Will Ignorance Defense Continue to Screw Auction-Rate Securities Investors?

Auction-rate securities investors remain at a decided disadvantage when it comes to pursuing legal claims. Misrepresentation by those distributing the auction-rate securities does not seem sufficient to warrant a claim, let alone retribution. The fact that investors are having difficulties bringing suit against Wall Street firms which distributed auction-rate securities should be further reason for investors to be cautious in engaging brokers and financial planners. Why? The fact that selected cases of auction-rate securities distribution have been designated as having occurred in a fraudulent fashion would seem to have established a significant precedent. The fact that the precedent has not been established is mind boggling.

$149 BILLION in auction-rate securities held by thousands of investors remain frozen. Where’s the justice?

Bloomberg provides a recent review of these developments in writing, Auction-Rate Investors Get Redo After Loss of First Fraud Suits:

Auction-rate securities investors who sued banks including Citigroup Inc. and UBS AG to recoup billions of dollars in losses went 0 for 5 as their first cases were thrown out. Now some are gearing up for a rematch over part of the $149 billion in securities that remain outstanding.

In three of the class actions, judges allowed the investors to refile their complaints after finding the initial suits failed to prove they lost money or satisfy a 1995 federal securities-fraud law designed to discourage frivolous stock-loss suits. Citigroup, UBS and Raymond James Financial Inc. have again asked that the cases be tossed out.

“The private litigation has run into a brick wall,” said James Cox, a law professor at Duke University in Durham, North Carolina. The legal bar for bringing such lawsuits has been too high for auction-rate investors to surmount, he said.

Those investors may need a change in federal law if the 1995 act proves too big an obstacle for genuine claims, said Elizabeth Warren, who chairs the congressional oversight panel monitoring the Troubled Asset Relief Program. She suggested the idea for a Consumer Financial Protection Agency.

“The rules in place for liability and the right to bring a lawsuit under these circumstances are determined by a combination of case law and legislation,” Warren said. “If we don’t like where the balance point is, we at least have the legal capacity to change that.”

What may investors need to change? Check what is on the side of the banks and brokers in cases such as these. Bloomberg highlights:

The judges who ruled on the motions to dismiss in the auction-rate cases decided against the investors because they didn’t lose money or didn’t satisfy the tough legal standards for bringing securities-fraud suits, according to their rulings.

Those standards include backing up allegations of wrongdoing with what the statute calls particular detail. This means investors must show, to the satisfaction of a judge, that the company probably knew it was doing something wrong.

Thus, the burden is put upon the ARS investors to prove that the banks and brokers were not merely ignorant in the distribution of ARS, but that they were well aware they were misrepresenting the product. Clearly, there may have been many salespeople,brokers, and financial planners who were ignorant of the particular risks embedded in ARS. I will, however, NEVER accept that the management of these institutions were ignorant of the risks in ARS.

ARS were continually marketed as cash, but  they were NEVER cash or cash-like. Who knew? The NASD. I wrote as much this past May in my piece “NASD Knew Auction Rate Securities Weren’t Cash.” What was the NASD and its successor FINRA charged to do? Protect investors. They failed miserably.

Will the Wall Street banks be able to hide behind the ignorance of their own salespeople and will ARS investors continue to get screwed not only by the banks but now by the courts as well?

Where’s the justice?

What happened to my country?

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

Visit: Sense On Cents

4 Comments on Will Ignorance Defense Continue to Screw Auction-Rate Securities Investors?

  1. It’s amazing that the criminals out there like Raymond James and Oppenheimer can for this long get away with screwing their customers this badly. How can theyre management allow this to happen? Don’t they care that the customers got KILLED by this stupid investment?

  2. What an ignorant, cheap rant. You write under the presumption that these firms marketed ARS as cash, which has not been proven. In fact, plaintiffs are down to trying to find any internal e-mail that might be perceived as supporting that claim after having found no marketing pieces. Rather, investors simply went on the notion that because ARS had always been liquid, it made sense that it would be that way in the future. Also, investing involves RISK!!! Illiquidity is one of those risks. There are no guarantees when you seek to make money off of someone else’s entrepreneurship. Period. I agree that FINRA’s disclose-away-the-liability approach is deeply flawed, and this episode provides plenty of evidence. But to chastise firms who operated within the rules, regardless of what you think about those rules, is to make cheap points at the expense of those who made you what you are today. Look around, people aren’t too enamored with the “professionals” behind mortgage securitization these days, either.

    • Having spoken with dozens and dozens of ARS investors, the one common theme is that the security was ALWAYS marketed as cash, cash-like, or a cash surrogate.

      In regard to mortgage securitizations,perhaps you can refresh my memory as to when we met so we can review the particulars of my career. If you care to critique my thoughts and opinions on mortgage securitizations or any other aspect of the market, come on over to Sense on Cents. Read away and comment frequently. All opinions always welcome. Including cheap rants from readers.

  3. Tramposo, you are the one who is ignorant about the facts of auction rate securities. ARS were sold to small investors specifically for their LACK of risk. Marketing materials trumpeted that ARS were for the extremely conversative, risk-averse investor. ARS appeared on statements as “cash alternatives” or “money markets”, and they were in all cases sold as being “as good as cash.” The fact that these investments were long-term or perpetual bonds was never disclosed.

    These firms DID NOT ACT WITHIN THE RULES. They misrepresented the nature of the investment. That fraud was committed is evident in the fact that, by the end of 2007, top executives were selling their own holdings after inside communication that the end was near, while increasing the commission to their brokers for pushing this rotten investment out the door onto unsuspecting small investors.

    So get your facts straight.

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