Some Auction Rate Securities to be bought back at discount
The Missouri Higher Education Loan Authority announced this week that it would begin buying back a portion of its auction rate securities at a discount on the Restricted Securities Trading Network. See the related news stories in Forbes and the St. Louis Business Journal.
This news is a mixed blessing for investors stuck with these or other auction rate securities. While such a buy-back will finally allow them to escape from these investments, they will probably have to take a loss on the investment if it is bought back at a discount on a secondary market. Many investors around the country were sold auction rate securities by major brokerage firms who incorrectly claimed they were safe, liquid, cash equivalents. This has turned out to not be the case as evidenced by the collapse of the auction markets earlier this year. Such sales practices can form the basis for claims of federal and state securities fraud among other causes of action.
If you are an investor who was sold Auction Rate Securities, and you would like to discuss your legal options with an attorney, please Contact Greco & Greco.
Posted by Greco & Greco on 05/09 at 03:23 PM
Auction Rate Securities (ARS) •
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Auction Rate Securities Failures
Auction Rate Securities and Auction Rate Preferred Securities (ARS) are securities made up of long term bonds or preferred stock with variable interest rates and yields. The yields are periodically reset through Dutch auctions. ARS are often marketed and sold by a single dealer with the only resale market being through a successful auction. Problems have arisen in recent months as a result of the failures of the auctions, leaving investors in the lurch and unable to redeem the security. As set out in this SmartMoney article, ARS have been marketed as a safe, liquid alternative to money market funds. Investors believing they had their money in a safe liquid investment are understandably concerned by the failures in the marketplace for these securities, and our firm has been monitoring the situation closely and discussing the matter with concerned individuals and businesses. Misrepresentations and omissions in the sale of a security can form the basis for a claim for securities fraud as well as other legal claims for recovery of damages.
As recently as 2006, the SEC censured 15 of the largest brokerage firms for sales and auctions of Auction Rate Securities. As stated by the SEC in its press release, “since the firms were under no obligation to guarantee against a failed auction, investors may not have been aware of the liquidity and credit risks associated with certain securities.” The SEC further stated that “the firms violated Section 17(a)(2) of the Securities Act of 1933, which prohibits material misstatements and omissions in any offer or sale of securities.” The fifteen firms which were censured were Bear, Stearns & Co., Inc., Citigroup Global Markets, Inc., Goldman Sachs & Co., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated/ Morgan Stanley DW Inc., RBC Dain Rauscher Inc., A.G. Edwards & Sons, Inc., Morgan Keegan & Company, Inc., Piper Jaffray & Co., SunTrust Capital Markets Inc., Wachovia Capital Markets, LLC, and Banc of America Securities LLC. Read the SEC Order here.
UBS appears to be the first firm to actually begin lowering the values of auction rate securities on its customers’ statements, as reported by many news sources on March 29 including this Reuters article. Citing a Wall Street Journal article, Reuters reported that the markdowns could exceed 20 percent for some customers. Additional concessions from other firms may be forthcoming as the first quarter of 2008 ends.
State Regulators, including Massachusetts, have also begun investigations of the auction rate securities market with Massachusetts reportedly issuing subpoenas to UBS, Merrill Lynch, and Bank of America.
The Financial Industry Regulatory Authority (FINRA) released an Investor Alert on March 31, 2008 regarding auction rate securities which purports to set out various options for investors stuck with these products. FINRA, which claims to be a “trusted advocate for investors,” notably fails to mention contacting an attorney or filing an arbitration claim as options. If you are an investor who was sold Auction Rate Securities, and you would like to discuss your legal options with an attorney, please Contact Greco & Greco.
Link to Securities-Lawyers.net Auction Rate Securities page.
Posted by Greco & Greco on 03/03 at 05:42 PM
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Fraud charges by SEC against Former UBS broker
Fraud charges related to the sale of a hedge fund operated as a ponzi scheme were settled with a former broker of UBS according to this CCH Wall Street article.. The SEC alleged in its Complaint that the UBS broker made misrepresentations regarding the GLT Venture Fund, L.P. while raising $14.1 million for the fund. The broker agreed to pay disgorgement and civil penalties in addition to an injunction forbidding future violations.
Posted by Greco & Greco on 01/25 at 05:21 PM
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New York subpoenas firms in mortgage fraud probe
Reuters has reported here that the state of New York has subpoenaed three large Wall Street banks (Merrill Lynch, Bear Stearns, and Deutsche Bank) pursuant to a probe related to the creation of mortgage-backed securities. The New York probe reportedly is looking into how mortgages were packaged together by Wall Street to create securities sold to investors and the banks’ relationship with credit-rating firms.
Posted by Greco & Greco on 01/11 at 04:36 PM
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Morgan Stanley Fined Over Failure to Produce E-mails in Arbitrations
Morgan Stanley was fined $3 million and forced to pay $9.5 million in restitution to arbitration Claimants as a result of its failure to produce emails in response to document requests in arbitrations with customers. According to the FINRA press release, Morgan Stanley incorrectly represented in the arbitration proceedings that “the destruction of the firm’s email servers in the Sept. 11, 2001 terrorist attacks on New York’s World Trade Center resulted in the loss of all pre-9/11 email.”
The unknown at this point is the amount of financial benefit gained by Morgan Stanley by this behavior through arbitration settlements and awards, and whether this benefit far exceeds the relatively small punishment ordered by FINRA.
Posted by Greco & Greco on 11/02 at 04:40 PM
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News from SEC’s Senior Summit
The SEC reported at its 2nd Annual Senior Summit that it was working on codifying suitability rules as they apply to recommendations for the purchase of securities by stock brokers, and further clarifying sales practice principals for investment professionals. If properly crafted, additional guidance in these areas should help prevent abuse of investors as well as provide additional tools for attorneys representing investors who have been abused by their stock brokers.
