Aidikoff, Uhl & Bakhtiari counsels Schwab investors to consider their exit options in the wake of Morningstar's recent report concerning the collapse of Schwab YieldPlus Fund Select Shares (SWYSX) and the Schwab YieldPlus Fund Investor Shares (SWYPX), referred to as the "YieldPlus" funds.
Aidikoff, Uhl & Bakhtiari represent numerous Schwab investors in FINRA arbitration claims alleging that Charles Schwab omitted or misrepresented important information to investors including the YieldPlus Fund's safety, composition, risk level and suitability as a money market alternative.
"On August 20, 2008 Morningstar reported that YieldPlus was an 'unmitigated disaster' and shareholders who haven't yet sold 'would be better off' following their counterparts that have dumped YieldPlus," said attorney Ryan K. Bakhtiari of Aidikoff, Uhl & Bakhtiari.
"This report is a wake-up call to investors. We believe that investors have recourse and may be able to recover damages as a result of purchasing and holding shares of YieldPlus," stated Mr. Bakhtiari. "Schwab Investors who have lost more than $10,000 should be aware of their rights."
Increased yield potential for ultrashort bond funds like the Schwab YieldPlus Funds have historically provided higher sustained yields versus money market funds, as their short duration helps minimize exposure to falling bond prices as rates rise. Even though the share price may fluctuate minimally, these funds offer lower risk than longer-term bond funds and only marginally higher risk than money market funds.
Schwab also emphasized the safety of the YieldPlus Funds was enhanced by the short duration of holdings in its portfolio even though this was not accurate.
The brokers who sold the Schwab Yield Plus fund are not targets of arbitration filings, according to the investors' legal team.
Thursday, August 28, 2008
Tuesday, August 26, 2008
Jefferson County Bonds To Default on Friday
Jefferson County Albama expects to default on its $3.2 billion sewer bonds this Friday and probably will not enter into another payment extension with its Wall Street creditors, Commission President Bettye Fine Collins said Monday.
At that point, the commissioners likely will authorize attorneys to begin bankruptcy proceedings, she said.
Collins said she had hoped a deal could be worked out without the county filing the largest municipal bankruptcy in the nation's history, but she now thinks that such a deal is unlikely.
The creditors "obviously seem to prefer bankruptcy and get 50 cents on the dollar," she said. "Bankruptcy is not pleasant. It will be expensive. We're down to the wire. I'm not happy about having to say this, but it appears to me that's the only course of action left."
At that point, the commissioners likely will authorize attorneys to begin bankruptcy proceedings, she said.
Collins said she had hoped a deal could be worked out without the county filing the largest municipal bankruptcy in the nation's history, but she now thinks that such a deal is unlikely.
The creditors "obviously seem to prefer bankruptcy and get 50 cents on the dollar," she said. "Bankruptcy is not pleasant. It will be expensive. We're down to the wire. I'm not happy about having to say this, but it appears to me that's the only course of action left."
Bankruptcy Option for Jefferson County Under Consideration
Jefferson County Commission President Bettye Fine Collins has told attorneys to begin research on the impact a bankruptcy filing for the county that has a $3.2 billion sewer debt and soaring interest rates.
Collins had been part of a 3-2 majority on the commission that opposed filing what would be the largest municipal bankruptcy on record. She now appears to be softening that opposition.
Banks that hold much of the sewer debt convinced Jefferson County in 2002 and 2003 to refinance what had been mostly fixed-rate bonds into variable- and adjustable-rate warrants that are causing the county’s financial crisis.
Collins had been part of a 3-2 majority on the commission that opposed filing what would be the largest municipal bankruptcy on record. She now appears to be softening that opposition.
Banks that hold much of the sewer debt convinced Jefferson County in 2002 and 2003 to refinance what had been mostly fixed-rate bonds into variable- and adjustable-rate warrants that are causing the county’s financial crisis.
Monday, August 25, 2008
WexTrust Sued by SEC for Ponzi Scheme
The Securities and Exchange Commission on Monday sued WexTrust Capital in federal court, accusing the private investment firm of running a Ponzi scheme that has defrauded nearly 1,200 investors since 2005.
According to a complaint filed by the regulator, the Chicago-based WexTrust and its founders, Steven Byers and Joseph Shereshevsky, created scores of entities through 60 private placements. While marketed as investment entities earmarked for specific investments, similar to the funds raised by private equity firms, these funds were used to pay off prior investors in the scheme, the S.E.C. said.
