Just last month (August 2010), a panel of arbitrators acting under the sponsorship of the Financial Industry Regulatory Authority (FINRA) ordered UBS Financial Services to pay $80.8 million as consequential damages to a corporate investor in Student Loan Auction Rate Securities ? an amount equal to more than ten times the amount of the investment, according to a recent Wall Street Journal article by Randall Smith.
The investor, Kajeet, Inc., a marketer of cellphones for kids, had requested an award of $110 million for damage to its business when its cash was frozen in auction-rate securities in early 2008.
The award shows how the costs and damages are still mounting more than three years after Wall Street dealers decided to allow the auctions to fail. The entire $330 billion market for auction-rate securities ground to a halt in February 2008.
According to the Securities and Exchange Commission, 40,000 UBS customers had held more than $35 billion in frozen and inaccessible auction-rate investments. Regulators eventually persuaded major brokerages to buy back more than $60 billion from investors.
Wall Street firms represented such investments as safe. The SEC charged that UBS and other firms misled investors to believe that such funds “were equivalent to cash or money market funds.” More than 650 claims to recover auction-rate losses or damages have been filed.
As part of the regulatory settlement by UBS and other brokerages in 2008, a special arbitration procedure was set up to allow investors to claim “recovery of consequential damages” based on lack of access to their funds. The firms are not allowed to contest liability, only the amount of consequential damages. As the name implies, consequential damages are losses beyond the amount of money that was actually invested, and could include, for example, lost business opportunities.
According to the article, without access to its funds, Kajeet had to cut its 60-member work force in half and lost a key distribution deal with a well-known national retail chain. Kajeet sold $4 million in auction-rate securities in May 2008 at a 10% loss, which was later made up by UBS, and sold its remaining $4 million in January 2009 under a regulator-mandated UBS buyback plan.
“Money is like oxygen,” Daniel Neal, Kajeet’s CEO, was quoted as saying. Merely recovering the original investment, he said, would be like being told, “I want to take all the oxygen out of your office and I’ll give it back in a week.” The arbitration award, which represented 73% of the $110 million the company claimed, “will make sure that we’ll be healthy” in the future.
In another auction rate securities case, STMicroelectronics NV won a $406 million arbitration award against Credit Suisse Group in February 2009 over its purchase of $415 million in auction-rate securities.
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 have extensive experience in representing investors in auction rate securities cases. For further information, please contact us.