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Articles Posted in Auction-Rate Securities

Merrill Lynch Pierce Fenner & Smith, a Bank of America (BAC) unit will pay Tutor Perini Corp. $37M to settle a securities case accusing the broker-dealer of selling the construction company millions of dollars of auction-rate securities (ARS) without giving it the heads up that the market was likely to experience a “spectacular crash.” Despite settling, neither party is admitting to wrongdoing.

Tutor Perini, which brought its ARS fraud case in 2011, claims that the brokerage firm, then called Banc of America Securities LLC, purposely directed it to buy ARS in 2008 even while knowing that the investments were problematic. By December 2007, the construction company had invested about $196M in ARSs. After the market failed Tutor Perini said that it had no choice but to sell the securities at a huge discount in a secondary market.

A district judge initially granted the broker-dealer summary judgment based on the determination that the construction company did not demonstrate misconduct by the Bank of America unit when the latter sold student loan-backed ARSs. Last year, however, the First Circuit partially reversed that ruling after finding that a jury could potentially determine that at least some of the ARSs bought by the construction company were a result of assessments that proved inaccurate because the broker-dealer did not examine certain key developments. Reviving the lawsuit, the federal appeals court said that dismissing certain Massachusetts state securities fraud claims and federal claims was a mistake.

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Goldman Sachs and Reno, NV Settle Securities Fraud Case 
According to the Reno Gazette-Journal, the city of Reno is about to settle its securities fraud lawsuit against Goldman Sachs (GS) for $750K. Nevada’s capital city claims that the firm misled it into taking on risky debt that nearly caused Reno to become insolvent. The Reno City Council will vote on approving the settlement next week. Other details of the settlement remain undisclosed at this time.

The auction-rate securities lawsuit involved over $210M in bonds issued by Reno in ’05 and ’06 to refinance the debt for an events center and another facility. The city claims that Goldman Sachs never disclosed that the ARS market was very risky or that the firm was bidding interest rates down to hold up the market.

When the financial collapse happened in 2008 and banks ceased to bid on auction rates, rates went soaring. This left Reno with a 15% debt interest rate and millions of dollars in penalties that it now owed Goldman. For example, in 2012 Reno paid the firm $2.6M. It paid the Goldman Sachs $7M the following year.

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The 1st U.S. Circuit Court of Appeals in Boston has resuscitated Tutor Perini Corp.’s (TPC) securities fraud lawsuit against Bank of America (BAC). Circuit Judge Ojetta Rogeriee Thompson said that a district court judge made a mistake when tossing the Massachusetts and federal securities claims accusing the bank of selling the construction company millions of dollars in auction-rate securities that it knew were about to fail.

Tutor Perini, which is estimating over $50M plus interest in losses, claims that Bank of America persuaded it to purchase auction-rate securities (ARS) prior to the financial crisis, toward the end of 2007 and the beginning of 2008, even though it knew that the securities were on the brink of becoming illiquid. It was in February 2008 that the dealer stopped supporting the $330B ARS market, leaving investors with debt that was illiquid—debt that they had been reassured time and again was liquid, like cash. Instead, investors were unable to access their funds.

In 2015, the district court judge dismissed Tutor Perini’s ARS fraud case, noting that Bank of America did not have the “duty” to reveal every fact about the risks involved to the construction company and that the bank had, in fact, already made a number of disclosures. Judge Thompson, however, said that because the auction-rate securities market was failing, this might have meant that Bank of America now had the duty to warn about the new risks, including those involving its earlier recommendations. Thompson noted that a jury could very well find that as the bank had sought to protect itself from the ARS market, it pushed the construction company toward greater exposure.

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A Wells Fargo & Co. (WFC) brokerage unit must buy back almost $94 million in auction rate securities from the family who said their adviser misrepresented the investments. The claimants are the relatives of deceased newsstand magnate Robert B. Cohen, who founded the chain Hudson News. Cohen died in 2012.

His family contends that Wells Fargo Advisors and one of its advisors made misleading and fraudulent statements about municipal auction-securities. They are alleging breach of fiduciary duty, negligence, and fraud in their municipal auction-rate securities fraud claim.