Among the alleged schemes disclosed by the S.E.C. was a 2005 offering to raise funds to buy seven properties leased by federal agencies — despite the fact that the properties could not be bought.
Wextrust Entities have conducted at least 60 securities offerings and raised at least $255 million from at least 1,196 investors. Most of these offerings occurred between 2005 and 2008, although at least four offerings occurred as early as 2002. Many of the securities offerings involved the sale of “preferred membership interests” in the LLC Entities, which were limited liability corporations created by Wextrust as the investment vehicle for the specific offering. These investments are securities in the form of investment contracts, notes or other evidence of indebtedness.
SEC information can be found by clicking here.
Information on the WexTrust receiver can be found by clicking here.
According to a complaint filed by the regulator, the Chicago-based WexTrust and its founders, Steven Byers and Joseph Shereshevsky, created scores of entities through 60 private placements. While marketed as investment entities earmarked for specific investments, similar to the funds raised by private equity firms, these funds were used to pay off prior investors in the scheme, the S.E.C. said.
Among the alleged schemes disclosed by the S.E.C. was a 2005 offering to raise funds to buy seven properties leased by federal agencies — despite the fact that the properties could not be bought.
Wextrust Entities have conducted at least 60 securities offerings and raised at least $255 million from at least 1,196 investors. Most of these offerings occurred between 2005 and 2008, although at least four offerings occurred as early as 2002. Many of the securities offerings involved the sale of “preferred membership interests” in the LLC Entities, which were limited liability corporations created by Wextrust as the investment vehicle for the specific offering. These investments are securities in the form of investment contracts, notes or other evidence of indebtedness.
SEC information can be found by clicking here.
Information on the WexTrust receiver can be found by clicking here.
FINRA Arbitration Claims Focused on Morgan Keegan Bond Mutual Funds
They're unlikely to set any legal precedent or bleed into any other local competitors, but the lawsuits and arbitration cases piling up at Morgan Keegan & Co., Inc., are likely to make their way into college finance textbooks as examples of poor investment structures.
At least that's the opinion of Morningstar senior fund analyst Lawrence Jones.
"From an investment manager case study, this will become one of the cases taught in business school about how illiquid, thinly traded securities can sink a fund in short order and there's nothing that can be done about it," Lawrence says.
What's at issue are the types of investments held in several mutual funds once managed by Morgan Asset Management, the investment advisory for Morgan Keegan & Co., the risk of those investments and whether or not investors were properly informed of the risk.
At least that's the opinion of Morningstar senior fund analyst Lawrence Jones.
"From an investment manager case study, this will become one of the cases taught in business school about how illiquid, thinly traded securities can sink a fund in short order and there's nothing that can be done about it," Lawrence says.
What's at issue are the types of investments held in several mutual funds once managed by Morgan Asset Management, the investment advisory for Morgan Keegan & Co., the risk of those investments and whether or not investors were properly informed of the risk.
Jefferson County Commission Seeks Public Referendum
The Jefferson County Commission will vote today on a new option in dealing with its sewer-debt crisis - letting residents decide Nov. 4 in a nonbinding referendum how the Jefferson County should tackle the problem.
Jefferson County voters, under a resolution the commissioners will consider in a 10 a.m. special meeting today, would be asked several advisory questions on a ballot in the coming election. Those include whether:
They favor a Chapter 9 municipal bankruptcy filing by Jefferson County.
Jefferson County should sell the sewer system to the Retirement Systems of Alabama.
All Jefferson County residents, or only sewer customers, should help pay for the sewer system debt.
A majority of the Jefferson County Commission voted last week to extend its overdue sewer bond debt payments through November and pay creditors $44 million as part of the agreement.
Meanwhile, 150 residents and at least six area mayors turned out for the Wednesday night public forum with Carns and Commissioner Bobby Humphryes at the Bessemer Civic Center.
Jefferson County voters, under a resolution the commissioners will consider in a 10 a.m. special meeting today, would be asked several advisory questions on a ballot in the coming election. Those include whether:
They favor a Chapter 9 municipal bankruptcy filing by Jefferson County.
Jefferson County should sell the sewer system to the Retirement Systems of Alabama.
All Jefferson County residents, or only sewer customers, should help pay for the sewer system debt.
A majority of the Jefferson County Commission voted last week to extend its overdue sewer bond debt payments through November and pay creditors $44 million as part of the agreement.
Meanwhile, 150 residents and at least six area mayors turned out for the Wednesday night public forum with Carns and Commissioner Bobby Humphryes at the Bessemer Civic Center.
