Articles Posted in Auction-Rate Securities

A Wells Fargo & Co. (WFC) brokerage unit must buy back almost $94 million in auction rate securities from the family who said their adviser misrepresented the investments. The claimants are the relatives of deceased newsstand magnate Robert B. Cohen, who founded the chain Hudson News. Cohen died in 2012.

His family contends that Wells Fargo Advisors and one of its advisors made misleading and fraudulent statements about municipal auction-securities. They are alleging breach of fiduciary duty, negligence, and fraud in their municipal auction-rate securities fraud claim.

Now, the firm must buy back at face value the municipal ARS it helped Cohen, his family, and affiliated business purchase. The transactions started beginning March 2008.

The U.S. District Court for the Southern District of New York has rejected Credit Suisse Group’s (CS) motion to dismiss Elbit Systems Ltd. v. Credit Suisse Group, the auction-rate securities lawsuit filed by an investor claiming that alleged misconduct took place at a Credit Suisse Group brokerage firm subsidiary Credit Suisse Securities (USA) LLC. The court said that the investor did an adequate job of alleging that the subsidiary acted with actual power of authority as Credit Suisse Group’s agent.

The plaintiff, Elbit Systems Ltd., contends that it invested in ARS because it was told that these were liquid, safe, and backed by the US government-backed. However, the Israeli electronics company claims that even as the market started failing in 2007, cash managers started to replace the government-backed ARS with more risky ARS backed by credit-linked note securities and collateralized debt obligations, and its Corporate Cash Management account began to fail, it was never informed that these problems were happening. Instead, its holdings in these risky investments were allegedly increased.

As of the complaints filing, Elbit’s securities have not been sold while its ARS investments had allegedly lost about $16 million. Also, a Credit Suisse Securities executive is accused of telling the plaintiff that brokers Eric Butler and Julian Tzolov were too busy to handle its account when actually, the two of them were no longer at the firm because they had been accused of securities fraud.

BNY Mellon Capital Markets LLC has agreed to pay the states of Texas, Florida, and New York $1.3M to settle allegations that it was involved in a bond bidding scam to reduce Citizens Property Insurance Corp. of Florida’s borrowing expenses. The Texas portion of the securities fraud settlement is $500,000, which will go toward its general revenue fund.

Per the Texas Securities Commissioner’s Consent Order, which it submitted last month, Mellon Financial Markets is accused of helping Citizens manipulate its ARS interest rate. Reducing these rates allowed Citizens to save money while costing investors that held the ARS when they ended up making $6.7M less in interest.

The Consent Order comes from a separate probe that the Texas State Securities Board had been involved in. The board found out that Citizens had sought the assistance of MFM in both the bidding on its own auctions and the concealment of this activity.

Per the Order, although an MFM broker reported the trading situation to a supervisor, the latter did not bring it to the financial firm’s compliance department or talk about it with legal counsel. As ARS interest rates went up, MFM placed bids for the debt at interest rates that were lower than going rates for similar ARS issues. The Order accuses MFM traders of understanding the consequences that would result from the way they were bidding.

Even after the ARS market failed in 2008, MFM traders continued to choose lower rates for Citizens until BNY’s compliance and legal departments stepped in to halt the process. The Texas State Securities Board determined that BNY Mellon Capital Markets’ actions involved “inequitable practices” related to securities sales. It also said that the financial firm violated regulations by not setting up, maintaining, and enforcing supervisory procedures that were reasonably designed.

Auction-Rate Securities
ARS are long-term debt issues with interest rates that are reset at auctions, which usually occur at set interval periods. The yield is a result of bidding that takes place at the auction, where investors are given an opportunity to get their funds without waiting for the debt to reach maturity. The ARS market let Citizen and other entities obtain long-term financing at interest rates that are usually connected with shorter-term investments.

Unfortunately, when the ARS market failed, investors found out that their money had become illiquid and inaccessible despite claims by financial firms that auction rate securities were safe, liquid investments.