Now, the firm must buy back at face value the municipal ARS it helped Cohen, his family, and affiliated business purchase. The transactions started beginning March 2008.

A New York Appellate Division’s panel has unanimously agreed to revive the state attorney general’s auction-rate securities lawsuit against Charles Schwab and Co. (SCHW). The 2009 securities case accuses the financial firm of committing fraud in its sale and marketing of the financial instruments. The decision reverses a state judge’s ruling to throw out the complaint.

According to the NY ARS lawsuit, the broker-dealer’s brokers made false representations that the securities were safe and liquid. In a 4-0 decision, the appeals panel said that the state had given enough evidence to merit a trial on two claims submitted per its Martin Act, a 1921 law that gives the attorney general of New York the ability to prosecute fraud without proof of intent. Under the law fraud is defined as acts that involve misleading or fooling the public.

Per the panel’s ruling, the claims are revived only as it pertains Schwab’s alleged misconduct before 9/5/07, which is when the first ARS sold by Schwab failed. The state wants the company to repurchase securities from customers and pay civil penalties and restitution.

A district court judge in Minnesota has ordered a $125 million auction-rate securities arbitration case filed by Allina Health System against UBS (UBS) to proceed.

U.S. District Judge Michael Davis found that claimant Allina is indeed a UBS client even though the financial firm had argued that under Financial Industry Regulatory Authority rules ARS issuers are not underwriter customers. The Minnesota non-profit healthcare system had filed its securities claim over ARS it issued in October 2007 that were part of a $475 million bond issuance to finance renovations and remodeling, as well as refinance debt. UBS was its underwriter.

Allina contends that the market collapsed in 2008 because UBS and other financial firms stopped putting in support bids to keep auctions from failing. The healthcare group says that because of this, it had to pay a great deal of money to refinance the securities and make higher bound payments after losing its bond insurance. Allina claims that UBS did not properly represent the ARS market risks, breached its fiduciary duties, and violated state and federal securities laws.

A US District judge is ordering Morgan Keegan & Co. to repurchase auction-rate securities and make a payment of $110,500 in an ARS lawsuit filed by the SEC that accuses the financial firm of misleading investors about these investments’ risks. The SEC contends that the $2.2B in securities that the firm sold left clients with frozen funds when the market failed in 2008.

Even after the financial firm started buying back ARS—it has since repurchased $2B in ARS of its own accord—the SEC decided to proceed with its securities case. The Commission contends that even as the ARS market failed, Morgan Keegan told clients that the securities being sold came with “zero risk” and were short-term investments that were liquid.

Now, Judge William Duffey Jr. has found that although Morgan Keegan’s brokers did not act fraudulently, some of them acted negligently when they left out key information and made misrepresentations when selling the securities. This including not apprising investors about the risk of failure, liquidity loss, or that interest rates might vary.

Duffey is the same judge who dismissed this very case in 2011. However, last May, the US Court of Appeals in Atlanta overturned his decision after determining that he wrongly found that verbal comments made to certain customers were not material because of disclosures that could be found on the financial firm’s web site.

Morgan Keegan Trial Judge to Decide SEC Case He Dismissed, Bloomberg.com, November 26, 2012

More Blog Posts:
Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds, Institutional Investor Securities Blog, December 17, 2012

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker fraud Blog, October 30, 2012

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A Financial Industry Regulatory Authority arbitration panel says that Oppenheimer & Co. has to pay US Airways Group Inc. (LCCC) $30 million for losses that the latter sustained in auction-rate securities. The securities arbitration case is related to the airline group’s contention that the financial firm and one of its former brokers misrepresented certain ARS that were structured and private placement.

US Airways had initially sought $110M in compensatory damages and $26 million in interest and legal fees. The FINRA panel, however, decided that Oppenheimer and its ex-broker, Victor Woo, owed $30 million—Woo’s part will not be greater than what he made in commissions. Oppenheimer is now thinking about whether to submit a motion to vacate the arbitration panel’s order.

