Dear Mr. Krantz:
Yesterday, I read with concern your article titled “Auction-rate bonds leave many investors hanging”. The article and advice that you provide is a disservice to the investing public for the following reasons:
Step one - The recognition of the issue by NASAA and state regulators is overplayed in your article. Investors are in fact alone. State regulators, federal regulators and SROs are not vested with the authority to restart the auction process. They are empowered to investigate and discipline misconduct, not create structural change. Moreover, state or federal regulators or SROs do not represent individual investors and act as advocates seeking the return of their losses. If you had an opportunity to speak to the various regulators prior to putting pen to paper, they would likely have confirmed their intentions to you as they have done in private to attorneys and law firms that regularly practice in this area.
On April 15, 2008 some of the most troubling news in this area surfaced when Citibank declared that going forward auction rate markets would cease to exist. Your article doesn’t acknowledge this important development nor it’s impact on pricing and liquidly for investors. The lack of a market place moving forward is a substantial impairment of liquidity. Investors should be very concerned about this problem moving forward, the words “don’t panic” are not reassuring to most investors who understand all of the potential ramifications of this situation.
Step two – The advice to “run up the chain of command” is almost always the wrong move for investors. The effect of using the term unsuitable by Ms. Hurme is also overstated. While an advocate for seniors, AARP plays no significant role in the dispute resolution process for investors before FINRA. The only significant investor advocacy organization is the Public Investors Arbitration Bar Association, PIABA. Moreover, Ms. Hume’s statement that “Regulators have been paying keen attention to suitability of broker recommendations” also demonstrates a lack of understanding of the dispute resolution process.
Looking up a CUSIP on the FINRA website is virtually useless. The only source of information for ARS securities is Bloomberg, even there you don’t get the full story. FINRA, for example, tells nothing of S&P, Moody or Fitch’s credit outlook on particular ARS securities and whether they may be facing a rating downgrade. This is material information that affects pricing and liquidity.
I also note that you didn’t discuss the fact that secondary markets for ARS securities exist. One such example is Restricted Securities Trading Network. There are others. ARPS for example, have been trading for the last couple of weeks at approximately $.85. Most ARP investors do have other liquidity options.
Step three- Ms. Hume’s advice to contact FINRA, state regulators or the SEC will not lead to any immediate response or assistance. Moreover, complaining about the broker is a mistake given the fact that the Auction Rate problem is a massive institutional type problem that is in most cases not a broker specific sales practice problem. Remember brokers were lied to about the product, how does staining their CRD help the individual investor recover their losses or create liquidity?
Step four- Your article points out the correct options, but not for the individualized issues. What I mean by this is that there are three distinct categories of ARS – Notes, Student Loans and Preferreds. Within the Preferred category there are two types taxable and non-taxable. The problem with your advice is that it doesn’t necessarily apply to the categories of investments you describe. For example, single credit worth issuer notes like the Metropolitan Museum of Art may likely be redeemed at some point in time, holding makes sense but not because they are “trading again”. Holding makes sense because single issuer note rate resets are high and will likely cause issuers like the Met to buy back the ARS at par to avoid paying excessive interest to investors.
You’re correct about student loans, however, your article fails to mention the fact that student loan ARS might be saleable through a secondary market. I have seen evidence of secondary market bids between $.60 and $.80 for particular Student Loan notes.
Step five- Regulators do not take cases to advocate the investor’s position. Even if they prevail the ultimate outcome will be fines that go back to a state treasury. Your article gives investors the hope that somehow government will do something for them – it wasn’t designed to.
You mention a firm that has filed a class action, this is the wrong route for ARS investors and ignores the individualized determinations that will likely someday defeat class certification. Doing nothing now is simply bad advice. The only advice is to consult a qualified securities arbitration attorney and determine your individual options based on the specific securities you hold.
By the way -- hoping that the credit crunch will ease is not an exit strategy for investors.
If you would like to discuss these ARS issues further, I invite you to contact me.
Ryan K. Bakhtiari
Aidikoff, Uhl & Bakhtiari
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