BNY Mellon Settles with Texas Over Probe Into Rigged Bond Bidding, December 22, 2011
Texas State Securities Board

Texas Securities Fraud: SEC Moves to Freeze Assets of Stewardship Fund LP, Stockbroker Fraud Blog, November 5, 2011
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Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts, Stockbroker Fraud Blog, December 20, 2011 Continue reading

Bank of New York Mellon Corp. (BNY) has agreed to pay $1.3 million to the states of Florida, New York, and Texas over allegations that it engaged in the manipulative trading of auction-rate securities. The settlement comes following a joint probe by New York Attorney General Eric Schneiderman, the Florida Office of Financial Regulation, and the Texas State Securities Board over Mellon Financial Markets’ actions as Citizens Property Insurance Corp. of Florida’s intermediary broker in an alleged scam to lower borrowing costs. Citizens Property is run by Florida and it is the largest home insurer in the state.

ARS interest rates are reset at auctions that usually occur at 7-day or 28-day intervals. According to the Texas State Securities Board, investors made $6.7 million less in interest than they would have earned if Citizens Property hadn’t placed bids during its own auctions. Mellon Financial Markets is accused of assisting Citizens Property in manipulating auction-rate securities‘ interest rates by making and accepting bids on the latter’s behalf.

In 2008, Citizens Property allegedly asked a Mellon Financial Markets representative to assist it in bidding on its own ARS while hiding this action because broker-dealers in charge of managing the securities would have otherwise turned their bids down. Citizens Property then made bids that were lower than market rates, which caused the auctions to clear at rates below what they would have been. Meantime, Mellon Financial made approximately $300,000 in fees. At least one Mellon Financial broker expressed concern about these trades to a supervisor, who allegedly failed to seek legal advice or talk about these concerns with the MFM’s compliance department.

Following the collapse of the ARS market, one broker-dealer, who suspected that Mellon Financial was making Citizens’ bids, said that orders would no longer be made for a company bidding on its own securities. Yet, according to authorities, traders kept on with this practice until Bank of New York Mellon issued the order to stop. Those involved allegedly knew that bidding for CPIC established lower clearing rates, which would prove “detrimental” to investors holding or bidding on these ARS.

Citizens Property Insurance maintains that it thought its actions were “legally permissible.” The company claims that it was “vigilant” about getting advice from outside legal counsel before taking part in the transactions.

BNY Mellon Capital Markets has said that the alleged misconduct was related to the “isolated conduct” of three persons no longer with the financial firm. Mellon Financial Markets was a separate entity when the alleged bidding scam was happening.

BNY Unit Settles Auction-Rate Case, Wall Street Journal, December 23, 2011
Bank of New York Mellon Settles Auction-Rate Investigation, Bloomberg/Businessweek, December 23, 2011
BNY Mellon to pay $1.3M in Schneiderman suit, Crain’s New York Business, December 22, 2011

More Blog Posts:
Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 30, 2011
Raymond James Settles Auction-Rate Securities Case with Indiana Securities Division for $31M, Stockbroker Fraud Blog, August 27, 2011 Continue reading

The U.S. Court of Appeals for the Second Circuit has affirmed a district court’s decision to dismiss securities fraud claims accusing Merrill Lynch & Co. of hiding its ARS practices to manipulate the market. The case had been filed by plaintiff Colin Wilson on behalf of all buyers between March 2003 and Feb. 13, 2008 that purchased ARS for which Merrill was the dealer.

Wilson contended that although until July 2007 Merrill Lynch did not allow its ARS auctions to fail, in the couple of months that followed the broker-dealer did not put in support bids during at least 34 auction-rate securities issuances. As a result, those auctions did fail. Wilson also claimed that because Merrill Lynch did not appropriately disclose the full scope of its ARS practices, the financial firm was sending out a false signal that the market was sustainable despite there being not enough of an investor demand for the instruments.

The district court threw out the Wilson’s ARS case after finding that Merrill’s disclosure did not mislead investors. Now, the appeals court is affirming. It found that if, as Wilson says, Merrill intended to put in support bids for every auction unless it decided to let certain ones fail or get out of the market in general, then the court believes that the broker-dealer gave fair disclosure of all this. The appeals court also didn’t agree with Wilson’s allegation that Merrill Lynch knew without a doubt that if it didn’t intervene an ARS auction was sure to fail.

