who were reportedly repeating what they had been told to say to their clients. “Wall Street houses were making so much money from this process, they were determined to find a way to write as much business as long as possible,” states the author, who describes how such firms kept perpetuating the ruse even after it was evident problems were eminent and were “artificially propping up these markets” until a tsunami of “failed” auctions struck last week.

The securities law firm of Shepherd Smith & Edwards, LLP does not endorse any opinions or allegations of the author of the article but beleives the information and opinions stated therein can be helpful to those seeking to understand the nature of this debacle and its scandalous implications for Wall Street.

LINK TO STORY:

ARC and ARP Securities: How Wall Street Brokerage Firms May Have Defrauded Their Clients Out of Billions Overnight Trading, February 24, 2008 (Author’s name withheld by request)

This week, Goldman Sachs told a number of investors that they could not withdraw money from their auction-rate securities investments. This move by Goldman came as a shock to investors—but the firm was not alone. Merrill Lynch, Lehman Brothers, and other banks have also found themselves notifying their investors that the market for these types of securities are frozen—along with their money. Just this week, there were nearly 1,000 failed auctions. The banks are now refusing to support the auctions and many investors are not sure when they’ll recover their investments.

Usually, auction-rate securities are considered safe alternatives to cash—and banks frequently recommend these bonds, considered long-term securities—to rich individuals and corporations. Banks regularly hold auctions to establish the interest rates and give holders an opportunity to sell their securities.

Auction-Rate Securities
The auction-rate market is valued at $330 billion. Tax-exempt institutions, including municipalities, student loan companies, closed-end mutual funds are among those who participate in the market.

Just because there is a failed auction does not mean the securities have defaulted. Issuers are allowed to pay interest at the “fail rate,” which is the higher rate.

Investors are not happy with the frozen state of the auction-rate securities market. Brokerage firms are not legally bound to make a market in auction securities or provide clients with a price.

One wealthy investors said he bought the securities after Goldman likened them to the equivalent of cash. Another investor, a New Jersey family, is suing Lehman Brothers because the value of its cash in auction-rate securities is decreasing. Drug manufacturer Bristol-Myers Squibb has already had to write-off the $275 million it invested in auction--rate securities because of the failed auctions.

These investments were often compared to money market funds. Many investors were told there was little or no risk in these investments, even after reports surfaced which indicated danger of owning such securities. Some financial firms reportedly encouraged individual investors to purchase these securities as they worked to reduce their own exposure and that of their large institutional clients.

Shepherd, Smith, & Edwards is a stockbroker fraud law firm that represents investors that wish to recover money they have lost because of the misconduct or negligence of an investment adviser, broker, or firm. One of our investment fraud lawyers would be happy to speak with you during a free consultation.

Related Web Resources:

New Trouble in Auction-Rate Securities, New York Times, February 15, 2008

Muni Regulators Seek Disclosure on Auction-Rate Bonds, Bloomberg.com, February 15, 2008