In true ‘Ponzi-scheme meets Hollywood movie’ fashion, former Credit Suisse broker, Julian Tzolov, who is the target of a federal investigation into an auction-rate securities scam has been declared missing and likely left the United States for his home in Bulgaria.
Bulgarian-born Julian Tzolov and Eric Butler are two former Credit Suisse brokers accused of lying to investors about how they invested their money in auction-rate securities. The two men resigned from Credit Suisse on September 7, 2007.
In other auction-rate securities news, UBS has agreed to pay Massachusetts $4.4 million as part of a settlement involving allegations by the state that it misrepresented the securities to municipalities.
Massachusetts securities regulators launched an investigation into UBS and its marketing practices of auction-rate securities in February, following complaints that the Swiss-based bank had deceived clients when it sold them the securities.
Of the $4.4 million settlement, $1 million will go toward state fees and to educate government officials about appropriate investments for their money. The remaining funds will allow Massachusetts cities and agencies to redeem the full value of their securities from UBS, according to Massachusetts Attorney General Martha Coakley.
The $4.4 million settlement now brings the total amount that UBS has paid to Massachusetts over its mishandling of auction-rate securities to $41.3 million, following a $37 million partial settlement that the bank agreed to in May. Meanwhile, Texas is now on the trail of UBS. The securities board in the Lone Star State is considering barring the bank from doing business in Texas, in which UBS’ wealth management unit has approximately $65 billion in assets under management.
Auction-rate securities are municipal bonds, corporate bonds, and preferred stocks in which interest rates or dividend yields reset through auctions held every seven, 14, 28, or 35 days. In February 2008, Wall Street investment banks and securities firms pulled out of the auction market, thereby setting off a chain reaction of auction failures.
Initially sold on auction-rate securities because of their supposed cash-like nature, they now find themselves holding illiquid investments. Many investors have since taken their frustration out in court after being left in limbo. According to a study by NERA Economic Consulting, a New York economic-consulting group, shareholder class-action filings have risen substantially in 2008, and expected to reach a 42% increase by year end - the largest annual rise since 2002.
Thursday, July 31, 2008
Massachusetts Charges Merrill Lynch With Fraud In Connection with Auction Rate Securities Sales Practices
The Massachusetts Secretary of the Commonwealth charged Merrill Lynch & Co. with fraud in pushing the sale of auction-rate securities while "mis-statingthe stability of the auction market itself."
"This company was aggressively selling ARS to investors and its auctiondesk was censoring the research analysts to make sure they downplayed ARS market risks in research reports up to the day Merrill pulled theplug on its auctions," Secretary William Galvin said. "They knew the auction markets were in trouble, but the investors were the last toknow." The complaint also alleges Merrill co-opted its research department to help sell the securities and seeks to order the brokerage to "make good"on the sales of now-frozen securities and make restitution to investorswho sold at less than par.
"This company was aggressively selling ARS to investors and its auctiondesk was censoring the research analysts to make sure they downplayed ARS market risks in research reports up to the day Merrill pulled theplug on its auctions," Secretary William Galvin said. "They knew the auction markets were in trouble, but the investors were the last toknow." The complaint also alleges Merrill co-opted its research department to help sell the securities and seeks to order the brokerage to "make good"on the sales of now-frozen securities and make restitution to investorswho sold at less than par.
UBS Confirms that Fixed Income Chief on Leave During Auction Rate Securities Investigation
UBS the world's largest wealth manager, said it placed an employee on administrative leave after the Wall Street Journal reported the Swiss bank suspended U.S. fixed-income chief David Shulman.
"We did place an employee on administrative leave last week but we decline to identify the employee,'' Tatiana Togni, a spokeswoman for UBS in Zurich, told Bloomberg News. Shulman remains head of fixed income, added Karina Byrne, a spokeswoman in New York.
E-mails between Shulman and UBS executives were disclosed in a lawsuit filed June 26 by Massachusetts Secretary of State William Galvin, who claimed the bank committed fraud by selling the bonds as the equivalent of money market securities without disclosing to investors that the $330 billion auction-rate securities market was lurching toward a breakdown.
Shulman, also global director of municipal securities, ran the auction-rate securities business for Switzerland's biggest bank, the New York-based newspaper said. UBS said it was "honest and ethical'' in its marketing of auction-rate securities, according to the bank's reply to a lawsuit filed last month.
"We did place an employee on administrative leave last week but we decline to identify the employee,'' Tatiana Togni, a spokeswoman for UBS in Zurich, told Bloomberg News. Shulman remains head of fixed income, added Karina Byrne, a spokeswoman in New York.
E-mails between Shulman and UBS executives were disclosed in a lawsuit filed June 26 by Massachusetts Secretary of State William Galvin, who claimed the bank committed fraud by selling the bonds as the equivalent of money market securities without disclosing to investors that the $330 billion auction-rate securities market was lurching toward a breakdown.
Shulman, also global director of municipal securities, ran the auction-rate securities business for Switzerland's biggest bank, the New York-based newspaper said. UBS said it was "honest and ethical'' in its marketing of auction-rate securities, according to the bank's reply to a lawsuit filed last month.
UBS Suspends Fixed Income Chief During State and Federal Auction Rate Securities Probe
UBS suspended David Shulman, its U.S. fixed income unit head and global head of municipal securities, at a time when the Swiss bank faces state and federal probes into its sales of auction-rate securities, a person familiar with the situation said.
UBS declined to comment, citing its policy on personnel matters.
New York State Attorney General Andrew Cuomo on Thursday sued UBS, accusing it of committing a "multibillion-dollar fraud" by steering clients into auction-rate securities even after there were signs these markets were no longer as safe or liquid as cash.
The lawsuit said at least seven UBS executives dumped $21 million in auction-rates held in personal accounts in December, as auctions began to fail and unwanted securities piled up in the bank's own inventory.
UBS declined to comment, citing its policy on personnel matters.
New York State Attorney General Andrew Cuomo on Thursday sued UBS, accusing it of committing a "multibillion-dollar fraud" by steering clients into auction-rate securities even after there were signs these markets were no longer as safe or liquid as cash.
The lawsuit said at least seven UBS executives dumped $21 million in auction-rates held in personal accounts in December, as auctions began to fail and unwanted securities piled up in the bank's own inventory.
Wednesday, July 30, 2008
UBS Pays Fine to Settle Auction Rate Securities Probe
UBS AG will pay Massachusetts $1 million as part of its agreement to settle the state's probe into the investment bank's inappropriate sale of auction-rate securities to 17 cities and towns.
UBS will also repurchase $3.4 million of auction-rate securities sold to the municipalities, according to a statement from Massachusetts Attorney General Martha Coakley issued on Wednesday.
UBS is paying $750,000 to the state to cover fees and expenses and $250,000 to provide support to cities and towns impacted by the breakdown of the auction rate markets.
Under a preliminary May agreement, UBS agreed to repurchase $35 million of the securities, which have been impossible to sell since credit markets froze up in January.
UBS will also repurchase $3.4 million of auction-rate securities sold to the municipalities, according to a statement from Massachusetts Attorney General Martha Coakley issued on Wednesday.
UBS is paying $750,000 to the state to cover fees and expenses and $250,000 to provide support to cities and towns impacted by the breakdown of the auction rate markets.
Under a preliminary May agreement, UBS agreed to repurchase $35 million of the securities, which have been impossible to sell since credit markets froze up in January.
Tuesday, July 29, 2008
Ex-Citi Hedge Fund Manager Blames Bank
A former Citigroup hedge fund manager has accused the troubled giant of acting against the best interests of the fund’s shareholders.
John Pickett, who ran CSO Partners from its inception in 1999 until his resignation in December, filed a sealed complaint with London’s Employment Tribunal, which handles disputes between employees and employers, accusing Citi of wrongfully forcing him out. Pickett seeks unspecified damages against the firm.
According to Pickett, Citi overruled him after he attempted to back out of a bid for some $730 million in leveraged loans at the height of the growing credit crisis last summer. Pickett argued that Morgan Stanley and the other banks selling the loans changed the terms of the deal and sought to cancel the order. But after Morgan Stanley complained, John Havens, who heads Citi’s alternative investments unit and has since been promoted to lead its investment bank, ordered Pickett not to sue the banks and reached a settlement that cost CSO $746 million, sending it to a 10.9% loss last year.
Pickett’s complaint accuses Citi of putting the interests of the banks—Havens, CEO Vikram Pandit and several other high-ranking Citi executives are Morgan Stanley alumni—ahead of the financial interests of shareholders.
John Pickett, who ran CSO Partners from its inception in 1999 until his resignation in December, filed a sealed complaint with London’s Employment Tribunal, which handles disputes between employees and employers, accusing Citi of wrongfully forcing him out. Pickett seeks unspecified damages against the firm.
According to Pickett, Citi overruled him after he attempted to back out of a bid for some $730 million in leveraged loans at the height of the growing credit crisis last summer. Pickett argued that Morgan Stanley and the other banks selling the loans changed the terms of the deal and sought to cancel the order. But after Morgan Stanley complained, John Havens, who heads Citi’s alternative investments unit and has since been promoted to lead its investment bank, ordered Pickett not to sue the banks and reached a settlement that cost CSO $746 million, sending it to a 10.9% loss last year.
