Investors and financial advisers who are stuck holding auction rate securities bought from “downstream” broker-dealers have begun to step up their legal claims against the major firms that marketed the investments as safe.
A new class of these “stranded” ARS investors, who didn't participate in redemptions offered by big banks as part of regulatory settlements, were named as plaintiffs in an amended complaint brought May 8 against
UBS AG of Zurich, Switzerland, and its New York-based subsidiary
UBS Securities LLC, in a federal lawsuit in New York.
“Some buyers of auction rate securities fell through the settlement cracks,” said Aaron Sheanin, a partner with Girard Gibbs LLP, a San Francisco law firm that is leading the class actions, which also include some investors who bought securities directly from
UBS.
The suits are targeting larger firms that conducted the auctions where investors could liquidate their holdings, because the downstream dealers generally don't have the resources to repurchase ARS at par value — one of the key obligations to which the larger firms agreed in settlements worth more than $50 billion with state and federal regulators.
According to investors and regulatory filings, Oppenheimer Holdings Inc., E*Trade Financial Corp., TD Ameritrade Holding Corp. and
Raymond James Financial Inc. were among the biggest distributors of auction rate securities to investors before the markets began freezing in February 2008, leaving investors holding more than $100 billion of the securities.
The complaint being filed by Girard Gibbs amends one dismissed this year on behalf of investors who purchased ARS directly from
UBS.
A judge in the U.S. District Court for the Southern District of New York said that investors' claims for redemption of the securities and recovery of lost interest, based on false marketing of the securities as highly liquid, was made redundant by the settlements. The new attempt focuses on alleged manipulation of auction prices by
UBS traders, Mr. Sheanin said.
UBS hasn't yet responded to the new complaint, said spokesman Kris Kagel.
Diane A. Nygaard, head of The Nygaard Law Firm in Leawood, Kan., a plaintiff's law firm, is pursuing another twist on behalf of in-vestors stuck with ARS. Those investors bought the securities from large banks sponsoring the auctions but transferred them to smaller brokers before the settlements were negotiated.
Ms. Nygaard plans to file group arbitrations with the
Financial Industry Regulatory Authority Inc. of New York and Washington. It is a rare move that she thinks will carry more weight with Finra arbitrators than a single investor's word against a financial institution, be-cause multiple investors can offer corroborating evidence about false marketing claims.
About $330 billion of auction rate securities were outstanding when auctions began collapsing after the big investment banks, worried about rapidly deteriorating assets' clogging their balance sheets, stopped supporting them.
About $160 billion of auction rates remain outstanding following the settlements, with most paying very low “penalty” rates under terms of failed auctions, according to a recent New York Law Journal article by Andrew Genser, a New York-based partner at Kirkland & Ellis LLP of Chicago.
An increasing number of direct lawsuits also are being filed by large institutional investors against the big banks since most of the regulatory settlements focused on retail investors, attorneys said. To be sure, some downstream brokers have been negotiating solutions.
Finra this month reached settlements with Philadelphia-based Janney Montgomery Scott LLC, M&I Financial Advisors Inc. in Milwaukee, Buffalo, N.Y.-based M&T Securities Inc. and Cleveland-based NatCity Investments Inc., bringing to nine the number of downstream brokers who have negotiated reimbursement schedules and fines with the self-regulatory group.
Stifel Nicolaus & Co. Inc., a St. Louis-based broker, last month said that over the next three years, it will redeem about $180 million of auction rate securities held by its clients.
Other firms with larger amounts outstanding continue to negotiate, according to regulatory filings.
Clients of TD Ameritrade as of May 1 held about $690 million of auction rate securities, including $190 million held in custody for clients of independent registered investment advisers, the company said in a recent filing.
Raymond James in January informed its clients that it didn't have the capital to buy back ARS, but has said it is trying to work out solutions.
Oppenheimer moved its corporate home to Delaware, from Toronto, in part to qualify for U.S. government aid that might help in redeeming ARS, said people familiar with the company's plans.
Some lawyers say that downstream firms, meanwhile, are trying to fashion alternatives to outright redemption of ARS. These included paying clients the difference between low penalty rates on their securities and higher rates on a benchmark index.
E-mail Jed Horowitz at [email protected].
