Auction-Rate Securities

NASAA Says State Regulators Continue To Investigating Auction-Rate Securities Problems Affecting Investors

Published on: April 24, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association announced that a number of its members are continuing to probe complaints about auction-rate securities (ARS). They are also coordinating efforts to help investors whose money was placed by brokers in these complex investment products get access to their funds.

An ARS Task Force, comprised of state securities regulators from Massachusetts, Illinois, Florida, Missouri, Georgia, New Jersey, New Hampshire, Texas, and Washington all working in their individual jurisdictions, is investigating these ARS-related complaints.

NASAA President Karen Tyler, also North Dakota’s securities commissioner, says that regulators will seek the proper remedies to any violation. Tyler says that task force members are focused on determining whether any broker violations, including omission and misrepresentation, took place during the point of sale. She also stressed the securities regulators’ commitment to making sure that investors can access their funds.

ARS Failures at Brokerage Firms So Bad Even Their Own Association is Critical!

Published on: April 2, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) conjures thoughts of jack-booted cops looking to “perp-walk” those who take advantage investors. Yet, FINRA is just the new name of the National Association of Securities Dealers. The NASD was, and FINRA is, a non-profit organization of all securities dealers, with a structure similar to a country club, which fines or expels those who embarrass its membership.

Yet, even FINRA is critical of its members for mishandling auction rate securities (ARS). For example, in a press release, FINRA acknowledges that “Investors who purchase ARS are typically seeking a cash-like investment that pays a higher yield than money market mutual funds or certificates of deposit.” This confirms, despite objections by firms, that investors believed they were getting liquid instruments, not 20 to 30 year obligations or even “no maturity” preferred shares

“If you need your money in a hurry, loss of liquidity is a financial hardship,” states John Gannon, FINRA’s Senior Vice President for Investor Education. “We want investors who have been affected by the recent auction failures to know what options are available to them.”

UBS Securities, Bank of America, and Merrill Lynch Among Firms Subpoenaed In Massachusetts Auction-Rate Market Sales Probe

Published on: April 1, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts Secretary of the Commonwealth William Galvin is subpoenaing Merrill Lynch, Pierce, Fenner, & Smith Inc., UBS Securities, and Bank of America Investments because it wants information about the companies’ involvement in selling auction-rate market securities to retail investors. The companies are all registered Massachusetts broker dealers. Galvin issued the subpoenas on behalf of the Massachusetts Securities Division.

The division wants to determine whether the firms followed proper procedures in letting Massachusetts investors know of the possibilities that their investments could become illiquid. The state is also trying to determine what role big investment banks played in causing the auctions to fail and whether the investments sold to retail investors were suitable.

Many of the investors that bought auction market securities cannot get their money because the securities are frozen. Small business owners and individual investors have been especially hurt by the failures in the auction market because of the subprime mortgage collapse.

Auction-Rate Securities to be Priced this Weekend by UBS – Others to Follow?

Published on: March 28, 2008 | by Shepherd Smith Edwards & Kantas, LLP

After weeks in limbo, some holding auction rate securities may gain some insight about their fate this weekend as UBS reports it will be “pricing” ARS securities in its customers’ accounts.

Brokerage firms and other financial institutions sold many ARS securities as comparable to money market funds, commercial paper and other liquid investments. Investors were later shocked to learn that the auctions “failed,” they were unable to sell securities and given little if any guidance in evaluating their situation. Many have been told their securities retain their “full value” but they would have to wait on their funds.

Perhaps realizing that this sham can go on no longer, using an internal model to value the securities, UBS will reportedly mark these down this afternoon and inform clients of such valuations via their online statements. Markdowns will apparently range from a few percentage points to more than 20%. Many believe that a portion of ARS securities are worth far less.

Too Little Too Late: Fund Compies’ Attempts to Refinance Auction Rate Preferred Securities Using Leverate or Varible Rate Securities Unlikely

Published on: March 20, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Some closed end funds which issued preferred shares in the auction rate market suggest they might obtain liquidity in Auction Rate Preferred Securities (ARPs) using leverage and Variable Rate Demand Preferred Securities. Such statements may give hope to those holding ARPs, yet we believe that these solutions unlikely create the liquidity sought.

This action by the closed-end fund companies is likely intended to benefit these companies and will not help the preferred share holders. If the goal were truly to benefit ARP holders, such action would have been initiated prior to the lock-up of the ARP market. As the broker-dealers actually increased sales to unwary investors, the fund companies were silent as risk to ARP investors grew and liquidity disappeared.

According to the Investment Company Institute, closed end fund companies manage a total of $314 billion dollars worth of assets for their common shareholder clients. Closed-end funds have borrowed about $60 billion of this total using preferred shares. The preferred shares were created to use a low rate paid to preferred holders in order to boost yield to common mutual fund shareholders. Risk to preferred shareholders could have been avoided by liquidating holdings within each respective fund when possible. This would have also greatly reduced risk to common fund shareholders by “getting them off margin.”

How Wall Street Firms Convinced Investors to Put Billions into ARS and ARP Securities Just Before the Auctions “Failed”

Published on: February 25, 2008 | by Shepherd Smith Edwards & Kantas, LLP

An SSE Exclusive: Provided below is a link to a comprehensive expose explaining how Wall Street firms and banks may have convinced investors it was safe to place over $300 billion into “auction rate securities” by promising that these were safe and liquid investments.

During the week of February 11, 2008 the $330 billion market for “Auction Rate Securities” market virtually collapsed overnight as the liquidity of many of these investments disappeared and their safety was reportedly in jeopardy. What had been described to many as safe AAA credits, comparable to money market funds, were instead exposed in a nightmare for investors.

The article states that the result was “mass confusion” which caused by one of the most “convoluted structures ever devised by Wall Street.” The writer, who demonstrates special insight into the situation but desires to remain anonymous, laments that since the problem emerged “[e]veryone has a piece of the puzzle but no one to date put it together in one document.” The article is a MUST READ for all those seeking to understand the nature of this problem, including investors, law enforcement, regulators, attorneys and journalists.

Goldman Sachs, Merrill Lynch, Lehman Brothers, and Other Investment Firms Deal with Frozen Auction-Rate Securities

Published on: February 15, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This week, Goldman Sachs told a number of investors that they could not withdraw money from their auction-rate securities investments. This move by Goldman came as a shock to investors-but the firm was not alone. Merrill Lynch, Lehman Brothers, and other banks have also found themselves notifying their investors that the market for these types of securities are frozen-along with their money. Just this week, there were nearly 1,000 failed auctions. The banks are now refusing to support the auctions and many investors are not sure when they’ll recover their investments.

Usually, auction-rate securities are considered safe alternatives to cash-and banks frequently recommend these bonds, considered long-term securities-to rich individuals and corporations. Banks regularly hold auctions to establish the interest rates and give holders an opportunity to sell their securities.

Auction-Rate Securities