Sunday, August 24, 2008
Subprime Mortgage Bonds on Verge of Extinction
Subprime mortgage-backed bonds lead credit products rendered extinct by the collapse of the U.S. housing market, according to Moody's Investors Service.
Collateralized debt obligations packaging loans and structured investment vehicles will also disappear as investors refuse to buy debt linked to U.S. housing market losses, Jennifer Elliott, Moody's group managing director in the Asia- Pacific, said today at conference in Melbourne.
The worst U.S. housing slump since the Great Depression has triggered more than $504 billion of writedowns and losses at the world's biggest financial companies, many of which sold and invested in securities based on American mortgages. Subprime mortgage bonds made up almost half of the world's home loan debt securities prior to the housing collapse, Elliott said.
Structured investment vehicles, which operated by selling short-term debt to buy higher-yielding assets, have been forced to wind down or have defaulted after the seizure in credit markets cut their funding avenues. Investors are also avoiding CDOs, which package mortgage-backed bonds and use the income to pay investors.
Collateralized debt obligations packaging loans and structured investment vehicles will also disappear as investors refuse to buy debt linked to U.S. housing market losses, Jennifer Elliott, Moody's group managing director in the Asia- Pacific, said today at conference in Melbourne.
The worst U.S. housing slump since the Great Depression has triggered more than $504 billion of writedowns and losses at the world's biggest financial companies, many of which sold and invested in securities based on American mortgages. Subprime mortgage bonds made up almost half of the world's home loan debt securities prior to the housing collapse, Elliott said.
Structured investment vehicles, which operated by selling short-term debt to buy higher-yielding assets, have been forced to wind down or have defaulted after the seizure in credit markets cut their funding avenues. Investors are also avoiding CDOs, which package mortgage-backed bonds and use the income to pay investors.
Saturday, August 23, 2008
UBS Dillon Read Hedge Fund Meltdown
Following are key events as reported by Reuters in the world's largest wealth manager's woes, which started last year in May, when it closed down its Dillon Read hedge fund unit.
CLOSES DILLON READ HEDGE FUND UNIT - MAY 3, 2007
UBS shocks investors by closing down its Dillon Read hedge fund unit after posting lower-than-expected first-quarter results, a rare event from the bank, whose track record had earned it a reputation as a serial outperformer.
WRITEDOWNS TO CAUSE THIRD-QUARTER LOSS - OCTOBER 1, 2007
UBS warns a 4 billion franc subprime hit would cause a third-quarter pre-tax loss of between 600 and 800 million Swiss francs. A few weeks later, UBS's quarterly loss -- its first in nine years -- at 726 million franc is within that range.
In a surprise statement ahead of its scheduled annual results release, UBS announces another subprime writedown, this time of $4 billion, dragging the bank deep into the red for the year. The new write-downs bring its total from the sub-prime debacle to $18.4 billion.
Two weeks later the bank posts a full-year loss of 4.4 billion francs, announcing tens of billions of dollars in new exposure to risky U.S. mortgages, leveraged finance and complex securities, sending shares tumbling to levels not seen since 2004.
Shareholders then back a $11.9 billion capital injection from Singapore and an unidentified Middle East investor.
WRITEDOWNS DOUBLE - APRIL 1, 2008
UBS doubles its writedowns from the subprime crisis, dumps its chairman, Marcel Ospel, and seeks more emergency capital.
The bank writes down an additional $19 billion in ailing assets, bringing to $37 billion the damage wrought by the subprime crisis and causing a net loss of $12 billion in the first quarter. It proposes its lawyer, Peter Kurer, as Ospel's successor.
Activist investor and former chief executive Luqman Arnold then demands UBS shake up its governance and structure, seeking to oust the newly named chairman, sell off asset management and the Brazilian division Pactual, placing the rest into a holding company with a view to selling investment banking and reducing the group to its wealth management rump.
SLASHES JOBS - MAY 6, 2008
UBS says it will axe 5,500 jobs and sell billions of dollars of ailing assets in a bid to break free from the subprime crisis. The job cuts, coming on top of 1,500 already completed, would reduce the Swiss bank's workforce by an additional 7 percent.
UBS also unveils a preliminary deal with U.S. asset manager BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz) to sell for $15 billion a portfolio of subprime mortgages with a face value of $22 billion.
The bank launches a rights issue worth $15.6 billion at a third below its latest market price in a bid to lure investors to repair its battered balance sheet.
