For the third time this summer, securities industry arbitrators have ordered brokerage units of Raymond James Financial Inc. to return money to clients who brought claims over frozen auction rate securities.
In the most recent arbitration decision, on Aug. 16, two of three industry arbitrators ordered Raymond James & Associates Inc. and broker Larry Milton to pay $925,000 to claimants who bought $1.4 million of “sewer revenue” bonds issued by Alabama's Jefferson County. The third arbitrator dissented, saying the claimants should have received the full $1.4 million, the actual dollar amount of the claim.
Since July 1, arbitrators have ordered Raymond James & Associates, the company's employee brokerage firm, and Raymond James Financial Services Inc., its independent broker-dealer, to buy back from clients auction rate securities totaling $3.5 million.
The market for auction rate securities, which had been sold by nearly every major firm on Wall Street as a cash equivalent, seized up in February 2008, one in a chain of events that led to the stock market crash that September.
When the market for the securities froze, Raymond James Financial's clients held $1.9 billion in auction rate debt. This since has been reduced to $600 million, according to company spokeswoman Anthea Penrose, who declined to comment further.
So far, no securities regulator has sued Raymond James in connection with its sale of auction rate securities. Other firms, however, have faced legal problems with regulators.
In August 2009, New York Attorney General Andrew Cuomo sued Charles Schwab & Co., alleging that it failed to disclose or misrepresented the liquidity risks of hundreds of million of dollars in auction rate securities. That case is pending in New York State Supreme Court.
In February, Oppenheimer & Co. Inc. and the Massachusetts Securities Division agreed to enter into a consent order which calls for Oppenheimer to offer to purchase approximately $4.5 million of auction rate securities from Massachusetts residents over a 15 month period as well as pay $250,000 to the Massachusetts regulator to cover the state’s investigative and administrative costs.
For Raymond James, auction-rate securities cases are “kind of a nagging thing that hasn't gone away yet,” said Douglas Sipkin, a managing director and senior analyst with Ticonderoga Securities LLC. The recent arbitration losses are “not a positive, but it's not groundbreaking negative news, either,” he said. “It used to be a bigger concern, because the number was bigger.”
In terms of its stock performance, Raymond James Financial, with more than 5,000 brokers across its various platforms, faces the same business challenges as competitors including
Stifel Financial Corp. and Morgan Stanley Smith Barney LLC, Mr. Sipkin said. The retail securities business is plagued by investor negativity toward the stock market and historically low interest rates, he noted.
In the most recently settled auction rate case, claimants Rex and Sherese Glendenning alleged that Mr. Milton recommended, and then invested their money in, an auction rate security consisting of sewer revenue bonds when they opened their account with Raymond James & Associates in or around January 2008.
The broker's “actions and conduct created the false impression that there were deep pools of liquidity in the auction market,” according to the arbitration award.
Mr. Milton, based in Fort Worth, Texas, was not available to comment.
One key to the investors' $925,000 award was the timing of the purchase, said Howard J. Klatsky, attorney for the Glendennings. Thirty-five days after the couple made the purchase, their securities came up for auction for the first time. The auction failed, he said, and his clients “never had the opportunity to go to auction.”
E-mail Bruce Kelly at [email protected].
