Brokerage Firms Face Suits Over Auction-Rate Securities Issued by CDOs and Other Structured Finance Vehicles


Corporate investors have begun filing lawsuits against major brokerage firms, including Merrill Lynch and Credit Suisse, seeking to recover losses sustained in auction-rate securities issued by CDOs and other structured finance vehicles, reported Elinor Comlay of Reuters on Wednesday, September 3, 2008. “I can assure you that more suits are going to be brought,” said J. Boyd Page, a senior partner at the Atlanta law firm of Page Perry. Corporate and institutional investors are likely to sue for losses, as well as consequential damages, added Mr. Page.

Unlike more conventional auction-rate securities, such as those linked to municipal debt or student loan trusts, auction-rate securities issued by these vehicles were backed by pieces of sub-prime mortgages or other exotic instruments of the types that major financial institutions have been forced to write down so heavily. For that reason, they viewed as particularly “toxic.” “These are the very worst,” said Mr. Page. The lawsuits allege that the risks of these securities were not fully explained and material facts were not disclosed to the investors.

Lehman, Deutsche Bank and Merrill sold more than $8.8 billion of these securities, and losses have been steep, as much as 80% or more, according to the article. Auction-rate securities issued by CDOs and other structured finance vehicles were sold mainly to corporations who are generally excluded from the settlements with regulators.

These private lawsuits could be “turbo-charged” by evidence already marshaled by the attorneys general of New York and Massachusetts, according to the article. Based on some internal UBS and Merrill Lynch e-mails relating to sales of auction-rate securities that have already been disclosed, it is reasonable to suppose that such evidence may demonstrate that brokerage firms knowingly misrepresented and omitted to disclose material facts about these securities to their corporate and institutional clients.

While sellers of these securities typically try to persuade arbitrators that their corporate and institutional victims were too knowledgeable to have been defrauded, that ploy should fail where, as here, smaller brokerage firms say they were themselves defrauded by the underwriters. The Regional Bond Dealers Association, an organization composed of regional brokerage firms, has claimed that many of the brokerage firms distributing auction-rate securities were themselves victimized by the fraud perpetrated by the major underwriters of auction-rate securities. If financial professionals working in brokerage firms say they were defrauded, arguments that clients of brokerage firms were too knowledgeable to have been defrauded lacks credence.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in auction-rate securities cases. For further information, please contact us.