MASSACHUSETTS SUES FOR FRAUD - JUNE 26, 2008
Massachusetts authorities sue two UBS subsidiaries for fraud, saying they misled investors about the safety of auction-rate securities.
The complaint accuses UBS of aggressively selling the investments to customers at a time when a top executive from the bank was dumping them from his personal holdings and large money managers were losing faith in them.
One month later, New York State also sues UBS, accusing the Swiss bank of committing a "multi-billion dollar fraud" by steering broker clients into auction-rate securities that became impossible to sell once the credit market tightened.
SHARES HIT 10-YEAR LOW - JULY 1, 2008
The bank fails to calm investors' fears of further asset writedowns, dishing out instead a restructuring of top management and sending the shares to a 10-year low.
Shortly afterwards, UBS says it should be saved from another hefty loss in the second quarter by a large tax credit.
AGREES TO BUY BACK DEBT SECURITIES - AUGUST 9, 2008
UBS agrees to buy back $18.6 billion of debt securities whose value collapsed during the global financial crisis and to pay $150 million to settle charges it misled investors.
The settlement is the largest in a U.S.-wide probe into whether banks sold bonds that were riskier than advertised and follows a day after Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) announced they would buy back almost $20 billion of the auction-rate securities between them.
SPLITS WEALTH MANAGEMENT AND INVESTMENT BANK - AUG 12, 2008
UBS says it will separate its prized wealth management business from investment banking, acknowledging flaws in its much-vaunted one-bank strategy. It also reports it made a loss of 358 million Swiss francs ($332 million) in the second quarter, when it also saw heavy money outflows.
CLOSES DILLON READ HEDGE FUND UNIT - MAY 3, 2007
UBS shocks investors by closing down its Dillon Read hedge fund unit after posting lower-than-expected first-quarter results, a rare event from the bank, whose track record had earned it a reputation as a serial outperformer.
WRITEDOWNS TO CAUSE THIRD-QUARTER LOSS - OCTOBER 1, 2007
UBS warns a 4 billion franc subprime hit would cause a third-quarter pre-tax loss of between 600 and 800 million Swiss francs. A few weeks later, UBS's quarterly loss -- its first in nine years -- at 726 million franc is within that range.
In a surprise statement ahead of its scheduled annual results release, UBS announces another subprime writedown, this time of $4 billion, dragging the bank deep into the red for the year. The new write-downs bring its total from the sub-prime debacle to $18.4 billion.
Two weeks later the bank posts a full-year loss of 4.4 billion francs, announcing tens of billions of dollars in new exposure to risky U.S. mortgages, leveraged finance and complex securities, sending shares tumbling to levels not seen since 2004.
Shareholders then back a $11.9 billion capital injection from Singapore and an unidentified Middle East investor.
WRITEDOWNS DOUBLE - APRIL 1, 2008
UBS doubles its writedowns from the subprime crisis, dumps its chairman, Marcel Ospel, and seeks more emergency capital.
The bank writes down an additional $19 billion in ailing assets, bringing to $37 billion the damage wrought by the subprime crisis and causing a net loss of $12 billion in the first quarter. It proposes its lawyer, Peter Kurer, as Ospel's successor.
Activist investor and former chief executive Luqman Arnold then demands UBS shake up its governance and structure, seeking to oust the newly named chairman, sell off asset management and the Brazilian division Pactual, placing the rest into a holding company with a view to selling investment banking and reducing the group to its wealth management rump.
SLASHES JOBS - MAY 6, 2008
UBS says it will axe 5,500 jobs and sell billions of dollars of ailing assets in a bid to break free from the subprime crisis. The job cuts, coming on top of 1,500 already completed, would reduce the Swiss bank's workforce by an additional 7 percent.
UBS also unveils a preliminary deal with U.S. asset manager BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz) to sell for $15 billion a portfolio of subprime mortgages with a face value of $22 billion.
The bank launches a rights issue worth $15.6 billion at a third below its latest market price in a bid to lure investors to repair its battered balance sheet.
MASSACHUSETTS SUES FOR FRAUD - JUNE 26, 2008
Massachusetts authorities sue two UBS subsidiaries for fraud, saying they misled investors about the safety of auction-rate securities.
The complaint accuses UBS of aggressively selling the investments to customers at a time when a top executive from the bank was dumping them from his personal holdings and large money managers were losing faith in them.
One month later, New York State also sues UBS, accusing the Swiss bank of committing a "multi-billion dollar fraud" by steering broker clients into auction-rate securities that became impossible to sell once the credit market tightened.