This is the first appellate ruling involving securities class litigation over the demise of the ARS market. Upon the market’s decline beginning 2007, Merrill Lynch and other large broker-dealers started letting auction-rate securities auctions fail. When they completely stopped their support, the market became illiquid. A number of investors have since filed ARS lawsuits seeking to recover their money.

Although Merrill appears to have won this case, Shepherd Smith Edwards and Kantas founder and stockbroker fraud attorney William Shepherd notes, “This is not the huge victory Merrill claims. The court did NOT find that Merrill did not engage in wrongdoing in the sale of auction rate securities (ARS) to its clients, most of whom were led to falsely believe that these ARS investments were similar to commercial paper or short-term treasury bills. This case is instead concerned with “market manipulation,” a type of securities fraud claim that is rarely brought and almost never successful. In order to win this case, among other hurdles the plaintiffs would have to demonstrate that Merrill’s practices were intentional and were intended to change the market value of the securities. Also, this decision is by the federal appeals court in New York, which mysteriously decides many cases in favor of Wall Street.”

2d Cir. Affirms Merrill Off the Hook In Investor Suit Over ARS Disclosures, BNA, November 16, 2011
Read the full opinion (PDF)

More Blog Posts:

SEC and SIFMA Divided Over Whether Merrill Lynch Can Be Held Liable for Alleged ARS Market Manipulation, Institutional Investor Securities Blog, July 29, 2011 Raymond James Settles Auction-Rate Securities Case with Indiana Securities Division for $31M, Stockbroker Fraud Blog, August 27, 2011
District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011 Continue reading

Raymond James has agreed to return $31,240,000 to Indiana investors to settle allegations that it misled them about the risks involved in the auction-rate securities market. In addition to repurchasing ARS that have been frozen since the market failed in 2008, the financial firm will also pay a $63,000 civil penalty.

When the ARS market froze, investors that had thought their investments were liquid like cash were left in the lurch because they were not able to retrieve their funds. The Indiana Securities Division has been at the helm of the efforts to investigated Raymond James and work out a settlement for all state securities regulators. Over the last few years, the states have worked hard to get all of the financial firms accused of not fully apprising investors about the ARS risks to buy back the securities.

Auction-Rate Securities
ARS are long-term investments with dividends or interest rates paid that are frequently reset through auctions that take place at specific intervals. The auctions are supposed to give a source of liquidity to investors wanting to sell their ARS.

Unfortunately, when the ARS market collapsed in early 2008, many of the auctions started to fail and investors could not get rid of their ARS holdings. This proved a problem for those that managed their ARS as a way to get easy access to cash.

While some ARS issuers did say they would redeem shares-usually at par value-some could not redeem all of their investors’ shares, which left the latter with holdings that could not be liquidated.

ARS and Hoosier Investors
The state of Indiana has also reached ARS settlements with other securities firms that allegedly misled Hoosier investors. In April of last year, 12 financial firms agreed to buyback over $370 million in ARS from these investors, while also consenting to pay over $3.5 million in fines. Financial firms that reached settlements then include:

• Goldman Sachs • Banc of America • Credit Suisse • Citigroup • JP Morgan • Deutsch Bank
• Morgan Stanley • Merrill Lynch • RBC • UBS • Stifel Nicolaus & Co.
• Wachovia
These financial firms have also reached settlements with other US states. However, millions of dollars in ARS remain frozen and there is still more to be done to help investors regain access to their frozen funds. Our stockbroker fraud law firm continues to work hard to help recoup our clients’ money from their ARS that turned illiquid.

Securities Fraud
Investors rely on brokers and investment advisers for advice on where they should place their money. When a financial adviser misleads a client, causing the latter to put their money in investments that are inappropriate, it is the investor who loses out and has to live with the consequences of a failed investment.