Pickett’s complaint accuses Citi of putting the interests of the banks—Havens, CEO Vikram Pandit and several other high-ranking Citi executives are Morgan Stanley alumni—ahead of the financial interests of shareholders.
Monday, July 28, 2008
Merrill to take $5.7 billion mortgage asset write-down
Merrill Lynch & Co Inc (MER.N) said it expects to take a $5.7 billion pretax write-down in the third quarter due to losses on the sale of mortgage assets and plans to raise at least $8.5 billion by selling new common shares.
Merrill said Singapore's Temasek Holdings Pte Ltd (TEM.UL) would buy $3.4 billion of the offering. Merrill has already taken billions of dollars in write-downs in past quarters and said it sold key holdings including a 20 percent stake in Bloomberg when it announced second-quarter earnings,
Merrill said on Monday it would pay $2.5 billion as required under a previous stock sale to state-run Temasek, along with $2.4 billion in required dividends to preferred shareholders. In previous deals to raise capital, Merrill had agreed that if it sold shares at too low a price in the future, it would reimburse investors.
The No. 3 Wall Street investment bank's shares were down 5 percent in after-hours trading after retreating 12 percent to $24.33 in the main trading session on the New York Stock Exchange.
Merrill also said it agreed to sell collateralized debt obligations with a face value of $30.6 billion for $6.7 billion to an affiliate of private equity fund Lone Star.
Merrill said Singapore's Temasek Holdings Pte Ltd (TEM.UL) would buy $3.4 billion of the offering. Merrill has already taken billions of dollars in write-downs in past quarters and said it sold key holdings including a 20 percent stake in Bloomberg when it announced second-quarter earnings,
Merrill said on Monday it would pay $2.5 billion as required under a previous stock sale to state-run Temasek, along with $2.4 billion in required dividends to preferred shareholders. In previous deals to raise capital, Merrill had agreed that if it sold shares at too low a price in the future, it would reimburse investors.
The No. 3 Wall Street investment bank's shares were down 5 percent in after-hours trading after retreating 12 percent to $24.33 in the main trading session on the New York Stock Exchange.
Merrill also said it agreed to sell collateralized debt obligations with a face value of $30.6 billion for $6.7 billion to an affiliate of private equity fund Lone Star.
Schwab names Bettinger CEO
Charles Schwab Corp. has named Walter Bettinger II chief executiveeffective Oct. 1. He will replace Charles Schwab, who will remain chairmanof the San Francisco brokerage firm he founded. Bettinger, 47, has been serving as president and chief operating officerfor the past 17 months and was considered the heir apparent. His previousrole was running Schwab's retail brokerage business. He joined Schwab in 1995 when it bought the Hampton Company, a 401(k)service provider Bettinger founded at age 22.
This will be the second time Schwab, 70, has relinquished the chiefexecutive's job.
Investors in the Schwab YieldPlus fund have not fared as well. The mutualfund, sold as a higher yielding alternative to money market funds, washeavily invested in mortgage securities, some of which went bad. As lossesmounted, investors fled. The fund is down almost 30 percent year to date,and its assets, which once topped $13 billion, are less than $1 billion.
This will be the second time Schwab, 70, has relinquished the chiefexecutive's job.
Investors in the Schwab YieldPlus fund have not fared as well. The mutualfund, sold as a higher yielding alternative to money market funds, washeavily invested in mortgage securities, some of which went bad. As lossesmounted, investors fled. The fund is down almost 30 percent year to date,and its assets, which once topped $13 billion, are less than $1 billion.
Looks Like Administrative Leave for UBS Exec
Head of UBS’s fixed income unit, David Shulman, has been placed on administrative leave as state and federal probes continue to heat up over the Swiss-based investment giant’s mishandling of the UBS failed auction rate securities.
E-mails between Shulman and other UBS executives are at the center of a lawsuit filed by Massachusetts Secretary of State William Galvin. Galvin, who filed the UBS lawsuit on June 26, says the bank committed securities fraud by selling the auction-rate notes as cash equivalents without telling investors the many risks associated with them.
Shulman ran the auction securities business for BS, which is the second largest underwriter of municipal auction-rate securities in the country. UBS, as well as other Wall Street firms, has been the subject of state and federal investigations following the collapse of the $330 billion auction securities market in February. For years, investment banks like UBS promoted auction-rate notes as secure and liquid investments that were issued by municipalities, student loan companies and not-for-profits. The interest rates on auction-rate securities are reset at weekly or monthly auctions.
Cuomo says his goal with the UBS lawsuit is to force UBS to make those assets liquid again for some 50,000 customers who have been unable to access $37 billion. As the credit crunch worsened, however, investment banks began to pull back their support from the auction-rate market, leaving tens of thousands of investors stuck with auction-rate notes no one wanted to buy.
E-mails between Shulman and other UBS executives are at the center of a lawsuit filed by Massachusetts Secretary of State William Galvin. Galvin, who filed the UBS lawsuit on June 26, says the bank committed securities fraud by selling the auction-rate notes as cash equivalents without telling investors the many risks associated with them.
Shulman ran the auction securities business for BS, which is the second largest underwriter of municipal auction-rate securities in the country. UBS, as well as other Wall Street firms, has been the subject of state and federal investigations following the collapse of the $330 billion auction securities market in February. For years, investment banks like UBS promoted auction-rate notes as secure and liquid investments that were issued by municipalities, student loan companies and not-for-profits. The interest rates on auction-rate securities are reset at weekly or monthly auctions.
Cuomo says his goal with the UBS lawsuit is to force UBS to make those assets liquid again for some 50,000 customers who have been unable to access $37 billion. As the credit crunch worsened, however, investment banks began to pull back their support from the auction-rate market, leaving tens of thousands of investors stuck with auction-rate notes no one wanted to buy.
Thursday, July 24, 2008
FINRA to Launch Pilot Program to Evaluate All-Public Arbitration Panels
The Financial Industry Regulatory Authority (FINRA) will launch a two-year pilot program later this fall that will allow some investors making arbitration claims to choose a panel made up of three public arbitrators instead of two public arbitrators and one non-public arbitrator, as is currently the norm.
Six firms – Merrill Lynch, Citigroup Global Markets, UBS, Wachovia Securities, Morgan Stanley and Charles Schwab – have volunteered to participate in the pilot program. The first five firms will contribute 40 arbitration cases each per year to the program and Schwab, with fewer cases in the forum, will refer 10 cases – meaning that over the course of the pilot, over 400 arbitration cases involving those firms can be heard by all-public arbitration panels. Only the investor making the arbitration claim can elect to participate in the pilot program; the firms will not decide which cases become part of the pilot. The pilot will be available to eligible claims filed on or after October 6, 2008.
FINRA is also reaching out to a wide range of other firms to join the pilot so that a variety of firm sizes and business models will be represented.
“This pilot will give investors greater choice when selecting an arbitration panel,” said FINRA CEO Mary Schapiro. “Additionally, this program will allow us to see if a change in the way arbitration panels are selected is a better way to serve and protect the interests of investors.”
Investors who choose to have their claims heard under the pilot program – and the firm they are making their claim against – will receive the same three lists of potential arbitrators that parties to standard arbitration disputes receive: a list of eight chair-qualified public arbitrators, a list of eight public arbitrators and a list of eight non-public arbitrators. Parties may strike up to four of the arbitrators from the chair-qualified and public arbitrator lists for any reason, then rank the remaining arbitrators on those lists according to preference. Parties participating in the pilot program may strike all eight names on the non-public arbitrator list and the next highest-ranked public arbitrator will be selected to complete the panel. This selection process “allows investor claimants to choose a non-public arbitrator if they prefer, or an all-public panel if that is their wish,” Schapiro said.
The pilot program will be evaluated according to a number of criteria, including the percentage of investors who opt into the pilot and the percentage of investors who choose an all-public panel after opting in. FINRA will compare the results of pilot and non-pilot investor cases, including the percentage of cases that settle before award (and how quickly they settle). FINRA will also study the length of hearings and the use of expert witnesses in pilot and non-pilot cases.
Six firms – Merrill Lynch, Citigroup Global Markets, UBS, Wachovia Securities, Morgan Stanley and Charles Schwab – have volunteered to participate in the pilot program. The first five firms will contribute 40 arbitration cases each per year to the program and Schwab, with fewer cases in the forum, will refer 10 cases – meaning that over the course of the pilot, over 400 arbitration cases involving those firms can be heard by all-public arbitration panels. Only the investor making the arbitration claim can elect to participate in the pilot program; the firms will not decide which cases become part of the pilot. The pilot will be available to eligible claims filed on or after October 6, 2008.
FINRA is also reaching out to a wide range of other firms to join the pilot so that a variety of firm sizes and business models will be represented.
“This pilot will give investors greater choice when selecting an arbitration panel,” said FINRA CEO Mary Schapiro. “Additionally, this program will allow us to see if a change in the way arbitration panels are selected is a better way to serve and protect the interests of investors.”
