Product Liability Attorney Blog

Regulators looking into the auction-rate securities debacle have widened their probe to include nearly 40 brokerages, the Los Angeles Times reports.

Journalist Walter Hamilton writes that investigators with the Financial Industry Regulatory Authority launched on-site examinations this week at brokerages to determine whether the middlemen knew about the problems in the market and warned customers about the risks.

Brokerages such as Charles Schwab Corp., Fidelity Investments and E*Trade Financial Corp. have also received subpoenas from New York Attorney General Andrew Cuomo, Bloomberg News reports.

The news comes on the heels of the announcement that eight Wall Street banks have reached legal settlements with state and federal regulators over claims they misled investors about the safety of the instruments.

So far, Merrill Lynch & Co., Goldman Sachs Group, Deutsche Bank, Citigroup Inc., UBS Financial Services, Morgan Stanley, JPMorgan Chase & Co., and Wachovia Corp. have agreed to buy back frozen auction-rate securities from investors.

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FOR IMMEDIATE RELEASE
WEDNESDAY, AUGUST 13, 2008
CONTACT: JOSEPH P. DANIS
COREY D. SULLIVAN
Phone: 1-800-721-2519

NEWS RELEASE

August 13, 2008

St. Louis, MO – The law firm of Carey & Danis LLC has filed a class action lawsuit on behalf of persons who purchased auction rate securities from Stifel Financial Corp. (NYSE: SF) and Stifel, Nicolaus & Company, Inc. between June 11, 2003 and Feb. 13, 2008 and who continued to hold the securities as of Feb. 13, 2008.

The class action lawsuit, Merrick v. Stifel Financial Corp., et al., 08-cv-01167, is pending in the U.S. District Court for the Eastern District of Missouri. The suit alleges that Stifel Financial Corp. and its subsidiary Stifel, Nicolaus & Company, Inc. violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by deceiving investors about the investment characteristics of auction rate securities and the auction market in which the securities are traded.

Auction rate securities are municipal or corporate debt securities or preferred stocks that pay interest at rates set through periodic auctions. The instruments typically have long-term maturity dates or no maturity date.

The suit filed on August 8 claims that, pursuant to uniform sales materials and top-down management directives, Stifel Financial Corp. offered and sold auction rate securities to the public as highly liquid cash-management instruments and as suitable alternatives to money market mutual funds. On Feb. 13, 2008, all of the major broker-dealers, including Stifel Financial Corp., withdrew their support for the auctions. The suit claims that, as a result, investors have been unable to liquidate their auction rate securities.

Continue reading "Carey & Danis LLC Announces Auction Rate Securities Class Action Lawsuit Filed Against Stifel Financial Corp." »

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Last week, three brokerage firms that sold auction-rate securities promised federal and state regulators that they would pay back $37 billion. Two of the firms – Citigroup and UBS – also agreed to fork over $250 million in fines.

St. Louis Post-Dispatch columnist David Nicklaus notes that e-mails released by Massachusetts regulators revealed that, in some cases, brokerages knew how shaky the auction-rate securities market had become. Nevertheless, the banks continued to tell investors that the instruments were highly liquid and as safe as cash.

The article, “Now playing: Latest revival of ‘Scoundrels on Wall Street,” also contains an interview with Carey & Danis lawyer Corey Sullivan. The article states:

“The investment firms also face numerous class-action lawsuits, including four filed by the Carey & Danis firm of St. Louis.

“Corey Sullivan, a lawyer at the firm, said the cases against UBS, Citigroup, Bank of America and Wells Fargo should benefit from the big-dollar regulatory settlements. ‘It certainly lends credence to the factual underpinnings of our cases,’ he said.”

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It was announced today that Citigroup Inc. has agreed to buy back $7.5 billion worth of auction-rate securities and it will pay a $100 million fine to settle charges levied by state and federal regulators that it fraudulently misled investors into believing the debts were “as safe as cash.”

The agreement was reached with the New York Attorney General’s office and the U.S. Securities and Exchange Commission.

Citigroup has until Nov. 5 to buy back $7.5 billion worth of auction-rate securities from about 40,000 retail customers, charities and small or mid-sized businesses. The bank will also reimburse investors who sold the securities at a loss and by the end of 2009 it will pay an additional $12 billion to institutional investors.

The $100 million fine will be split evenly between New York and the North American Securities Administrators Association.