State Announces $31 Million Securities Settlement, Inside Indiana Business, August 24, 2011
State finalizes auction-rate securities settlements, Indianapolis Business Journal, April 29, 2010
Auction Rate Securities: What Happens When Auctions Fail, FINRA

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Auction-Rate Securities Investigations by SEC and NY Attorney General Are Ongoing, Stockbroker Fraud Blog, April 21, 2011
Class Auction-Rate Securities Lawsuit Against Raymond James Financial Survives Dismissal, Stockbroker Fraud Blog, September 27, 2010
Credit Suisse Ordered to Pay STMicroelectronics N.V. $404M Over Improper ARS Investment, Institutional Investor Securities Blog, June 15, 2011 Continue reading

The U.S. District Court for the Southern District of Texas has ruled that Credit Suisse Securities shouldn’t have to pay Luby’s Restaurants another $186,000 as part of its arbitration to the investor. The case is Luby’s Restaurants LP v. Credit Suisse Securities (USA) LLC. Shepherd Smith Edwards and Kantas Founder and Texas Securities Fraud Attorney William Shepherd had this to say about the ruling: “Attorneys for each side have the opportunity to submit language to the arbitrators that it desires to be reflected in an award. In cases where the award sought is anything more than payment of a specific amount it is wise to submit such language.”

Luby’s Restaurants LP bought over $30 million in auction-rate securities from Credit Suisse. The investor bought the ARS based on the financial firm’s representation that the instruments were very liquid, safe, and a suitable investment.

Luby’s later filed its arbitration claim with FINRA for ARS losses. By then it had gotten back everything but $8.9 million in securities. Then, after initiating the proceedings-but prior to the arbitration hearing-Luby’s redeemed another one of its securities for less than par and lost $186,000.

The arbitration panel would go on to rule in favor of Luby’s. Credit Suisse was directed to buy back the ARS from Luby’s at par and with interest. While both parties sought to confirm the award, they were in dispute over whether the $186,000 that Luby’s lost after it filed its arbitration case should be included.

The court says that Credit Suisse does not have to pay that amount to Luby’s. The court noted that the Award doesn’t mention the additional damages that Luby’s sustained when it sold some of the securities under par during pendency of the arbitration but prior to the hearing.

Related Web Resources:
$186K Under Arbitration Award, BNA Securities Law Daily, May 31, 2011
Luby’s Restaurants LP v. Credit Suisse Securities (USA) LLC, Justia

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Goldman Sachs and Wells Fargo Investments Repurchase $26.9M in Auction-Rate Securities from New Jersey Investors, Institutional Investors Securities Blog, May 25, 2011 Continue reading

The Securities and Exchange Commission and the New York Attorney General’s office are still investigating whether auction-rate securities market participants knew they were misleading investors about the complexity and liquidity of debt instruments leading up to the market collapse in 2008. Officials for both agencies told BNA about the ongoing probes last month.

It was these misrepresentations to investors that prompted the Financial Industry Regulatory Authority to issue a concept proposal that, should it become a rule, would hold research analysis and reports that analyze debt securities accountable to FINRA requirements. A federal regulator told BNA that the SRO is concerned about misrepresentations that may have been made to retail investors as early as in late 2007 when, even as institutional investors were buying less ARS-causing the market to lose liquidity-ARS sellers were being pushed by underwriters to get retail clients to buy the securities under the guise that the bonds were very liquid and like cash. Also, underwriters and others allegedly knew that the market conditions were headed toward illiquidity despite their claims that the instruments were highly liquid.

The New York Attorney General’s office reported that says that as of last month, financial institutions have agreed to repurchase $60 billion of the ARS. The financial firms have also agreed to pay about $597 million in fines. Among the investment banks that the SEC has reached settlement agreements with are Citigroup Inc. (C), Wachovia Securities LLC, Royal Bank of Canada subsidiary RBC Capital Markets Corp., UBS AG, Merrill Lynch & Co., TD Ameritrade Online Holding Corp. (AMTD, Bank of America Corp. (BAC), and Deutsche Bank AG.