Investors who choose to have their claims heard under the pilot program – and the firm they are making their claim against – will receive the same three lists of potential arbitrators that parties to standard arbitration disputes receive: a list of eight chair-qualified public arbitrators, a list of eight public arbitrators and a list of eight non-public arbitrators. Parties may strike up to four of the arbitrators from the chair-qualified and public arbitrator lists for any reason, then rank the remaining arbitrators on those lists according to preference. Parties participating in the pilot program may strike all eight names on the non-public arbitrator list and the next highest-ranked public arbitrator will be selected to complete the panel. This selection process “allows investor claimants to choose a non-public arbitrator if they prefer, or an all-public panel if that is their wish,” Schapiro said.
The pilot program will be evaluated according to a number of criteria, including the percentage of investors who opt into the pilot and the percentage of investors who choose an all-public panel after opting in. FINRA will compare the results of pilot and non-pilot investor cases, including the percentage of cases that settle before award (and how quickly they settle). FINRA will also study the length of hearings and the use of expert witnesses in pilot and non-pilot cases.
Wednesday, July 23, 2008
New York State Readies UBS Auction Rate Securities Civil Suit
Andrew Cuomo, New York's Attorney General, is preparing to file civil securities fraud charges against UBS AG. Cuomo could act as early as this week, joining Massachusetts which already filed charges against UBS in June over the auction-rate securities debacle.
Although it's not clear if individuals would be named or charged, the impending lawsuit could include allegations of auction-rate malfeasance by senior UBS executives. Cuomo could also potentially file charges against other entities his office is investigating.
Since UBS trading operations for auction-rate securities are based in New York, this lawsuit could bring a broad resolution for UBS auction-rate clients nationwide. That means if there is a settlement it would let customers cash in their illiquid securities at face value. Like the other countless arbitration claims, class-action lawsuits and federal and state investigations into auction-rate securities, Cuomo's probe is focused on whether Wall Street firms adequately disclosed the liquidity risks of auction-rate securities to investors. Investors nationwide are saying they thought they were investing in safe, cash-like instruments. UBS clients currently hold approximately $25 billion worth of illiquid auction-rate securities.
Cuomo initially subpoenaed 18 firms in April and has expanded his probe this summer to consider potential liability by individuals at UBS. So far, Cuomo's office has subpoenaed 100 high-level individuals and 30 firms including Citigroup, Merrill Lynch, Goldman Sachs and J.P. Morgan, seeking information about the sales of auction-rate securities. Cuomo's suit is another blow to the industry and UBS.
Although it's not clear if individuals would be named or charged, the impending lawsuit could include allegations of auction-rate malfeasance by senior UBS executives. Cuomo could also potentially file charges against other entities his office is investigating.
Since UBS trading operations for auction-rate securities are based in New York, this lawsuit could bring a broad resolution for UBS auction-rate clients nationwide. That means if there is a settlement it would let customers cash in their illiquid securities at face value. Like the other countless arbitration claims, class-action lawsuits and federal and state investigations into auction-rate securities, Cuomo's probe is focused on whether Wall Street firms adequately disclosed the liquidity risks of auction-rate securities to investors. Investors nationwide are saying they thought they were investing in safe, cash-like instruments. UBS clients currently hold approximately $25 billion worth of illiquid auction-rate securities.
Cuomo initially subpoenaed 18 firms in April and has expanded his probe this summer to consider potential liability by individuals at UBS. So far, Cuomo's office has subpoenaed 100 high-level individuals and 30 firms including Citigroup, Merrill Lynch, Goldman Sachs and J.P. Morgan, seeking information about the sales of auction-rate securities. Cuomo's suit is another blow to the industry and UBS.
Tuesday, July 22, 2008
Should I Sell My Auction Rate Securities?
Auction Rate Securities holders are asking whether they should sell their illiquid holdings or should wait in hopes of their auction rate securities being refinanced or redeemed. Unfortunately, there is no one answer that is right for every investor. This article attempts to discuss various factors that investors may wish to consider in making their own decision. Among other things, we discuss the status of the market, describe relevant considerations and discuss the advantages of selling and of waiting. We also provide investors with information on what they can do if they are interested in selling their auction rate securities.
General
In determining whether to sell their illiquid auction rate securities, investors need to remember that no one can predict the future. It is important to appreciate that while things could improve in the auction rate securities market, they could also get worse.
An individual investor’s decision on whether to sell or to hold may be influenced by a variety of important factors. For example, the investor’s need for liquidity in the foreseeable future, the investor’s desire to eliminate risk, and the investor’s personal perspective of the future are among important factors that may well influence the investor’s ultimate decision.
Status of Market
A review of recent developments in the auction rate securities markets may help an investor make an informed decision about how to handle his or her own holdings. Recently, there have been some auction rate securities that have been redeemed or refinanced and it is anticipated that additional redemptions or refinancings will occur in the future. An investor should remember that there are significant differences among the various types of auction rate securities that impact the likelihood of refinancing or redemption.
At present, it appears unlikely that the auction rate securities market will ever return to the way it was. Several firms, including UBS and Citigroup, have expressed views that the auction rate securities market is dead.
Municipal auction rate securities have been refinanced at a much quicker rate than other types of auction rate securities. This has occurred, in large part, because many municipal auction rate securities have higher penalty interest rates when auctions freeze. As a result, there is a much greater incentive on the municipal issuers to refinance to avoid higher, and in some cases burdensome, interest obligations. Recently, Bloomberg News reported that slightly over 50% of all municipal auction rate securities had been redeemed or refinanced, but that the trend appears to be slowing. Capital Advisors Group has estimated that, ultimately, approximately two-thirds of outstanding municipal auction rate securities will be redeemed or refinanced.
Investors in auction rate preferred stocks issued by mutual funds have also experienced some success in having their auction rate securities redeemed or refinanced. Unfortunately, issuers of auction rate preferred stocks have not generally experienced the high penalty interest rates when their auctions failed so they have had less incentive to redeem or refinance their auction rate securities. According to a recent Bloomberg News report, approximately 30% of auction rate preferred stocks have been refinanced. It is important to note that it is anticipated that ultimately there will be additional redemptions or refinancings but that there will also be many auction rate preferred stock issuers that decide not to refinance at all. Capital Advisors Group has estimated that, ultimately, approximately 50% or so of the auction rate preferred stocks will be redeemed or refinanced. In evaluating this portion of the market, it is important to consider that there has been a lot of talk about refinancings but there are still various uncertainties attendant to such refinancings or redemptions. For example, some issuers have decided to only redeem a portion of their outstanding auction rate preferred stocks. The question remains open then what happens to the portion of auction rate preferred stocks that are not redeemed. Similarly, some issuers have issued statements that they intend to redeem portions of their outstanding auction rate preferred stocks but that such redemptions are dependent upon novel financing arrangements, the ultimate success of which remains unknown at the present time.
Student loan auction rate securities remain relatively illiquid. There have been few refinancings and it is generally believed that most issuers of student loan auction rate securities have little incentive to refinance or redeem their outstanding auction rate securities. This is true because there are cap rates on the amount of interest that student loan auction rate securities can pay. Thus, issuers of student loan auction rate securities do not face the high penalty rates facing some other issuers. As of this date, less than $3 billion of student loan auction rate securities (out of $85 billion of student loan auction rate securities outstanding) have been redeemed. Capital Advisors Group believes that, absent intervention by the federal government or a global broker-dealer settlement, liquidity is a long way off. Similarly, in a recent report, JP Morgan analyst Alex Roever concluded that investors may be stuck with as much as $70 billion worth of student loan auction rate securities. He stated: “Current investors are at risk of having to hold positions until maturity, which in a few cases may be almost 40 years away.”
The most illiquid portion of the auction rate securities market remains those auction rate securities issued by CDOs or other structured finance vehicles. Many of the issuers of these securities have suffered significant adverse financial developments and their ultimate refinancing or redemption is regarded as unlikely.
Considerations
There are various factors that a prudent investor should consider in reaching his or her ultimate decision. Some of these considerations are economic, some relate to the individual’s own financial condition, and others relate to the investor’s future intentions, and the future intentions of the issuer of the auction rate securities.
Liquidity should be an important consideration for most investors. Does the investor need liquidity in the foreseeable future? Remember that auction rate securities are long term instruments and the investor must decide of he or she is willing to hold for the long term. If the investor needs liquidity in the foreseeable future, serious consideration should be given to selling the position. “A bird in hand is worth two in the bush.”
The investor’s expectations for future developments in the economy may also play a significant role in the investor’s decision. Obviously, things could get better, but things could also get worse. It is possible that issuers will be better positioned financially to redeem or refinance their auction rate securities in the coming months, but it is also quite possible that issuers may be in worse economic conditions and less able to refinance or redeem such securities. Similarly, future economic developments could result in prices in the private resale auction rate securities market going up or going down. Each investor needs to consider how much they want to eliminate future risks.
