Large corporate and institutional investors have been “left out in the cold” in the regulators recent auction-rate securities settlements with Wall Street brokerage firms. While some investors ( individuals, small businesses, and charities,) will reportedly recoup all of their losses in auction-rate securities as part of the $50 billion settlements between Wall Street firms and regulators, hundreds of corporations and institutions will not, reported Robert Frank and Liz Rappaport of the Wall Street Journal, in their August 29, 2008 article entitled “Big Boys Face ‘Auction’ Monster Alone.” Instead of having a place at the settlement table, corporations and institutions must fend for themselves even if it requires bringing legal claims to protect their interests. This despite the fact that most corporate and institutional investors were misled about their auction-rate securities in the same way as other investors.
Merrill Lynch, Citigroup, Goldman Sachs, Wachovia, Morgan Stanley, Deutsche Bank and UBS have agreed to buy- back auction-rate securities bought by individuals, charities or companies with accounts of less than $10 million. The banks and regulators say that companies with account of $10 million or more are largely excluded from the settlement, because their officers were financially sophisticated and should have known better, according to the article. The message from Wall Street to these companies is: “You shouldn’t have trusted us.”
This distinction is simply not justified ? sophisticated people can’t bring their sophistication to bear when they are lied to. Furthermore, as the article points out, not all investors with larger accounts are truly sophisticated in terms of expertise in investments. Even if an investor claimant is deemed to be sophisticated, that is only one of a number of factors that may be considered by an arbitration panel in determining whether a claim has merit, and, if so, the amount of damages to be awarded. Other factors include the investor’s investment objectives and need for liquidity, whether the broker relationship was fiduciary or longstanding, the specificity of misrepresentations relied on by the investor, whether the brokerage firm omitted to disclose material facts to the investor, and whether the fraud was concealed by the broker, among other things.
The fallacy in the rationale adopted by the Wall Street firms and accepted by the regulators was clearly underscored several weeks ago in a letter written by an organization, the Regional Bond Dealers Association, which represents certain brokerage firms that sold auction?rate securities but did not underwrite them. In its letter, the Regional Bond Dealers Association 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. Specifically, the Regional Bond Dealers Association claimed that the major underwriters of auction-rate securities withheld material information about auctions and the auction process from them. If financial professionals working in brokerage firms were defrauded by their peers, it is easy to understand how corporations and institutions were also defrauded.
Pluris Valuation Advisors, LLC, has reported that U. S. companies held nearly $165 billion of ARS June 2007, $100 billion in December 2007, and $39 billion at the end of July 2008. Google Inc., Bed Bath & Beyond Inc., and Starbucks Corp., among other companies, purchased auction-rate securities because they were led to believe such securities were cash equivalents and were not advised of material facts regarding auction-rate securities, the auction-rate securities markets and the auction process.
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.