The financial firm is, however, going to go ahead with the arbitration it had filed against Deutsche Bank (DB) to get back the award money and associated costs from this case. Oppenheimer’s claim against Deutsche Bank is linked to the US Airways case but became a separate proceeding in 2010.

The U.S. District Court for the Southern District of New York has rejected Credit Suisse Group’s (CS) motion to dismiss Elbit Systems Ltd. v. Credit Suisse Group, the auction-rate securities lawsuit filed by an investor claiming that alleged misconduct took place at a Credit Suisse Group brokerage firm subsidiary Credit Suisse Securities (USA) LLC. The court said that the investor did an adequate job of alleging that the subsidiary acted with actual power of authority as Credit Suisse Group’s agent.

The plaintiff, Elbit Systems Ltd., contends that it invested in ARS because it was told that these were liquid, safe, and backed by the US government-backed. However, the Israeli electronics company claims that even as the market started failing in 2007, cash managers started to replace the government-backed ARS with more risky ARS backed by credit-linked note securities and collateralized debt obligations, and its Corporate Cash Management account began to fail, it was never informed that these problems were happening. Instead, its holdings in these risky investments were allegedly increased.

As of the complaints filing, Elbit’s securities have not been sold while its ARS investments had allegedly lost about $16 million. Also, a Credit Suisse Securities executive is accused of telling the plaintiff that brokers Eric Butler and Julian Tzolov were too busy to handle its account when actually, the two of them were no longer at the firm because they had been accused of securities fraud.

Almost a year and a half after US District Judge William Duffey Jr. dismissed the SEC’s lawsuit accusing Morgan Keegan & Co. of misleading thousands of auction-rate securities investors about the risks involved with these investments, he must now rule on the same case again. This latest trial in federal court comes after the 11th U.S. Circuit Court of Appeals in Montgomery, Alabama dismissed Duffey’s decision on the grounds that he erred when he concluded that the verbal comments made by brokers to four clients were immaterial because of disclosures that were on the retail brokerage firm’s website. Morgan Keegan is a Raymond James Financial (RJF.N) unit.

In SEC v. Morgan Keegan & Company Inc., regulators are claiming that the brokerage firm told its clients that over $2B securities came with no risk, even as the ARS market was failing, and that the investments were short-term and liquid. The commission filed its ARS fraud lawsuit against the broker-dealer in 2009.

During opening statements at this latest trial, prosecutors again contended that the brokers did not tell the investors that their cash could become frozen indefinitely. Reports Bloomberg News, orange grower John Tilis, who is a witness in this case, said that he decided to invest $400K in ARS in 2007 because he thought they were a safe place to keep his money until he had to pay taxes in April the next year. Tilis claims that the firm’s broker had informed him that he would be easily able to get his funds when he needed them. Yet when Tilis attempted to do so, he said that all the broker would tell him is that the ARS couldn’t be sold. (Morgan Keegan later refunded his principal.)

The SEC is arguing that Morgan Keegan found out about a number of failed auctions in November of 2007. In March 2008, one month after even more auctions had begun failing, the brokerage company started mandating that customers that wanted to buy ARS sign statements noting that they were aware that it might be some time before the investments became liquid again.

Meanwhile, Morgan Keegan is maintaining that it did not fail to inform clients about the risks involved in auction-rate securities, which had a history of being very “safe and liquid.” The firm contends that not being able to predict the future is not the same as securities fraud (Duffey noted this same logic when he dismissed the SEC lawsuit last year), and that even prior to the SEC lawsuit, it bought back $2B in ARS from clients. Morgan Keegan says that those who took part in the buyback program did not lose any money.

Morgan Keegan Trial Judge to Decide SEC Case He Dismissed, Bloomberg, November 26, 2012

U.S. SEC fraud lawsuit vs Morgan Keegan revived, Reuters, May 2, 2012

SEC v. Morgan Keegan & Company Inc. (PDF)


More Blog Posts:

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012

Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker fraud Blog, October 30, 2012

Morgan Keegan & Company Ordered by FINRA to Pay $555,400 in Texas Securities Case Involving Morgan Keegan Proprietary Funds, Stockbroker fraud Blog, September 6, 2011

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