It is important for investors to consider the plans of the issuers of the auction rate securities. Investors should seriously consider contacting the entity that issued the auction rate securities that they hold. What are the issuer’s plans? What are the issuer’s time parameters? What are the contingencies attendant to the issuer’s plans? Most issuers should be willing to share their future intentions with auction rate securities holders. Recently, one of our clients (after being told repeatedly by a brokerage firm that his auction rate securities would be redeemed) contacted the issuer only to learn that the issuer had no plans to redeem the securities.
Investors may also want to consider the future availability of viable options for disposing of illiquid auction rate securities. At present, there is a private resale market (discussed herein) where many illiquid auction rate securities can be sold. There is no certainty, however, regarding how long this market will exist or at what prices auction rate securities may be sold. Several months ago, one of our clients obtained bids to purchase his auction rate securities but elected to wait. Recently when the client decided to sell these securities, there were no bids. The client could not sell.
The investor also may wish to consider the current penalty interest rates that the issuer is paying. If the rate is satisfactory to the investor and the investor has no need for liquidity in the foreseeable future, it may make sense for the investor to hold the investment and view it as simply a supplement to income in coming years.
Investors may also want to consider their own plans and whether they wish to pursue legal action to recover damages that they have sustained as a result of their illiquid auction rate securities positions. Investors’ attorneys believe that most investors in auction rate securities have compelling claims to recoup the damages which they have sustained. If the investor is inclined to seek legal relief, the investor should keep in mind that there are statutes of limitations within which the investor needs to file his or her claim or lose the same. Similarly, if investors are inclined to file legal action, they should be reminded that the law requires that investors mitigate their damages. Stated another way, once the investor discovers that they have been the victim of improper conduct, they have an obligation to act reasonably in an effort to reduce damages. Waiting to see what happens could, in some cases, reduce the extent to which an investor can recover damages.
Advantages to Selling
There are clearly advantages to an investor selling his or her auction rate securities in the secondary market immediately. The primary advantage is, of course, liquidity. By selling in the secondary market, the investor immediately turns all or a portion of his or her auction rate securities into liquid cash.
A second advantage of immediate sales is the complete avoidance of future uncertainties in the marketplace and the economy. By selling in the short term, the investor is no longer subject to adverse market or economic developments that could result in substantial diminution of the value of what he owns. Likewise, the investor no longer needs to be concerned about the private resale market disappearing.
If the investor is contemplating legal action, selling accomplishes several advantages. First, it fixes the investor’s damages. Second, if the investor is hiring a lawyer on a contingency basis, the investor will likely end up paying a smaller contingency fee if his claim is successful. Third, the investor will have mitigated his or her damages and will be subject to fewer arguments that part of the investor’s loss is his or her own fault.
Selling in the short term also gives the investor some degree of certainty with respect to his investment holdings. The investor may find that peace of mind is beneficial. The investor will no longer worry about the position, worry about whether there will be a future market for the position, worry about whether he or she will have access to cash if needs arise, or worry about the impact of future economic developments on his or her holdings.
Advantages to Waiting
Waiting also can have advantages to an investor. Obviously, the biggest advantage would occur if his or her auction rate securities are redeemed or refinanced, in whole, in the near future. This would give the investor liquidity and would remove the uncertainties attendant to the current frozen market at no loss to the investor.
Waiting would allow the investor to avoid taking an immediate discount (realizing an immediate loss) on his or her auction rate securities holdings. According to recent reports, municipal auction rate securities and auction rate preferred stocks can often be sold for between 85% and 92% of face value. Student loan auction rate securities, on the other hand, often can only be sold at a discount of 25% to 50% of face value, if at all. Thus, investors must anticipate that they will not receive face value if they decide to sell their auction rate securities.
If the auction rate securities are redeemed or refinanced in whole, the investor avoids any inconvenience associated with contemplated legal procedures. No time, effort or expense is necessary.
How to Sell
A private market has developed in illiquid auction rate securities. Restricted Securities Trading Network (a/k/a Restricted Stock Partners) in New York has been coordinating this private market activity over the past four months and has been able to conclude successful dispositions of illiquid auction rate securities in many instances. Restricted Securities has become a respected presence in this illiquid market. Individuals interested in exploring the sale of their illiquid auction rate securities should contact Preston Blankenship at (212) 668-3903. Institutions interested in exploring sales of their illiquid auction rate securities should contact Brendan O’Connor at (212) 668-3909.
Conclusion
In summary, there is no absolute right or wrong course of conduct for an investor to follow. There is much uncertainty in the future. Each investor is encouraged to evaluate his or her own financial circumstances and needs, the securities held, the investor’s beliefs about future developments, and the investor’s risk tolerance in reaching a final decision.
General
In determining whether to sell their illiquid auction rate securities, investors need to remember that no one can predict the future. It is important to appreciate that while things could improve in the auction rate securities market, they could also get worse.
An individual investor’s decision on whether to sell or to hold may be influenced by a variety of important factors. For example, the investor’s need for liquidity in the foreseeable future, the investor’s desire to eliminate risk, and the investor’s personal perspective of the future are among important factors that may well influence the investor’s ultimate decision.
Status of Market
A review of recent developments in the auction rate securities markets may help an investor make an informed decision about how to handle his or her own holdings. Recently, there have been some auction rate securities that have been redeemed or refinanced and it is anticipated that additional redemptions or refinancings will occur in the future. An investor should remember that there are significant differences among the various types of auction rate securities that impact the likelihood of refinancing or redemption.
At present, it appears unlikely that the auction rate securities market will ever return to the way it was. Several firms, including UBS and Citigroup, have expressed views that the auction rate securities market is dead.
Municipal auction rate securities have been refinanced at a much quicker rate than other types of auction rate securities. This has occurred, in large part, because many municipal auction rate securities have higher penalty interest rates when auctions freeze. As a result, there is a much greater incentive on the municipal issuers to refinance to avoid higher, and in some cases burdensome, interest obligations. Recently, Bloomberg News reported that slightly over 50% of all municipal auction rate securities had been redeemed or refinanced, but that the trend appears to be slowing. Capital Advisors Group has estimated that, ultimately, approximately two-thirds of outstanding municipal auction rate securities will be redeemed or refinanced.
Investors in auction rate preferred stocks issued by mutual funds have also experienced some success in having their auction rate securities redeemed or refinanced. Unfortunately, issuers of auction rate preferred stocks have not generally experienced the high penalty interest rates when their auctions failed so they have had less incentive to redeem or refinance their auction rate securities. According to a recent Bloomberg News report, approximately 30% of auction rate preferred stocks have been refinanced. It is important to note that it is anticipated that ultimately there will be additional redemptions or refinancings but that there will also be many auction rate preferred stock issuers that decide not to refinance at all. Capital Advisors Group has estimated that, ultimately, approximately 50% or so of the auction rate preferred stocks will be redeemed or refinanced. In evaluating this portion of the market, it is important to consider that there has been a lot of talk about refinancings but there are still various uncertainties attendant to such refinancings or redemptions. For example, some issuers have decided to only redeem a portion of their outstanding auction rate preferred stocks. The question remains open then what happens to the portion of auction rate preferred stocks that are not redeemed. Similarly, some issuers have issued statements that they intend to redeem portions of their outstanding auction rate preferred stocks but that such redemptions are dependent upon novel financing arrangements, the ultimate success of which remains unknown at the present time.
Student loan auction rate securities remain relatively illiquid. There have been few refinancings and it is generally believed that most issuers of student loan auction rate securities have little incentive to refinance or redeem their outstanding auction rate securities. This is true because there are cap rates on the amount of interest that student loan auction rate securities can pay. Thus, issuers of student loan auction rate securities do not face the high penalty rates facing some other issuers. As of this date, less than $3 billion of student loan auction rate securities (out of $85 billion of student loan auction rate securities outstanding) have been redeemed. Capital Advisors Group believes that, absent intervention by the federal government or a global broker-dealer settlement, liquidity is a long way off. Similarly, in a recent report, JP Morgan analyst Alex Roever concluded that investors may be stuck with as much as $70 billion worth of student loan auction rate securities. He stated: “Current investors are at risk of having to hold positions until maturity, which in a few cases may be almost 40 years away.”
The most illiquid portion of the auction rate securities market remains those auction rate securities issued by CDOs or other structured finance vehicles. Many of the issuers of these securities have suffered significant adverse financial developments and their ultimate refinancing or redemption is regarded as unlikely.
Considerations
There are various factors that a prudent investor should consider in reaching his or her ultimate decision. Some of these considerations are economic, some relate to the individual’s own financial condition, and others relate to the investor’s future intentions, and the future intentions of the issuer of the auction rate securities.
Liquidity should be an important consideration for most investors. Does the investor need liquidity in the foreseeable future? Remember that auction rate securities are long term instruments and the investor must decide of he or she is willing to hold for the long term. If the investor needs liquidity in the foreseeable future, serious consideration should be given to selling the position. “A bird in hand is worth two in the bush.”