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Citigroup may buy back more than $5 billion worth of auction-rate securities and pay up to a $100 million fine to settle allegations made by regulators that the company engaged in wrongdoing over the investments, the Wall Street Journal reports.

Citigroup, the largest U.S. bank by assets, has apparently been in talks this week with representatives from New York Attorney General Andrew Cuomo’s office, state securities regulators and regulators with the U.S. Securities and Exchange Commission.

As noted by Reuters, a settlement by Citigroup could become a model for other banks facing allegations that they misrepresented auction-rate securities as “safe as cash” investments.

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Last Friday, New York Attorney General Andrew Cuomo sent a letter notifying Citigroup Inc. that he plans to file suit against the U.S. banking giant alleging it used fraudulent tactics to sell auction-rate securities.

As Bloomberg News reports in “New York to Sue Citigroup Over Auction-Rate Sales,” the letter of intent also claimed Citigroup destroyed documents under subpoena. During the five-month investigation, the Attorney General’s office requested telephone conversation recordings related to the marketing, sale or distribution of action-rate securities. However, Bloomberg reporter Karen Freifeld writes, the recordings at the auction-rate securities desk were destroyed.

In the letter, Cuomo said:

“The investigation has revealed that Citigroup has repeatedly and persistently committed fraud by making material misrepresentations and omissions in connection with Citigroup’s underwriting, distribution and sale of auction-rate securities.”

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Massachusetts regulators filed civil fraud charges against New York-based Merrill Lynch & Co. on July 31 for allegedly claiming that risky auction-rate securities were stable.

The 80-page complaint, filed by the Massachusetts Securities Division, claims that Merrill “co-opted” its research department to help sell the securities. Massachusetts Secretary of State William Galvin said in a statement:

“This company was aggressively selling ARS to investors and its auction desk was censoring the research analysts to make sure they downplayed ARS market risks in research reports up to the day Merrill pulled the plug on its auctions. They knew the auction markets were in trouble, but the investors were the last to know.”

The state wants Merrill to make good on the now-frozen auctions and to reimburse investors who sold the instruments at a loss.

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The Swiss banking giant UBS has suspended David Schulman, the head of its U.S. fixed income unit and global head of municipal securities, Reuters reports.

The revelation comes on the heels of a lawsuit filed last Thursday by New York State Attorney General Andrew Cuomo which alleges UBS committed multibillion-dollar fraud when it steered clients into the auction-rate securities market.

The lawsuit alleges that at least seven UBS executives dumped $21 million worth of auction-rate investments at the same time they urged clients to continue buying the instruments.

UBS did not comment on the personnel matter. However, as Reuters notes in “UBS suspends munis head amid auction-rate probe,” the Swiss banker shut down its U.S. municipal bond business last month.

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Yesterday, New York Attorney General Andrew Cuomo filed a civil fraud lawsuit against UBS alleging the banking behemoth knew the auction-rate securities market was on the verge of collapse when they told investors the securities were as safe as cash.

The suit, filed in state court in Manhattan, alleges that bank executives yanked their personal investments from the auction-rate securities market when they realized it was in trouble, the Associated Press reports. At the same time, they allegedly reassured customers that the market was solid.

Cuomo said in a press release issued by his office:

“Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag.”

Continue reading "New York AG Hits UBS with Auction-Rate Securities Suit" »

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FOR IMMEDIATE RELEASE
FRIDAY, JULY 18, 2008
CONTACT: JOSEPH P. DANIS
MICHAEL J. FLANNERY
COREY D. SULLIVAN
Phone: 1-800-721-2519

NEWS RELEASE

July 18, 2008

Carey & Danis LLC Announces Auction Rate Securities Class Action Lawsuit Filed Against Bank of America (NYSE: BAC).

St. Louis, MO – The law firm of Carey & Danis LLC has filed a class action lawsuit on behalf of persons who purchased auction rate securities from Bank of America Corp. (NYSE: BAC), Bank of America Investment Services, Inc. and Bank of America Securities, LLC between June 11, 2003 and Feb. 13, 2008 and who continued to hold the securities as of Feb. 13, 2008.

The class action lawsuit, Cattell v. Bank of America Corp., et al., 08-cv-00511, is pending in the U.S. District Court for the Southern District of Illinois. The suit alleges that Bank of America Corp. and its subsidiaries Bank of America Investment Services, Inc. and Bank of America Securities, LLC violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by deceiving investors about the investment characteristics of auction rate securities and the auction market in which the securities are traded.

