Citi Smith Barney and Raymond James Financial Services Inc. have won major arbitration claims involving institutional and individual clients seeking tens of millions of dollars in restitution for the purchase of auction rate securities.
A three-member Finra arbitration panel last month in Miami denied claims, including fraud and breach of fiduciary duty, brought against Smith Barney, or Citigroup Global Markets Inc., by the Banco Industrial De Venezuela that totaled $118.7 million — the firm's most significant win yet in auction rate securities cases.
As is typical of the Financial Industry Regulatory Authority Inc., it did not provide reasoning behind the decision.
Also last month, a Finra arbitration panel denied a claim from an investor who bought $10.7 million worth of auction rate securities from a Raymond James broker in 2006 and 2007, according to the arbitrators' explanation of the award.
Smith Barney and Raymond James played very different roles in the $330 billion ARS market, which froze in February 2008 as a result of the credit crisis. Smith Barney's former parent, Citigroup Inc., was one of the largest dealers of ARS, while Raymond James did not underwrite the securities but sold those of other firms.
Earlier this year, Citigroup sold Smith Barney group to Morgan Stanley. Raymond James Financial Services is the independent contractor arm of Raymond James Financial Inc.
One source with knowledge of the Smith Barney case, who also asked not to be identified, said it was the “best result yet” for the firm regarding ARS. Citigroup argued that the Banco Industrial De Venezuela's Miami Agency understood what it was buying, and it's the firm's first decision in an ARS case involving a significant institutional client, the source said.
Meanwhile, the Raymond James decision shows that brokers were not always sure of what it was they were selling when it came to auction rate securities, a common criticism of the retail securities business and its marketing of the product.
The broker, Rick Woolfolk, “was poorly trained with respect to the ARS product,” according to the Finra decision. “At various times he described the investment as ‘unit trusts', ‘short-term paper', or ‘short term stuff'.” The panel stated the investor, Gene McCutchin, was sophisticated and used a certified public accountant, Dan Chilton, to buy investments. Citing inadequate training and other deficiencies, the panel ordered Raymond James to pay $7,000 in fees for the various sessions in the hearing.
Alexander Samuelson, a Citigroup spokesman, declined to comment, as did Barton Sacher, an attorney for the Venezuelan Bank.
In the Raymond James matter, a lawyer for the client, Robert Wright, did not immediately return a phone call for comment, and a Raymond James lawyer, Paul Matecki said the firm was “happy” with the decision. The panel decided that Raymond James “had confirmation that disclosed the risk of auction failure,” he said, although he was “not sure” how the panel concluded that Mr. Woolfolk was not adequately trained.