The investor’s expectations for future developments in the economy may also play a significant role in the investor’s decision. Obviously, things could get better, but things could also get worse. It is possible that issuers will be better positioned financially to redeem or refinance their auction rate securities in the coming months, but it is also quite possible that issuers may be in worse economic conditions and less able to refinance or redeem such securities. Similarly, future economic developments could result in prices in the private resale auction rate securities market going up or going down. Each investor needs to consider how much they want to eliminate future risks.
It is important for investors to consider the plans of the issuers of the auction rate securities. Investors should seriously consider contacting the entity that issued the auction rate securities that they hold. What are the issuer’s plans? What are the issuer’s time parameters? What are the contingencies attendant to the issuer’s plans? Most issuers should be willing to share their future intentions with auction rate securities holders. Recently, one of our clients (after being told repeatedly by a brokerage firm that his auction rate securities would be redeemed) contacted the issuer only to learn that the issuer had no plans to redeem the securities.
Investors may also want to consider the future availability of viable options for disposing of illiquid auction rate securities. At present, there is a private resale market (discussed herein) where many illiquid auction rate securities can be sold. There is no certainty, however, regarding how long this market will exist or at what prices auction rate securities may be sold. Several months ago, one of our clients obtained bids to purchase his auction rate securities but elected to wait. Recently when the client decided to sell these securities, there were no bids. The client could not sell.
The investor also may wish to consider the current penalty interest rates that the issuer is paying. If the rate is satisfactory to the investor and the investor has no need for liquidity in the foreseeable future, it may make sense for the investor to hold the investment and view it as simply a supplement to income in coming years.
Investors may also want to consider their own plans and whether they wish to pursue legal action to recover damages that they have sustained as a result of their illiquid auction rate securities positions. Investors’ attorneys believe that most investors in auction rate securities have compelling claims to recoup the damages which they have sustained. If the investor is inclined to seek legal relief, the investor should keep in mind that there are statutes of limitations within which the investor needs to file his or her claim or lose the same. Similarly, if investors are inclined to file legal action, they should be reminded that the law requires that investors mitigate their damages. Stated another way, once the investor discovers that they have been the victim of improper conduct, they have an obligation to act reasonably in an effort to reduce damages. Waiting to see what happens could, in some cases, reduce the extent to which an investor can recover damages.
Advantages to Selling
There are clearly advantages to an investor selling his or her auction rate securities in the secondary market immediately. The primary advantage is, of course, liquidity. By selling in the secondary market, the investor immediately turns all or a portion of his or her auction rate securities into liquid cash.
A second advantage of immediate sales is the complete avoidance of future uncertainties in the marketplace and the economy. By selling in the short term, the investor is no longer subject to adverse market or economic developments that could result in substantial diminution of the value of what he owns. Likewise, the investor no longer needs to be concerned about the private resale market disappearing.
If the investor is contemplating legal action, selling accomplishes several advantages. First, it fixes the investor’s damages. Second, if the investor is hiring a lawyer on a contingency basis, the investor will likely end up paying a smaller contingency fee if his claim is successful. Third, the investor will have mitigated his or her damages and will be subject to fewer arguments that part of the investor’s loss is his or her own fault.
Selling in the short term also gives the investor some degree of certainty with respect to his investment holdings. The investor may find that peace of mind is beneficial. The investor will no longer worry about the position, worry about whether there will be a future market for the position, worry about whether he or she will have access to cash if needs arise, or worry about the impact of future economic developments on his or her holdings.
Advantages to Waiting
Waiting also can have advantages to an investor. Obviously, the biggest advantage would occur if his or her auction rate securities are redeemed or refinanced, in whole, in the near future. This would give the investor liquidity and would remove the uncertainties attendant to the current frozen market at no loss to the investor.
Waiting would allow the investor to avoid taking an immediate discount (realizing an immediate loss) on his or her auction rate securities holdings. According to recent reports, municipal auction rate securities and auction rate preferred stocks can often be sold for between 85% and 92% of face value. Student loan auction rate securities, on the other hand, often can only be sold at a discount of 25% to 50% of face value, if at all. Thus, investors must anticipate that they will not receive face value if they decide to sell their auction rate securities.
If the auction rate securities are redeemed or refinanced in whole, the investor avoids any inconvenience associated with contemplated legal procedures. No time, effort or expense is necessary.
How to Sell
A private market has developed in illiquid auction rate securities. Restricted Securities Trading Network (a/k/a Restricted Stock Partners) in New York has been coordinating this private market activity over the past four months and has been able to conclude successful dispositions of illiquid auction rate securities in many instances. Restricted Securities has become a respected presence in this illiquid market. Individuals interested in exploring the sale of their illiquid auction rate securities should contact Preston Blankenship at (212) 668-3903. Institutions interested in exploring sales of their illiquid auction rate securities should contact Brendan O’Connor at (212) 668-3909.
Conclusion
In summary, there is no absolute right or wrong course of conduct for an investor to follow. There is much uncertainty in the future. Each investor is encouraged to evaluate his or her own financial circumstances and needs, the securities held, the investor’s beliefs about future developments, and the investor’s risk tolerance in reaching a final decision.
Wachovia Reports Loss of Nearly $9 Billion
Wachovia Corp. lost $8.86 billion in the second quarter, and said Tuesday it was slashing its dividend and cutting 6,350 jobs after losses tied to mortgages soared.
Even excluding one-time items, the results substantially missed Wall Street estimates, and shares sank to mid-1991 levels in premarket trading.
"These bottom-line results are disappointing and unacceptable," Chairman Lanty Smith said in a statement. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility."
The nation's fourth-largest bank by assets says it lost the equivalent of $4.20 per share in the April-June period. In the same timeframe last year, the bank earned $2.34 billion, or $1.22 per share.
Even excluding one-time items, the results substantially missed Wall Street estimates, and shares sank to mid-1991 levels in premarket trading.
"These bottom-line results are disappointing and unacceptable," Chairman Lanty Smith said in a statement. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility."
The nation's fourth-largest bank by assets says it lost the equivalent of $4.20 per share in the April-June period. In the same timeframe last year, the bank earned $2.34 billion, or $1.22 per share.
Monday, July 21, 2008
Former Bear Stearns Cos. hedge fund managers may face more charges
Former Bear Stearns Cos. hedge fund managers Ralph Cioffi and Matthew Tannin, indicted for fraud and conspiracy last month in the first case stemming from a federal probe of the mortgage-market collapse, may face more charges.
The two men were accused June 19 of misleading investors about the health of two hedge funds that failed last year. The implosion helped trigger the credit crunch and the eventual collapse and sale of Bear Stearns to JPMorgan Chase & Co.
"The government is indeed contemplating additional charges,'' Assistant U.S. Attorney Patrick Sinclair said at a preliminary hearing July 18 in Brooklyn, New York, federal court, adding that any new counts would be added by "early fall.''
Sinclair declined to say what charges are being considered.
The government has been investigating possible fraud by banks and mortgage firms whose investments in subprime loans and securities plunged in value, causing losses that now total almost $450 billion. Cioffi and Tannin have also been sued by the U.S.
Securities and Exchange Commission.
At the hearing, the men made their initial appearance before U.S. District Judge Frederic Block, who would preside over any trial. Brooklyn U.S. Attorney Benton Campbell has said the investigation is continuing.
Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer. The funds, which put most of their assets in subprime mortgage-related securities, failed in June 2007 when prices for collateralized-debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt.
The two men were accused June 19 of misleading investors about the health of two hedge funds that failed last year. The implosion helped trigger the credit crunch and the eventual collapse and sale of Bear Stearns to JPMorgan Chase & Co.
"The government is indeed contemplating additional charges,'' Assistant U.S. Attorney Patrick Sinclair said at a preliminary hearing July 18 in Brooklyn, New York, federal court, adding that any new counts would be added by "early fall.''
Sinclair declined to say what charges are being considered.
The government has been investigating possible fraud by banks and mortgage firms whose investments in subprime loans and securities plunged in value, causing losses that now total almost $450 billion. Cioffi and Tannin have also been sued by the U.S.
Securities and Exchange Commission.
At the hearing, the men made their initial appearance before U.S. District Judge Frederic Block, who would preside over any trial. Brooklyn U.S. Attorney Benton Campbell has said the investigation is continuing.
Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer. The funds, which put most of their assets in subprime mortgage-related securities, failed in June 2007 when prices for collateralized-debt obligations linked to home loans fell amid rising late payments by borrowers with poor credit or heavy debt.
Thursday, July 17, 2008
Wachovia Securities raided in Auction Rate Securities Investigation
Securities regulators from several U.S.states raided the St. Louis headquarters of Wachovia Securities on Thursdayas part of a broad investigation into questionable practices involvingauction rate securities, Missouri officials said. Missouri Secretary of State Robin Carnahan's office said the "special inspection" at the Wachovia Corp affiliate, the former A.G.Edwards, concerned the $330 billion auction rate securities meltdown.
It said regulators were looking for information about Wachovia Securities'sales practices, internal evaluations of the auction rate securities market,and marketing strategies.