SHARES HIT 10-YEAR LOW - JULY 1, 2008
The bank fails to calm investors' fears of further asset writedowns, dishing out instead a restructuring of top management and sending the shares to a 10-year low.
Shortly afterwards, UBS says it should be saved from another hefty loss in the second quarter by a large tax credit.
AGREES TO BUY BACK DEBT SECURITIES - AUGUST 9, 2008
UBS agrees to buy back $18.6 billion of debt securities whose value collapsed during the global financial crisis and to pay $150 million to settle charges it misled investors.
The settlement is the largest in a U.S.-wide probe into whether banks sold bonds that were riskier than advertised and follows a day after Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) announced they would buy back almost $20 billion of the auction-rate securities between them.
SPLITS WEALTH MANAGEMENT AND INVESTMENT BANK - AUG 12, 2008
UBS says it will separate its prized wealth management business from investment banking, acknowledging flaws in its much-vaunted one-bank strategy. It also reports it made a loss of 358 million Swiss francs ($332 million) in the second quarter, when it also saw heavy money outflows.
Friday, August 22, 2008
SEC Accuses Texan of Selling Fraudulent Securities
On August 20, 2008, the Securities and Exchange Commission filed an action in Dallas federal court to halt an alleged unregistered and fraudulent offering of securities by Patrick H. Haxton of Carrollton, Texas, and his company Royal Forex Management, LLC ("Royal"). The securities were investment contracts involving the trading of foreign currencies on the Forex market. On August 21, 2008, United States District Judge Sam A. Lindsay entered a temporary restraining order suspending the offering and orders freezing the defendants' assets, requiring sworn accountings, prohibiting any alteration or destruction of documents and expediting discovery. The court set a hearing for September 4, 2008 to consider the Commission's application for preliminary injunctive relief.
The defendants named in the Commission's Complaint are:
Patrick H. Haxton, age 51, of Carrollton, Texas, the owner and sole manager of Royal; and
Royal Forex Management, LLC, a Texas limited liability corporation operated out of Haxton's Carrollton home.
The defendants named in the Commission's Complaint are:
Patrick H. Haxton, age 51, of Carrollton, Texas, the owner and sole manager of Royal; and
Royal Forex Management, LLC, a Texas limited liability corporation operated out of Haxton's Carrollton home.
Lehman Bros. Up For Sale?
Lehman Brothers shares fell 4.3 percent on Thursday after a newspaper reported the bank had tried to sell a stake of itself to South Korean or Chinese parties and failed, and a Citigroup analyst reduced his estimates for the sector.
Lehman's share decline came amid a broader drop in financial stocks after oil prices rose and investors' concerns about write-downs mounted.
Citigroup analyst Prashant Bhatia cut his estimate for Lehman's third-quarter results to a loss of $3.25 per share from his prior estimate of a loss of 41 cents per share. He said he expects $2.9 billion of asset-related write-downs for the bank.
Lehman's share decline came amid a broader drop in financial stocks after oil prices rose and investors' concerns about write-downs mounted.
Citigroup analyst Prashant Bhatia cut his estimate for Lehman's third-quarter results to a loss of $3.25 per share from his prior estimate of a loss of 41 cents per share. He said he expects $2.9 billion of asset-related write-downs for the bank.
Thursday, August 21, 2008
Auction Rate Securities - Merrill Lynch Settles and Agree to Buyout Investors Starting in October 2008
Merrill Lynch & Co. reached a settlement with the Massachusetts Secretary of the Commonwealth to provide clients beginning in October with access to billions of dollars in funds that have been frozen in the market.
The announcement comes nearly a week after Merrill had indicated it would begin buying back about $10 billion in auction-rate holdings from individual, or retail, investors for one year starting Jan. 15.
A Merrill Lynch spokesman declined comment on the Massachusetts announcement.
Merrill's retail clients hold about $12 billion in auction-rate securities, but the firm had expected that number to drop to less than $10 billion by January as a result of expected issuer redemptions. "We have been discussing this issue with New York and other regulators" and "we thought we were making progress," the company said last week.
Under the deal announced Thursday, Merrill will buy back all illiquid auction-rate securities at par starting Oct. 15 from its retail customers who have less than $3 million on deposit. Merill also agreed repurchase, on or after Jan. 15, all illiquidied auction-rate securities at par from all other clients with deposits of $100 million or less.
The announcement comes nearly a week after Merrill had indicated it would begin buying back about $10 billion in auction-rate holdings from individual, or retail, investors for one year starting Jan. 15.
