Arbitration Claims for Consequential Damages on Auction Rate Securities (ARS)

After months of uncertainty and delays, investors in Auction Rate Securities continue to receive conflicting news about their situation. While some investors may have access to funds in the near future, many have been severely damaged by this debacle and the delays. In settlements with regulators several firms were forced to acknowledge such “consequential damages” by investors

A special arbitration program is currently being designed to determine claims for “consequential damages” in which some firms have agreed not to contest their own liability. The arbitrations will be conducted through the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD).

What is FINRA Arbitration?

When opening brokerage accounts, virtually all investors sign agreements requiring them to arbitrate any dispute with their investment firm through FINRA Arbitration. Thus, all that will change in the special ARS arbitration process is the procedure to be used.

For example, rather than a panel of three arbitrators, one of which is an “industry” arbitrator, a single “public” arbitrator will decide the ARS cases. However, investors may chose FINRA’s existing three arbitrator process if the decision of one person is feared as too unpredictable.

Not all details on the special arbitration process for ARS claims have been determined. The Securities Industry and Financial Markets Association (SIFMA) and the Public Investors Arbitration Bar Association (PIABA) continue to battle over procedural and other issues regarding ARS arbitrations.

Lay-Down Case?

Some may believe that, because investment firms can not deny that the ARS investment was misrepresented, investors can not lose. However, investors must demonstrate how they were damaged, how much they were damaged, that such damages are not speculative and how being locked in the auction rate securities caused these damages. In fact, a precedent exists which demonstrates the difficulty which may be involved in winning ARS arbitration claims.

In the 1980’s, Prudential Securities sold limited partnership investments to thousands of investors which regulators later determined were misrepresented. Prudential agreed to a settlement in which it agreed to a “special arbitration” process through NASD Arbitration. Although Prudential was not allowed to dispute its misrepresentations, the results of these arbitrations varied greatly: Some investors recovered damages, but few recovered the amount they sought and many received nothing at all.

Consequential Damages?

Examples of ARS “consequential damages” could be losses sustained when frozen funds caused a business transaction to be terminated, when funds were unavailable for inventory purchases or when other business losses were caused by frozen capital. Large investors who sustained income losses from ARS securities which reset to very low or zero interest rates should insist on being reimbursed.

Individual investors may have sustained consequential damages over are a delay in a home purchase resulting in a substantially higher rate of interest on their mortgage for years to come. One investor claims that medical procedures were delayed because of lack of liquid funds. Meanwhile, lost profits because of the inability to purchase other securities, et cetera, may be more difficult to prove.

Legal Representation?

Since 2000, approximately 5,000 claims are filed each year by investors in securities arbitration through FINRA and its predecessors. Statistics demonstrate that investors who retain experienced securities attorneys fare far better than those with inexperienced attorneys or who attempt to proceed with no attorney at all.

The law firm of Shepherd Smith Edwards & Kantas, LLP specializes in recovering investment losses for institutions and individuals nationwide. Our attorneys and staff have more than 100 years of brokerage and legal experience. Contact us today for a free no-obligation consultation with one of our attorneys.

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