In addition to securities regulators from Missouri, regulators fromIllinois, Massachusetts, New Jersey, Pennsylvania and other states were partof the team entering Wachovia Securities' headquarters, the officials said. Missouri has also served subpoenas on more than a dozen Wachovia Securitiesagents and executives after receiving more than 70 complaints representingmore than $40 million in frozen investments over the last four months.
It said regulators were looking for information about Wachovia Securities'sales practices, internal evaluations of the auction rate securities market,and marketing strategies.
In addition to securities regulators from Missouri, regulators fromIllinois, Massachusetts, New Jersey, Pennsylvania and other states were partof the team entering Wachovia Securities' headquarters, the officials said. Missouri has also served subpoenas on more than a dozen Wachovia Securitiesagents and executives after receiving more than 70 complaints representingmore than $40 million in frozen investments over the last four months.
Tuesday, July 15, 2008
Devaney's Funds Wiped Out After United Capital Margin Call
John Devaney is liquidating hedge funds at his United Capital Markets Holdings Inc. after failing to meet a margin call from Deutsche Bank AG.
Deutsche Bank seized and auctioned off collateral after the Horizon group of funds failed to meet the bank's demands, according to a letter to clients obtained by Bloomberg News yesterday. The funds were frozen a year ago because of wrong-way bets on mortgage securities.
"The survival of the funds and any potential recovery for their investors has been dependent on these lenders continuing their relationships with the funds,'' Devaney wrote in the letter dated July 9. United Capital is based in Key Biscayne, Florida.
Deutsche Bank seized and auctioned off collateral after the Horizon group of funds failed to meet the bank's demands, according to a letter to clients obtained by Bloomberg News yesterday. The funds were frozen a year ago because of wrong-way bets on mortgage securities.
"The survival of the funds and any potential recovery for their investors has been dependent on these lenders continuing their relationships with the funds,'' Devaney wrote in the letter dated July 9. United Capital is based in Key Biscayne, Florida.
Friday, July 11, 2008
German Retail Business Sold by Citigroup for $7.7 Billion
The nation’s biggest bank is has sold its German retail business to France’s Credit Mutuel for $7.7 billion in cash in an effort to raise capital and shore up its balance sheets as it struggles to come to terms with billions of dollars in write-downs on toxic subprime- related debt.
In a statement released July 11, Citigroup said the deal includes its Duesseldorf-based Citibank Privatkunden AG & Co. KGaA, along with some affiliates. The sale is expected to close in the fourth quarter if approved by regulators.
Like many U.S. banks, Citigroup has been hit hard from the subprime mortgage meltdown, writing off $17 billion in subprime-related investments in the fourth quarter alone. Since late last year, the beleaguered bank recorded more than $45 billion of write-downs and credit losses and slashed its dividend 41 percent.
In the fourth quarter, the bank posted a loss of $9.83 billion - its first loss since its creation in 1998 from the merger of Citicorp and Weill’s Travelers Group, and amidst the credit crisis Ctigroup will suffer up to 30,000 or more job cuts. According to its corporate Web site, Credit Mutuel is France’s second-largest retail bank, with nearly 15 million customers and more than 5,000 branches.
In a statement released July 11, Citigroup said the deal includes its Duesseldorf-based Citibank Privatkunden AG & Co. KGaA, along with some affiliates. The sale is expected to close in the fourth quarter if approved by regulators.
Like many U.S. banks, Citigroup has been hit hard from the subprime mortgage meltdown, writing off $17 billion in subprime-related investments in the fourth quarter alone. Since late last year, the beleaguered bank recorded more than $45 billion of write-downs and credit losses and slashed its dividend 41 percent.
In the fourth quarter, the bank posted a loss of $9.83 billion - its first loss since its creation in 1998 from the merger of Citicorp and Weill’s Travelers Group, and amidst the credit crisis Ctigroup will suffer up to 30,000 or more job cuts. According to its corporate Web site, Credit Mutuel is France’s second-largest retail bank, with nearly 15 million customers and more than 5,000 branches.
Wednesday, July 9, 2008
Wall Street Auction Rate Securities Probe Grows - UBS Targeted
Federal prosecutors, ramping up criminal probes stemming from the credit crunch, are investigating whether two former Credit Suisse Group brokers lied to investors about how they placed their money into short-term securities, according to people familiar with the matter.
At issue is the $330 billion market for "auction rate" securities, which allow issuers such as municipalities and student loan companies, closed-end mutual funds or financial institutions to borrow money for the long term but at short-term, or lower, interest rates.
For example, Massachusetts's securities regulators last week filed a civil fraud lawsuit against investment bank UBS AG, one of the biggest players in the auction-rate market, alleging that UBS brokers told investors the securities "were safe, liquid 'cash alternatives' when UBS knew they were not." UBS has denied wrongdoing.
At issue is the $330 billion market for "auction rate" securities, which allow issuers such as municipalities and student loan companies, closed-end mutual funds or financial institutions to borrow money for the long term but at short-term, or lower, interest rates.
For example, Massachusetts's securities regulators last week filed a civil fraud lawsuit against investment bank UBS AG, one of the biggest players in the auction-rate market, alleging that UBS brokers told investors the securities "were safe, liquid 'cash alternatives' when UBS knew they were not." UBS has denied wrongdoing.
Evergreen CEO to Retire Amid Mutual Fund Closure
Evergreen Investments, the mutual-fund operation, will soon get new leadership.
The money-management unit of banking giant Wachovia Corp. told employees on Tuesday that Chief Executive Dennis Ferro, 63 years old, will retire at the end of this year, five years after assuming the top job. He will be succeeded by Peter Cieszko, 48, currently head of global distribution, who has been at Evergreen since July 2006.
The leadership changes come amid a troubled time for Evergreen. In the past year, the firm has been besieged with problems because of its funds' mortgage- and asset-backed investments.
Evergreen's money-market funds held some such securities, which eventually Wachovia had to step in and buy, in order to prevent the funds from breaking the buck -- when their net asset value per share falls below the $1 money-market standard. Wachovia booked a loss of more than $40 million on the asset-backed securities it purchased from Evergreen's money funds.
Last month, the unit announced the liquidation of one of its bond funds, Evergreen Ultra Short Opportunities Fund, after it lost half of its value in six months, thanks to subprime-mortgage investments.
The money-management unit of banking giant Wachovia Corp. told employees on Tuesday that Chief Executive Dennis Ferro, 63 years old, will retire at the end of this year, five years after assuming the top job. He will be succeeded by Peter Cieszko, 48, currently head of global distribution, who has been at Evergreen since July 2006.
The leadership changes come amid a troubled time for Evergreen. In the past year, the firm has been besieged with problems because of its funds' mortgage- and asset-backed investments.
Evergreen's money-market funds held some such securities, which eventually Wachovia had to step in and buy, in order to prevent the funds from breaking the buck -- when their net asset value per share falls below the $1 money-market standard. Wachovia booked a loss of more than $40 million on the asset-backed securities it purchased from Evergreen's money funds.
Last month, the unit announced the liquidation of one of its bond funds, Evergreen Ultra Short Opportunities Fund, after it lost half of its value in six months, thanks to subprime-mortgage investments.
Toxic CDOs Reincarnated as Re-Remics
They're baaaaack. Those toxic and worthless colllateralized debt obligations (CDOs) that helped drive banks $400 billion into the red are finding new buyers under a different name: Re-Remics.
Due to the global credit crunch, CDOs sales fell from $227 billion in 2007 to $1 billion this year so Goldman Sachs, J.P. Morgan and at least six other brokerage firms are repackaging unwanted mortgage bonds into Re-Remics. Re-Remic stands for ``resecuritizations of real estate mortgage investment conduits,'' the formal name of mortgage bonds. Re-Remics supposedly has parts that are structured to guard against higher losses than most CDOs and would allow investors to sell or keep other parts at lower prices that can translate to potential yields greater than 20 percent. For example, a bond trading at 40 cents on the dollar could be split into a piece worth 80 cents and another piece that could then be sold cheaply enough to offer returns as high as 20 percent.
Re-Remics are different from CDOs in some way. Re-Remics are composed of AAA-rated bonds backed by Alt-A mortgages issued to high quality borrowers instead of debt or credit-default swaps based on the lowest-ranking sub-prime mortgage-bond classes. And while CDOs are backed by more than a hundred bonds, Re-Remics typically combine fewer than a dozen which makes it easier and quicker for investors to separate the better debt from the riskier debt.
According to investment experts like Paul Colonna at GE Asset Management, these Re-Remics are just a different version of CDOs; the mechanics are the same but the valuation levels are different. Colonna said GE has considered buying the debt and might make some of its riskier bonds into re-remics. Analysts also think Re-remics may help revive the market for new home-loan debt by moving illiquid bonds to interested buyers.
Firms like Goldman Sachs, J.P. Morgan and Lehman Brothers all hold significant residential-mortgage securities on its books and this restructuring with Re-Remics could throw them a lifeline. These banks can increase the total credit quality of their assets by selling off lower-rated pieces and keeping the better pieces. So, banks are buying the lower-yielding senior pieces and some are also considering buying the bonds for their pension funds. Companies like Transamerica Life Insurance and Reliance Standard Life Insurance also bought Re-Remics this year.