The SEC, FINRA, and state regulators also reported the results of their “free lunch” sweep of seminars targeted as seniors. The findings included 59% of the brokerage firms involved failing to properly supervise the seminars, and 23% of the seminars including advice that was unsuitably risky for senior investors.
Posted by Greco & Greco on 09/21 at 02:31 PM
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Merrill reduces value of assets linked to subprime mortgages
Merrill Lynch warned last week that it was reducing the value of certain securities linked to subprime mortgages, thereby reducing its third quarter profits. Reuters article.
Posted by Greco & Greco on 09/21 at 02:20 PM
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Securities Fraud Guilty Plea for IPOF Fund Manager
A fund manager who had utilized Ferris Baker Watts accounts for his IPOF fund plead guilty in Cleveland, Ohio to securities fraud related to stock price manipulation. According to this Baltimore Sun article, David A. Dadante lost $28 million dollars of investors’ monies in a scheme that started as a ponzi scheme and led to at least four different illegal trading techniques to artificially increase the price of a specific stock, Innotrac.
The Baltimore Sun has extensively covered the involvement of Ferris Baker Watts in this matter in these linked articles, which discuss the early retirement of several executives since the investigation began, a 2003 company memo regarding concerns, and internal flags of potential problems in Dadante’s accounts.
Stephen J. Glantz, a former Ferris broker, has recently been charged with related securities fraud by federal prosecutors in Cleveland. According to this Baltimore Sun article, the Ferris broker is charged with engaging in unauthorized trading in his clients’ account to aid Dadante’s scheme.
Posted by Greco & Greco on 08/17 at 12:03 PM
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Suitability of Hedge Funds
Hedge funds are largely unregulated investment funds which are typically limited to investment by accredited investors, i.e. high net worth individuals, pension funds, and other institutional investors. These funds are not restricted by many of the regulations and disclosure requirements of mutual funds, and they have evolved into a widely diverse industry investing in an array of traditional and non-traditional investments.
As set out in the NASD Notice to its Members linked below, the NASD / FINRA has expressed its concern regarding the sale of hedge funds by its representatives to retail customers. The Notice emphasizes that the risks and disadvantages associated with hedge funds must be fully disclosed to retail customers, and the sales representative or member must use due diligence to investigate the fund and must make a customer specific determination of suitability for the customer’s situation.
NASD Notice to Members
Posted by Greco & Greco on 08/16 at 01:47 PM
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Morgan Stanley fined for corporate bond overcharges
As set out in this FINRA press release Morgan Stanley was fined and forced to pay restitution to retail customers for overcharging for corporate bond sales and for “having an inadequate supervisory system for monitoring the pricing of corporate fixed income securities sold to customers.”
Posted by Greco & Greco on 08/03 at 04:30 PM
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Universal Leases found to be Unregistered Securities
As set out more fully below on our firm’s website (link below), the sale of Universal Leases in the name of Resort Holdings, Yucatan Resorts, and Avalon Resorts have been found by many states to be violations of securities laws prohibiting the sale of unregistered securities. The federal government has alleged that these investments relating to timeshares were a ponzi scheme. The link below further has a link to the FBI press release regarding the arrest of Michael Kelly.
Greco & Greco Universal Lease page
Posted by Greco & Greco on 08/03 at 04:13 PM
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Universal Lease - Resort Holdings, Yucatan, Avalon •
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CMOs and Mortgage Backed Securities
CMOs, or collateralized mortgage obligations, are bundles of mortgages which are then divided up for sale by investment banks. Different types of these mortgage backed securities can vary widely in risk for investors, but recent problems with the subprime mortgage lending market could portend future problems for individual investors who have been sold these types of securities without their brokers fully explaining the risks involved. As set out in the following linked news stories, customers of Brookstreet Securities and Wedbush Morgan Securities have filed arbitration claims against their brokerage firms related to the sale of CMOs and other mortgage securities.
Wall Street Journal article
Orange County Register Article
Posted by Greco & Greco on 07/20 at 02:21 PM
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Morgan Stanley Fined $250,000 by Rhode Island
The Rhode Island Department of Business Regulation fined Morgan Stanley $250,000 for failing to supervise sales representatives at its Providence, Rhode Island office. According to the Rhode Island press release below, the charges related to the replacement of mutual funds with more expensive mutual funds and variable annuities.
Rhode Island Press Release
Posted by Greco & Greco on 07/20 at 02:16 PM
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Life Settlements
The NASD has issued an Investor Alert regarding the purchase of life settlements, also known as senior settlements. Unlike viaticals, life settlements generally involve the sale of life insurance policies on policyholder individuals who are not terminally ill.
NASD Investor Alert
The National Association of Insurance Commissioners has also issued a statement regarding the risks involved in purchases of such settlements by individuals: it is not a liquid investment, there is no guaranteed rate of return, and you could be responsible for paying the premiums on the policy if the insured’s policy if they do not die within a certain time.
NAIC Statement to Consumers
Posted by Greco & Greco on 07/20 at 01:41 PM
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Wachovia Fine Related to Fee Based Accounts
Fee based accounts with brokerage firms are typically an alternative to commission accounts in which the account is charged a fixed annual fee or an annual percentage fee based on the assets in the account. These accounts may not be suitable for all customers. As set out in the link below, the NASD fined Wachovia for “failing to adequately supervise its fee-based brokerage business between 2001 through 2004.”
NASD Press Release
Posted by Greco & Greco on 07/20 at 11:29 AM
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