Related Web Resources:
SEC, New York Continuing ARS Probes;
Retail ARS Risk Behind FINRA Proposal, BNA, March 23, 2011
Auction Rate Securities, SEC

More Blog Posts:
Class Auction-Rate Securities Lawsuit Against Raymond James Financial Survives Dismissal, Stockbroker Fraud Blog, September 27, 2010
Securities Fraud Lawsuit Against Calamos Investments Filed on Behalf of Calamos Convertible Opportunities and Income Fund Shareholders, Stockbroker Fraud Blog, September 17, 2010
Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute, Institutional Investor Securities Blog, September 1, 2010 Continue reading

In the U.S. District Court for the Southern District of New York, U.S. District Judge Lewis A. Kaplan has allowed some of the investor claims in the class action auction-rate securities lawsuit against broker dealer Raymond James Financial Inc. (RJF) and its broker-dealer subsidiary to proceed. This is the first ARS class action case filed since the auction rate securities market failed in 2008 to survive a dismissal motion. The case can now go to the discovery stage.

Kaplan, who had dismissed an earlier lawsuit in this case, let the plaintiffs move forward with their ARS case on the claim that Raymond James & Associates Inc. (RJA) violated antifraud provisions between November 2007 and February 13, 2008. A claim against RJF was allowed to proceed because of its “operational and management control” of RJA during this time. Other claims were dismissed.

Investors had filed the initial class action in April 2008 against RJA, RJF, and Raymond James Financial Services Inc. (RJFS), another Raymond James broker-dealer subsidiary. The plaintiffs contended that between April 8, 2003 and February 13, 2008, the two subsidiaries told financial advisers that ARS were extremely liquid, short-term investments that could work well for any investor with at least $25,000 and with as little as a week to invest. However, when the ARS market failed, over $300 million in ARS became illiquid. Per Kaplan, RJA sold $2.3 billion of ARS, underwrote $1.2 billion, and was the auction dealer for over $725 million.

ARS cases filed by individual investors have been faring better than class-action ARS lawsuits. Of the class-action and group complaints filed against some 19 underwriters and broker-dealers since the ARS market failed, reports that Citigroup, Deutsche Bank AG, and at least six other financial firms have managed to get the lawsuits thrown out by judges ruling that the complaints failed to meet pleading requirements. Some plaintiffs were told to refile their lawsuits and provide more details.

Raymond James Auction Rate Class-Action Fraud Suit Is First to Be Upheld, Bloomberg, September 8, 2010
Court Clears Lawsuit Against Raymond James,, September 9, 2010 Continue reading

Calamos Asset Management, Inc., the Calamos Convertible Opportunities and Income Fund (NYSE: CHI), Calamos Advisors LLC, current trustees, and one former Fund trustee are now the defendants of a putative class action securities complaint purportedly submitted on behalf of a class of common fund shareholders. The securities fraud lawsuit is alleging breach of fiduciary duty, the aiding and abetting of that breach, and unjust enrichment related to the redemption of auction rate preferred securities (ARPS) after the ARS market collapsed in 2008.

In the securities fraud lawsuit filed by Christopher Brown, Calamos Holdings LLC founder John Calamos Sr. is accused of allowing the investment firm and its management team to benefit from investors’ losses. Brown’s complaint is a refiling of a lawsuit filed in federal court last July. That complaint was withdrawn earlier this month and the claims resubmitted in state court.

Brown contends that Calamos and others were aware they were breaching their fiduciary duty when they let fund advisers benefit while investors sustained financial losses in the “multiple millions of dollars.” Brown wants all losses restored.

He claims that even as the ARS market failed, a burden was not placed on the Calamos Convertible Opportunities and Income Fund, which held auction market preferred shares. However, in June and August, Calamos managers allegedly redeemed some of the funds’ holdings, which were replaced with debt financing that was “less favorable.” Brown says that because this advanced the interests of the managers, the funds’ investment advisors and affiliates but not the interests of common shareholders, it was a breach of fiduciary duty.

Brown is seeking class-action status for any investors in the fund since March 19, 2008. He wants a judge to prevent Calamos trustees from earning fees from the fund or acting as advisers.

Related Web Resources:
Calamos Investments Statement on ARPS Lawsuit for Convertible Opportunities and Income Fund,, September 15, 2010
Calamos founder sued by investor who claims bad fund management, Chicago Business, September 14, 2010 Continue reading