In the first five months of 2008, more than $9.3 billion of Re-Remics were created - triple from a year ago. Re-Remics made up 47 percent of mortgage bonds issued in the period, excluding those guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Due to the global credit crunch, CDOs sales fell from $227 billion in 2007 to $1 billion this year so Goldman Sachs, J.P. Morgan and at least six other brokerage firms are repackaging unwanted mortgage bonds into Re-Remics. Re-Remic stands for ``resecuritizations of real estate mortgage investment conduits,'' the formal name of mortgage bonds. Re-Remics supposedly has parts that are structured to guard against higher losses than most CDOs and would allow investors to sell or keep other parts at lower prices that can translate to potential yields greater than 20 percent. For example, a bond trading at 40 cents on the dollar could be split into a piece worth 80 cents and another piece that could then be sold cheaply enough to offer returns as high as 20 percent.
Re-Remics are different from CDOs in some way. Re-Remics are composed of AAA-rated bonds backed by Alt-A mortgages issued to high quality borrowers instead of debt or credit-default swaps based on the lowest-ranking sub-prime mortgage-bond classes. And while CDOs are backed by more than a hundred bonds, Re-Remics typically combine fewer than a dozen which makes it easier and quicker for investors to separate the better debt from the riskier debt.
According to investment experts like Paul Colonna at GE Asset Management, these Re-Remics are just a different version of CDOs; the mechanics are the same but the valuation levels are different. Colonna said GE has considered buying the debt and might make some of its riskier bonds into re-remics. Analysts also think Re-remics may help revive the market for new home-loan debt by moving illiquid bonds to interested buyers.
Firms like Goldman Sachs, J.P. Morgan and Lehman Brothers all hold significant residential-mortgage securities on its books and this restructuring with Re-Remics could throw them a lifeline. These banks can increase the total credit quality of their assets by selling off lower-rated pieces and keeping the better pieces. So, banks are buying the lower-yielding senior pieces and some are also considering buying the bonds for their pension funds. Companies like Transamerica Life Insurance and Reliance Standard Life Insurance also bought Re-Remics this year.
In the first five months of 2008, more than $9.3 billion of Re-Remics were created - triple from a year ago. Re-Remics made up 47 percent of mortgage bonds issued in the period, excluding those guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Tuesday, July 8, 2008
Lawsuit Alleges UBS Auction-Rate Fraud
An arbitration claim just filed with FINRA against UBS Financial Services and David Shulman, global head of UBS’ Municipal Securities Group, is seeking the return of $2.5 million now frozen in auction-rate securities and punitive damages for alleged fraudulent sale of the shares. The twist in this suit is that the investor filing the claim had been sold the securities by his own son, a UBS broker at the time, and later by other UBS brokers.
The claim is accusing UBS of several wrongs: misleading investors by not providing information regarding the liquidity risks of auction-rate securities, failing to disclose the manner in which the auctions were run and the fact that UBS helped prop up the auction-rate securities market and neglecting to train and inform brokers in the risks and complexities of the various auction-rate securities
The unnamed investor filing the claim is a 70-year-old retired doctor residing in Florida who says he was sold student-loan-related auction-rate securities by his son, a former UBS broker. The son, who left UBS several years ago, was told that the securities were cash alternatives and could be used to lure clients away from bank money-market funds. The investor bought securities in Missouri Higher Education, Pennsylvania Student Loan, Iowa Student Loan, Illinois Student Loan Assist, Utah Student Board of Regents and Kentucky Higher Education Student Loan. All of the securities were listed as “cash alternatives" when in reality, some of them wouldn’t even mature until the investor was 107 years old.
According to the plaintiff’s attorney, the investor would have never bought auction-rate securities if UBS had warned investors that auctions could fail, certain features could impact its liquidity and that UBS propped up the auctions.
This claim is also citing Massachusetts’s case to support its claims. William F. Galvin, Massachusetts Secretary of State, filed civil charges accusing UBS of fraud and dishonest conduct in misleading investors about the risk of auction-rate securities. UBS is already facing claims from every direction but Galvin’s effort has opened the door to punitive damages.
Galvin’s office also charged Shulman of engaging in an internal marketing campaign to sell UBS' own inventory of auction-rate securities to investors while he sold his personal auction-rate holdings at the same time due to increasing risks.
The claim is accusing UBS of several wrongs: misleading investors by not providing information regarding the liquidity risks of auction-rate securities, failing to disclose the manner in which the auctions were run and the fact that UBS helped prop up the auction-rate securities market and neglecting to train and inform brokers in the risks and complexities of the various auction-rate securities
The unnamed investor filing the claim is a 70-year-old retired doctor residing in Florida who says he was sold student-loan-related auction-rate securities by his son, a former UBS broker. The son, who left UBS several years ago, was told that the securities were cash alternatives and could be used to lure clients away from bank money-market funds. The investor bought securities in Missouri Higher Education, Pennsylvania Student Loan, Iowa Student Loan, Illinois Student Loan Assist, Utah Student Board of Regents and Kentucky Higher Education Student Loan. All of the securities were listed as “cash alternatives" when in reality, some of them wouldn’t even mature until the investor was 107 years old.
According to the plaintiff’s attorney, the investor would have never bought auction-rate securities if UBS had warned investors that auctions could fail, certain features could impact its liquidity and that UBS propped up the auctions.
This claim is also citing Massachusetts’s case to support its claims. William F. Galvin, Massachusetts Secretary of State, filed civil charges accusing UBS of fraud and dishonest conduct in misleading investors about the risk of auction-rate securities. UBS is already facing claims from every direction but Galvin’s effort has opened the door to punitive damages.
Galvin’s office also charged Shulman of engaging in an internal marketing campaign to sell UBS' own inventory of auction-rate securities to investors while he sold his personal auction-rate holdings at the same time due to increasing risks.
Monday, July 7, 2008
UBS Hit With Whistleblower Suit Over Auction Rate Securities Probe
UBS AG, the biggest wealth manager, was targeted by a whistleblower suit from a former employee who said the bank forced him to resign after he assisted regulators probing auction-rate securities sales in Massachusetts.
Flynn, who was a senior vice president at UBS, sold $30 million of auction-rate securities in around two years. UBS violated securities laws by failing to disclose to him and his clients that auction rate securities weren't truly cash equivalents, as they'd claimed, and sometimes couldn't be traded, he said in the complaint.
Massachusetts Secretary of State William Galvin sued UBS on June 26 for fraud relating to the bank's sale of auction-rate securities to investors in the state and for allegedly telling them the bonds were safe and liquid. UBS said it "will defend the specific allegations.''
Municipalities, student loan corporations and closed-end mutual funds issued about $330 billion in auction-rate bonds and preferred shares before the market collapsed in February.
Flynn, who was a senior vice president at UBS, sold $30 million of auction-rate securities in around two years. UBS violated securities laws by failing to disclose to him and his clients that auction rate securities weren't truly cash equivalents, as they'd claimed, and sometimes couldn't be traded, he said in the complaint.
Massachusetts Secretary of State William Galvin sued UBS on June 26 for fraud relating to the bank's sale of auction-rate securities to investors in the state and for allegedly telling them the bonds were safe and liquid. UBS said it "will defend the specific allegations.''
Municipalities, student loan corporations and closed-end mutual funds issued about $330 billion in auction-rate bonds and preferred shares before the market collapsed in February.
Thursday, July 3, 2008
AREI Offices in Redding Raided by Attorney General
Yesterday, the California Attorney General’s office raided Redding-based Asset Real Estate & Investment Co. (AREI) as part of their ongoing investigation of the firm. AREI is accused of defrauding investors and is the center of a flurry of investor lawsuits. Jim Koenig, who founded AREI in the late 1990s, is seeking bankruptcy protection and closing the firm.
AREI once controlled about two-dozen assisted senior living and memory care centers nationwide (including Sierra Oakdale Property Management and Oakdale Heights Senior Living in Redding) that offered tenants-in-common investments and tax shelter property exchanges.
Investors in some of the senior care centers have not received base rent since November and have faced foreclosure on their properties. AREI also offered shares in a San Joaquin County golf course and a $55 million corporate note issued without collateral. The lawsuits are accusing AREI of the classic Ponzi scheme - it defaulted on the corporate note after issuing greater debt to pay off prior promises of a 12-percent annual return. The lawsuits also allege Koenig and his partners own at least a half-dozen other firms that charged investors processing fees, brokerage fees, loan processing fees, property operating fees and other fees without letting investors know they owned those firms.
The Attorney General’s office is asking any investors who lost funds to send copies of their documents to the agency’s Public Inquiry Unit. Documents should show the nature of the investment, what promises were made, where the sales occurred and how much was lost.
This is not the first time Koenig has ran into trouble with the law. In 1986, Koenig was sentenced to two years in prison and ordered to pay $5 million in restitution to investigators after he and two partners were convicted of fraud in a gold selling scam.
AREI once controlled about two-dozen assisted senior living and memory care centers nationwide (including Sierra Oakdale Property Management and Oakdale Heights Senior Living in Redding) that offered tenants-in-common investments and tax shelter property exchanges.
