Bank of America Unit Settles Auction-Rate Securities Fraud Lawsuit

Merrill Lynch Pierce Fenner & Smith, a Bank of America (BAC) unit will pay Tutor Perini Corp. $37M to settle a securities case accusing the broker-dealer of selling the construction company millions of dollars of auction-rate securities (ARS) without giving it the heads up that the market was likely to experience a “spectacular crash.” Despite settling, neither party is admitting to wrongdoing.

Tutor Perini, which brought its ARS fraud case in 2011, claims that the brokerage firm, then called Banc of America Securities LLC, purposely directed it to buy ARS in 2008 even while knowing that the investments were problematic. By December 2007, the construction company had invested about $196M in ARSs. After the market failed Tutor Perini said that it had no choice but to sell the securities at a huge discount in a secondary market.

A district judge initially granted the broker-dealer summary judgment based on the determination that the construction company did not demonstrate misconduct by the Bank of America unit when the latter sold student loan-backed ARSs. Last year, however, the First Circuit partially reversed that ruling after finding that a jury could potentially determine that at least some of the ARSs bought by the construction company were a result of assessments that proved inaccurate because the broker-dealer did not examine certain key developments. Reviving the lawsuit, the federal appeals court said that dismissing certain Massachusetts state securities fraud claims and federal claims was a mistake.

Earlier this year, the BofA unit attempted to obtain summary judgment again by arguing that it had not been trying to get rid of auction-rate securities. It pointed to its attempt to raise its own ARS balance sheet limit by billions of dollars just one day before Goldman Sachs (GS) took actions that spurred the market’s decline.

Tutor Perini countered by pointing out how Banc of America Securities had written an internal memo about the very issues that it hid from the plaintiff. The construction company accused the brokerage firm of attempting to give off the “illusion” that the ARS market was “active and liquid” even as it tried to get rid off the most high-risk auction-rate securities from its own balance sheet.

Auction-Rate Securities
This type of debt or preferred equity securities comes with interest rates that re-set periodically via auctions. Auction-rate securities are typically structured as either preferred shares or bonds with maturity terms of 20 to 30 years. They were touted to investors as a “cash-like” investment with a higher yield payment than CDs or money market mutual funds.

After interest-rate auctions failed to attract enough bidders to arrive at a clearing rate, the market began to fail and the $330M market collapsed in February 2008. Investors were left holding illiquid investments with long-term maturities and were unable to access their funds. Over a dozen companies, including Bank of America, eventually had to agree buy back over $61B of ARS to resolve claims brought by then-New York AG Andrew Cuomo.

Auction Rate Securities Cases
At The SSEK Partners Group, we help auction-rate securities investors in trying to recoup their fraud losses. Contact our institutional investor fraud law firm today and ask to speak with one of our auction-rate securities fraud attorneys.