Not All Auction Rate Securities Investors Are Getting Their Money Back


Right before the stock market fell off a cliff in September, the news media were filled with stories about the regulators forcing investment banks to settle the claims of individual investors whose assets were stuck in frozen auction rate securities. It turns out, however, that many investors have fallen through the cracks.

Obviously, the largest group of investors that have been ignored are large institutional and corporate investors that have typically been excluded from auction rate settlements notwithstanding the fact that they were not provided with full disclosure and material information was withheld from them. Most of these investors will have to decide whether to take legal action in order to protect themselves and their shareholders.

Many investors who purchased auction rate securities from so-called “downstream” or “distributing” broker/dealers have also been denied relief. Clients of Wells Fargo, Raymond James, Stiefel Nicholas and Oppenheimer remain out in the cold and there is no indication that this is going to change.

In addition to the investors described above, as Gretchen Morgensen wrote in her recent Fair Game column in the Sunday edition of The New York Times, some investors remain frozen in the auction rate securities for “quirky” reasons, including the date of purchase and whether they have moved their account from one firm to another. One such customer is Irene Scharf, who, on the advice of her UBS broker, invested $75,000 in several municipal auction rate securities in 2005. Her broker moved from UBS to SmithBarney last year, and Ms. Scharf moved her account with him to the new firm. Because of that action, she has been disqualified from participating in the settlements agreed to by both UBS and SmithBarney.

The Massachusetts settlement with UBS requires it to redeem (i) auction rate securities of those clients who bought them from the firm between October 1, 2007, and February 13, 2008, regardless of whether the securities were moved to other firms, and (ii) auction rate securities held at UBS on February 13, 2008 whether purchased there or not. The agreement struck by SmithBarney requires that it redeem auction rate securities that were bought by its customers directly from the firm before February 11, 2008.

Since Ms. Scharf did not buy the auction rate securities from SmithBarney, it will not redeem her auction rate securities. Since she bought the auction rate securities from UBS before October 1, 2007, and because the securities are no longer held at UBS, she will not receive any settlement from UBS either. This effectively leaves her in limbo.

According to Massachusetts’s regulators, the October 1, 2007, redemption starting point was based on the date that officials concluded UBS knew that the auctions were beginning to fail. Investors such as Ms. Scharf, who bought before that date, appear to be out of luck.

This distinction, however, makes little sense. Brokerage firms sold auction rate securities to their customers based on misrepresentations that they were as safe and as liquid as money market funds. A customer’s right to recover cannot be limited based on when he was lied to.

As Ms. Morgensen points out at the close of her column, “This predicament is like so many of the messes created by Wall Street in recent years: Easy to make. Hard to fix.”

Investors that are being denied recovery on their auction rate securities are encouraged to carefully consider their legal options. The passage of time can result in such investors losing viable claims.

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 counseling institutional and individual investors regarding their auction-rate securities investment problems. For further information, please contact us.