Investors in some of the senior care centers have not received base rent since November and have faced foreclosure on their properties. AREI also offered shares in a San Joaquin County golf course and a $55 million corporate note issued without collateral. The lawsuits are accusing AREI of the classic Ponzi scheme - it defaulted on the corporate note after issuing greater debt to pay off prior promises of a 12-percent annual return. The lawsuits also allege Koenig and his partners own at least a half-dozen other firms that charged investors processing fees, brokerage fees, loan processing fees, property operating fees and other fees without letting investors know they owned those firms.
The Attorney General’s office is asking any investors who lost funds to send copies of their documents to the agency’s Public Inquiry Unit. Documents should show the nature of the investment, what promises were made, where the sales occurred and how much was lost.
This is not the first time Koenig has ran into trouble with the law. In 1986, Koenig was sentenced to two years in prison and ordered to pay $5 million in restitution to investigators after he and two partners were convicted of fraud in a gold selling scam.
Wednesday, July 2, 2008
Fugitive hedge-fund swindler surrenders in Mass.
A hedge fund swindler who set off a national manhunt when he faked his suicide to avoid reporting to prison surrendered Wednesday to Massachusetts police after three weeks in which authorities suspected he was hiding out in RV parks and highway rest areas. Authorities say his own mother helped broker the surrender.
Samuel Israel III, 48, walked into the police station in Southwick, Mass., at about 9:15 a.m. wearing a colored T-shirt and shorts, identified himself and said he was a fugitive wanted by the federal government, officials said.
Prosecutors said he and two other men scammed investors into putting $450 million into the funds by announcing nonexistent profits and providing fake audits, and made millions in commissions on trades that lost money for the investors. The collapse of the funds prompted calls for stricter oversight.
Samuel Israel III, 48, walked into the police station in Southwick, Mass., at about 9:15 a.m. wearing a colored T-shirt and shorts, identified himself and said he was a fugitive wanted by the federal government, officials said.
Prosecutors said he and two other men scammed investors into putting $450 million into the funds by announcing nonexistent profits and providing fake audits, and made millions in commissions on trades that lost money for the investors. The collapse of the funds prompted calls for stricter oversight.
Wall Street's Conflict of Interest Evident in UBS Emails
After the $330 billion auction-rate market imploded in February and complaints from wealthy and modest investors who were unable to access their cash poured in, William F. Galvin, secretary of Massachusetts, subpoenaed documents from some major brokerage firms. Galvin wanted to see how these firms marketed these supposedly safe and liquid securities to investors. Galvin just released materials produced by UBS and filed a civil suit against the firm, accusing it of defrauding investors. UBS emails show UBS played dual roles in the auction-rate securities market and how its conflict of interest had a devastating effect on auction-rate investors.
According to Galvin's suit, UBS misled investors by marketing auction-rate securities as safe, cash alternatives and when the market started to go bad, UBS dumped these securities on individual investors to minimize its own exposure to the risks inherent in keeping them on its own books. If Galvin's allegations prove to be true and prevalent among Wall Street firms, then civil and criminal actions against these firms may become widespread.UBS denies Galvin's allegations but the evidence backing Galvin's claim is apparent in the email messages among UBS executives.
The problem facing UBS surfaced last August when the credit markets seized up. Corporations that used to be big buyers of auction-rate securities began to sell instead of buy so UBS, as underwriter and auction market manager, had to find new buyers or be stuck with the securities. At the same time, UBS was suffering from losses in the sub-prime mortgage market so an auction-rate securities mess would compound UBS' troubles.
Frantic e-mail messages flew among UBS executives during that time. “As you can imagine during these stressful times, the pressure is on to move our inventory,” wrote David Shulman, global head of fixed income distribution at UBS, on Aug. 30. “I am aware that JPM and Citi are on all ‘alert’ in the same fashion with their retail groups.”
Joel P. Aresco, chief risk officer for the Americas, sent this message on Nov. 15: “Why the continual increase” in the inventory of auction-rate securities? “What measures are being taken to reduce this exposure?” In response, on Dec. 11, Shulman wrote: “I am pushing every angle here to move product.” However, the product being moved was Shulman’s own stake in auction-rate securities. By Dec. 12, Shulman had dumped all his holdings.
On Feb. 12, just days before the auctions collapsed, another UBS executive wrote: “We need to beat the bushes harder than ever to unload this paper.” Meanwhile, UBS’ web site still said auction-rate securities are a highly liquid cash alternative.
However, it seems some UBS brokers were not told about the risks that auctions could fail and their clients could be stuck with their holdings. Complaining about UBS' auction-rate unit in an email on Jan. 10, one broker wrote "we continue to be frustrated by the lack of information that they are providing to us" and “given the strange and difficult environment, it is imperative that we are fully aware of the risk we are taking." The broker also wrote "we do not want to imperil any relationships over something as ‘simple’ as their cash investments. The lack of clarity regarding ARPS is contrary to our focus on ‘improving the client experience.’ ” (ARPS refers to auction-rate preferred shares.)
UBS' conflict of interest is most glaring in an email written by Joe Gallichio, a managing director in the municipal finance department at UBS, on Feb. 21, after the market for auction-rate securities had frozen. “As things change they also remain the same,” Mr. Gallichio wrote. “What we face now in the firm as related to muni short term is classic Wall Street. In its core, it is trading versus sales, risk management versus client franchise.”
“As a firm we tell people we are client focused,” Gallichio went on. “So if the client is always right, then we should fix the problem this product has created in WM,” the firm’s wealth management unit, which includes retail investors. “To let WM and the firm as a whole go through costly litigation, the loss of investor confidence and significant assets, the cost in management time, legal and compliance, IT spend, the total distraction from our core growth strategy and overall employee morale — will certainly be in excess of the multibillion-dollar hit to balance sheet we would take by just buying the rest of the assets from WM. I just don’t get it.”
Gallichio's email said it all.
According to Galvin's suit, UBS misled investors by marketing auction-rate securities as safe, cash alternatives and when the market started to go bad, UBS dumped these securities on individual investors to minimize its own exposure to the risks inherent in keeping them on its own books. If Galvin's allegations prove to be true and prevalent among Wall Street firms, then civil and criminal actions against these firms may become widespread.UBS denies Galvin's allegations but the evidence backing Galvin's claim is apparent in the email messages among UBS executives.
The problem facing UBS surfaced last August when the credit markets seized up. Corporations that used to be big buyers of auction-rate securities began to sell instead of buy so UBS, as underwriter and auction market manager, had to find new buyers or be stuck with the securities. At the same time, UBS was suffering from losses in the sub-prime mortgage market so an auction-rate securities mess would compound UBS' troubles.
Frantic e-mail messages flew among UBS executives during that time. “As you can imagine during these stressful times, the pressure is on to move our inventory,” wrote David Shulman, global head of fixed income distribution at UBS, on Aug. 30. “I am aware that JPM and Citi are on all ‘alert’ in the same fashion with their retail groups.”
Joel P. Aresco, chief risk officer for the Americas, sent this message on Nov. 15: “Why the continual increase” in the inventory of auction-rate securities? “What measures are being taken to reduce this exposure?” In response, on Dec. 11, Shulman wrote: “I am pushing every angle here to move product.” However, the product being moved was Shulman’s own stake in auction-rate securities. By Dec. 12, Shulman had dumped all his holdings.
On Feb. 12, just days before the auctions collapsed, another UBS executive wrote: “We need to beat the bushes harder than ever to unload this paper.” Meanwhile, UBS’ web site still said auction-rate securities are a highly liquid cash alternative.
However, it seems some UBS brokers were not told about the risks that auctions could fail and their clients could be stuck with their holdings. Complaining about UBS' auction-rate unit in an email on Jan. 10, one broker wrote "we continue to be frustrated by the lack of information that they are providing to us" and “given the strange and difficult environment, it is imperative that we are fully aware of the risk we are taking." The broker also wrote "we do not want to imperil any relationships over something as ‘simple’ as their cash investments. The lack of clarity regarding ARPS is contrary to our focus on ‘improving the client experience.’ ” (ARPS refers to auction-rate preferred shares.)
UBS' conflict of interest is most glaring in an email written by Joe Gallichio, a managing director in the municipal finance department at UBS, on Feb. 21, after the market for auction-rate securities had frozen. “As things change they also remain the same,” Mr. Gallichio wrote. “What we face now in the firm as related to muni short term is classic Wall Street. In its core, it is trading versus sales, risk management versus client franchise.”
“As a firm we tell people we are client focused,” Gallichio went on. “So if the client is always right, then we should fix the problem this product has created in WM,” the firm’s wealth management unit, which includes retail investors. “To let WM and the firm as a whole go through costly litigation, the loss of investor confidence and significant assets, the cost in management time, legal and compliance, IT spend, the total distraction from our core growth strategy and overall employee morale — will certainly be in excess of the multibillion-dollar hit to balance sheet we would take by just buying the rest of the assets from WM. I just don’t get it.”
Gallichio's email said it all.
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