Roche International has sued Credit Suisse for over $270 million in losses that the drug company incurred after the bank’s brokers invested $545 million of its money in auction rate securities. Roche’s Credit Suisse relationship managers were Julian Tzolov and Eric Butler, who are now serving federal prison sentences for securities fraud in connection with auction rate securities. In its lawsuit, Roche alleges that it was among Tzolov and Butler’s victims, accusing them of investing the company’s money in risky auction rate securities while claiming it was invested in highly liquid, government-backed student loan securities.
Auction rate securities are variable rate instruments in which the rates are determined through periodic auctions, but since the auction markets collapsed in February 2008 many investors holding such securities have been unable to liquidate their investments. Problems with these securities were increasingly evident in the summer and fall of 2007 when auctions began to fail, but most broker-dealers failed to inform their customers of the increased risks and continued to misrepresent the product as a safe cash equivalent. Since the collapse of the market, many broker-dealers have entered into settlements with state, federal and industry regulators to redeem auction rate securities at par value. But not all investors are eligible for the regulatory settlements, and several broker-dealers have not agreed to settle.
While regulators and hundreds of individual investors have filed lawsuits and arbitrations alleging civil fraud in the marketing of auction rate securities, Credit Suisse’s Tzolov and Butler have so far been the only ones prosecuted criminally in connection with the auction rate debacle. According to federal prosecutors, Tzolov and Butler took the fraud to a higher level by misrepresenting that the auction rate securities they were selling were backed by federally-insured student loans, when in fact they were riskier mortgage-backed securities that paid higher commissions to the brokers. But the government also charged that the brokers misrepresented the risks of auction rate securities in general. According to attorney Craig Jones, “You can say that about anyone who sold auction rate securities in the months leading up to the February 2008 crash, where the risks of the auction rate market were dramatically increasing and there was a duty to disclose those increased risks.” Jones’ law firm, Page Perry of Atlanta, represents a number of investors who have brought fraud claims over auction rate securities. Most are demanding arbitrations against the responsible banks or broker-dealers to get their money back.
The Roche case against Credit Suisse is being brought in federal court, but most customer claims are subject to industry arbitration. Jones’ firm is one of a few boutique law firms across the country that focuses its practice on both the arbitration and litigation of investor claims. “Lately,” says Jones, “auction rate securities have been a large part of my practice.”
It is estimated that investors were left holding a total of $330 billion in auction rate securities when the auctions froze in early 2008. While there is a limited secondary market in which some of these securities have been sold at a steep discount, many investors have turned to lawyers to explore their options. “In some cases there is a secondary market solution,” says Jones, “and in others the only viable strategy is to sue for rescission and/or damages. If you are one of the investors who got stuck with these securities, we would be happy to discuss your situation and see what approach makes the most sense for you.”