Auction rate securities are municipal or corporate debt securities or preferred stocks that pay interest at rates set through periodic auctions. The instruments typically have long-term maturity dates or no maturity date.

The suit filed on July 17 claims that, pursuant to uniform sales materials and top-down management directives, Bank of America offered and sold auction rate securities to the public as highly liquid cash-management instruments and as suitable alternatives to money market mutual funds. On Feb. 13, 2008, all of the major broker-dealers, including Bank of America, withdrew their support for the auctions. The suit claims that, as a result, investors have been unable to liquidate their auction rate securities.

The lawsuit alleges that Bank of America failed to disclose the following material facts about the auction rate securities it sold to the class:

• The auction rate securities were not cash alternatives like money market funds but were instead complex long-term financial instruments with 30-year maturity dates.

• The auction rate securities were only liquid at the time of the sale because Bank of America and other broker-dealers were artificially supporting and manipulating the market to maintain the appearance of liquidity and stability.

• Bank of America and other broker-dealers routinely intervened in the auctions for their own benefit to set rates and to prevent all-hold auctions and failed auctions.

• Bank of America continued to market auction rate securities as liquid investments even after Bank of America and other broker-dealers determined that they would likely be withdrawing support for the periodic auctions and that a freeze of the auction rate securities market would result.

Investors who purchased or acquired auction rate securities from Bank of America between June 11, 2003, and Feb. 13, 2008, and who continued to hold the securities as of Feb. 13, 2008, may request appointment as lead plaintiff by the Court on or before July 21, 2008. A lead plaintiff is a representative party acting on behalf of other class members. To be appointed, the Court must conclude that the investor’s claims are typical of other class members’ and that the investor will adequately represent the class. The investor’s ability to share in any recovery is not affected by the decision to serve as lead plaintiff. The investor may retain Carey & Danis LLC, or other attorneys, to serve as counsel.

Auction rate securities investors who wish to discuss their rights against Bank of America or any other broker-dealer may contact Carey & Danis LLC toll-free at 800-721-2519. A copy of the lawsuit is available from the Court.

Carey & Danis LLC is a national law firm based in St. Louis that aids victims of corporate abuse, greed and neglect. For more information, contact Joseph Danis (jdanis@careydanis.com), Michael Flannery (mflannery@careydanis.com) or Corey Sullivan (csullivan@careydanis.com). You can also visit our website at www.careydanis.com.

###
Media Contact: Geri L. Dreiling
Legal Media Matters LLC
314.743.3851 or 314.520.3897
legalmediamatters@sbcglobal.net

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The Missouri Secretary of State’s office announced today that as part of its investigation into the meltdown of the auction-rate securities market, it led a raid on the St. Louis headquarters of Wachovia Securities.

The investigation took place this morning in the building that was formerly the downtown headquarters for A.G. Edwards. In addition to Missouri regulators from Robin Carnahan’s office, the team included investigators from Illinois, Massachusetts, New Jersey and Pennsylvania.

According to a news release, inspectors were looking for information on Wachovia’s sales practices, internal evaluations of the auction-rate securities market and marketing strategies. Subpoenas were also served on more than a dozen Wachovia agents and executives.

Carnahan said in a written statement:

“Hundreds of Missouri investors have called my office because of inability to access their money. They were told these investments were safe and easy to cash in, but now they cannot run their business, make medical payments, or pay school tuition.”

Carnahan's office also noted that the Missouri Securities Division is reviewing the fraud complaint filed about UBS Financial Services by Massachusetts regulators and it is investigating auction-rate securities complaints against Commerce Bank and Stifel, Nicolaus & Company.

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Federal prosecutors are investigating whether two former Credit Suisse Group brokers lied to clients about their investments into auction-rate securities, the Wall Street Journal reports.

From November 2003 to September 2007, Eric Butler and Julian Tzolov worked as brokers for the second-biggest bank in Switzerland. According to the article, “Auction-Rate Probe Grows Over Clarity From Brokers,” by reporters Amir Efrati, Liz Rappaport and Randall Smith, the two brokers were suspended and then resigned after clients complained they were misled about the nature of the auction-rate securities they bought. They subsequently moved over to Morgan Stanley.

