New York Attorney General Andrew Cuomo has announced a $2.75 million settlement with a former top executive at UBS over allegations that he used insider information to sell his auction rate securities just before the market for such securities collapsed. According to prosecutors in Cuomo’s office, the executive in question was UBS’s global head of municipal securities and was in charge of fixed income investments for the bank’s American operations when he decided to close his positions in auction rate securities in December 2007 because he heard that the market for student loan-based auction rate securities was about to fail?and he did so without warning investors of the increased risks of such securities.
Auction rate securities (ARS) are debt instruments ? usually municipal bonds or preferred shares of closed end funds ? for which interest is regularly reset through a Dutch auction. Auction rate securities were once routinely marketed as safe, cash equivalents that were highly liquid, but the broker-dealers who sold them failed to disclose that liquidity was entirely dependent upon the success of the auction process, which was being artificially supported by the undisclosed participation of brokers bidding in auctions where they had an interest. Auctions were held every 7 to 35 days by the brokerage firms that dealt in auction rate securities, but because of the credit crisis and its effect upon the financial markets, auctions ground to a halt in February 2008 because they were no longer viable investments and broker-dealers who had previously propped up the market by bidding in their own auctions were no longer inclined to invest in them. The result has been that holders of auction rate securities have been unable to cash out even at a loss, and investors who were led to believe that they were purchasing cash equivalents have learned that they essentially have no liquidity at all.
UBS was just one of many investment banks and broker-dealers that represented auction rate securities as being safe, liquid cash equivalents. When market developments in the second half of 2007 exponentially increased the risk of auction rate securities, broker-dealers and investment advisers had a duty to warn their clients of those increased risks. “The failure to warn of such risks, either in connection with the sale of securities or in advising investors to continue holding them, is fraud,” says Craig T. Jones, an attorney with the Atlanta law firm of Page Perry who is representing several investors in auction rate securities cases. UBS was not unusual in this regard, because representations about auction rate securities were so pervasive during that time frame. But what is unusual is that a market insider was prosecuted for getting himself out of the market while leaving unsuspecting Investors stranded. While there have been a number of regulatory settlements with banks and large brokerage firms, this may be the first settlement between a regulator and an individual involved in the auction rate securities market.
According to attorney Jones, “I am handling several cases where banks and brokerage firms sold auction rate securities from their own inventories to their own customers?without letting the customers know there was a problem. If you are an auction rate securities investor and think that may have happened to you,” says Jones, “take a look at the trade confirmations from when you bought the securities. They will tell you if the bank or broker acted as an agent (selling for someone else) or a principal (selling for themselves) in the transaction. But either way, you probably have a valid legal claim if your auction rate securities positions are still illiquid.”
Most of Jones’ auction rate securities clients are filing arbitration claims due to mandatory arbitration clauses in brokerage contracts, which generally take less time to resolve than lawsuits filed in court. “Some of the cases we have filed have already settled,” says Jones, “while I know other investors who have not pursued claims that are still waiting for something to happen. You know what they say about the squeaky wheel getting the grease.” Jones also points out that the statutes of limitations in some states are now beginning to bar auction rate securities claims. “If you think you may have an ARS claim, it is important to get a lawyer now, before it is too late to force anyone to liquidate.”
Jones’ firm, Page Perry, is based in Atlanta but represents investors in securities fraud cases all over the country.