Credit Suisse later shelled out over $10 million to the brokers’ unhappy investors. According to Bloomberg News, Credit Suisse paid one customer $7.03 million to settle a dispute. In another case, the bank paid $3.6 million to an investor.

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While he was a broker for UBS Financial Services, Timothy Flynn sold $30 million in auction-rate securities to towns and cities in Massachusetts.

Now, the same broker has filed a whistle-blower lawsuit against his former employer claiming UBS retaliated against him for cooperating with state regulators and forced him to resign.

In “Former UBS broker files suit in U.S. over securities investigation,” Boston Globe reporter Beth Healy writes that Flynn met with investigators from the Massachusetts attorney general’s office on April 16. During the meeting, Flynn said that brokers had been led to believe auction-rate securities were cash alternatives.

Flynn alleged that his testimony led to a fraud suit filed in late June by the Massachusetts Securities Division against UBS.

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In the weeks before the auction-rate securities market collapsed, five Wall Street firms warned the state of Massachusetts of the danger. But small investors were kept in the dark about the looming crisis and when the market failed on Feb. 13, they were taken by surprise.

According to a Boston Globe article written by Beth Healy, “State was warned on securities,” UBS Financial Services Inc., JP Morgan Securities Inc., Lehman Brothers, Morgan Stanley, Bear Stearns Cos., and Merrill Lynch & Co. all knew the market was in distress.

Documents obtained by the newspaper through a public records request reveal that the firms warned the state treasurer's office about the dire condition of the auction-rate securities market in the weeks before the collapse.

“As early as Jan. 10, Bear Stearns…told the state in a presentation: ‘As discussed in previous meetings,’ credit and liquidity concerns have ‘resulted in a dislocation in the market for auction rate securities.’

“On Jan. 15, Lehman Brothers warned that brokerage firms were using their own money to keep auctions from failing. But it noted ‘severe constraints’ on the firms’ balance sheets.

“On Feb. 11, two days before the market froze, JP Morgan sent research to the state that offered the bluntest assessment yet: ‘We would not be surprised if these recent failed auctions began to breed like rats, begetting more fails…’”

And in an aptly named memo, “Smelling Rats,” JP Morgan wrote:

“If the pace of failed auctions increases, there will be widespread market impact.”

Continue reading "Wall Street warns state about auction-rate securities but ignores the small investor" »

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Organizations that invested in auction-rate securities mistakenly believed that the dealers who sold the instruments would support the auctions, according to a survey released on Monday by the Association for Financial Professionals.

According to the “2008 AFP Liquidity Survey,” many organizations believed that they would be rescued if the market ran into trouble.

The survey states:

“Sixty-nine percent of organizations that invested in ARS over the past four years indicate that dealer support had been implied.

“Seventeen percent of organizations that invested in ARS over the past four years indicate that dealer support had been explicitly promised to them.”

Continue reading "Investors Believed Dealers Would Come to the Rescue" »

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Massachusetts regulators filed civil fraud charges against UBS Financial Services on June 26 for allegedly claiming that risky auction-rate securities were as safe as cash.

The 101-page lawsuit filed by the Massachusetts Securities Division claims that the financial services arm of the company knowingly let brokers represent auction-rate securities as safe to investors so that the company could reduce its stake in the instruments.

The complaint asserts that even though UBS insiders were calling the program an “albatross” and knew it was likely to collapse early in 2008, it continued selling the auction-rate securities to individual investors.

The state wants UBS to return all of the funds to Massachusetts investors and to pay a fine.

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Until this past May, auction-rate securities were classified as “Cash alternatives/Municipal securities” on the customer statements issued by UBS Financial Services.

And well into March, Merrill Lynch customers who checked their accounts online found their auction-rate securities investments listed under “Other Cash.”

The classifications were disclosed in a recent Boston Globe article written by reporter Beth Healy titled: “Brokerage practices draw criticism – Clients say they were misled about risks of auction-rate debt.”

The recent revelations further support the claim that investors were told auction-rate securities were “same as cash.” For many of the investors, that claim was the very reason they chose auction-rate debt. The investors were looking for a safe, short-term place to park their money before drawing on it for expenses such as college tuition, house purchases, impending retirement and even daily living expenses.

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Holders of auction-rate securities are stuck between the proverbial rock and hard place. The predicament of 47-year-old Cecilia Walsh is a prime example.

Walsh was profiled by The Wall Street Journal columnist Liz Rappaport in the article, “Holders of Auction-Rate Debt Have Cho