A Merrill Lynch spokesman declined comment on the Massachusetts announcement.
Merrill's retail clients hold about $12 billion in auction-rate securities, but the firm had expected that number to drop to less than $10 billion by January as a result of expected issuer redemptions. "We have been discussing this issue with New York and other regulators" and "we thought we were making progress," the company said last week.
Under the deal announced Thursday, Merrill will buy back all illiquid auction-rate securities at par starting Oct. 15 from its retail customers who have less than $3 million on deposit. Merill also agreed repurchase, on or after Jan. 15, all illiquidied auction-rate securities at par from all other clients with deposits of $100 million or less.
Cuomo To Merrill Lynch: Friday is the Deadline to Settle ARS Problem
Merrill Lynch has until Friday to settle an auction-rate securities case with New York Attorney General Andrew Cuomo's office or it will face a lawsuit.
Cuomo said on CNBC that he has tried to reach a settlement with the Wall Street investment banker in the probe but has been unsuccessful.
His office has reached $42 billion in settlements with five other banks, including Citigroup Morgan Stanley and Wachovia, during an investigation into whether the banks misled investors who bought the offerings thinking they were secure but in fact were attached to high-risk debts that collapsed.
"Today is the last day," Cuomo said. "If we don't settle today, tomorrow at this time we'll be in court."
Cuomo said on CNBC that he has tried to reach a settlement with the Wall Street investment banker in the probe but has been unsuccessful.
His office has reached $42 billion in settlements with five other banks, including Citigroup Morgan Stanley and Wachovia, during an investigation into whether the banks misled investors who bought the offerings thinking they were secure but in fact were attached to high-risk debts that collapsed.
"Today is the last day," Cuomo said. "If we don't settle today, tomorrow at this time we'll be in court."
Auction Rate-Securities: Merrill Lynch Brokers Demand Buyback of ARS from PIMCO and Blackrock
Merrill Lynch brokers are pressing fund managers Pacific Investment Management Co. and BlackRock Inc. to buy back auction-rate securities, aiming to speed up client bailouts in the frozen market.
More than 300 brokers have e-mailed Pimco saying its executives may "no longer be welcome in our offices" unless they redeem the securities, according to Erick Ellsweig, a Merrill financial adviser in North Carolina who spearheaded the e-mail campaign. Will Fuller, head of distribution for Merrill's U.S. brokerage arm, wrote to BlackRock on Aug. 15 saying its failure to offer redemptions in the past two months has created "dissatisfaction in our financial advisers and clients."
Merrill's brokers, who make up the biggest U.S. financial advisory network, say they're trying to help clients stuck with more than $10 billion of securities in the $200 billion auction- rate market. Pimco, which manages the world's biggest bond fund, and BlackRock, the largest publicly traded U.S. fund manger, used the market to finance their closed-end mutual funds, and Merrill brokers sold the investments to its customers.
"The brokers at Merrill are very upset about the lack of access to capital for their clients, and they have been rattling the cage," said Geoffrey Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island.
The auction-rate market seized up in February with $330 billion in securities when the credit crisis prompted Wall Street firms to stop supporting the periodic auctions in which the securities were bought and sold. New York Attorney General Andrew Cuomo has accused Merrill and other brokers of improperly peddling them as investments that were as liquid as cash. Merrill has said it's cooperating with government probes.
More than 300 brokers have e-mailed Pimco saying its executives may "no longer be welcome in our offices" unless they redeem the securities, according to Erick Ellsweig, a Merrill financial adviser in North Carolina who spearheaded the e-mail campaign. Will Fuller, head of distribution for Merrill's U.S. brokerage arm, wrote to BlackRock on Aug. 15 saying its failure to offer redemptions in the past two months has created "dissatisfaction in our financial advisers and clients."
Merrill's brokers, who make up the biggest U.S. financial advisory network, say they're trying to help clients stuck with more than $10 billion of securities in the $200 billion auction- rate market. Pimco, which manages the world's biggest bond fund, and BlackRock, the largest publicly traded U.S. fund manger, used the market to finance their closed-end mutual funds, and Merrill brokers sold the investments to its customers.
"The brokers at Merrill are very upset about the lack of access to capital for their clients, and they have been rattling the cage," said Geoffrey Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island.
The auction-rate market seized up in February with $330 billion in securities when the credit crisis prompted Wall Street firms to stop supporting the periodic auctions in which the securities were bought and sold. New York Attorney General Andrew Cuomo has accused Merrill and other brokers of improperly peddling them as investments that were as liquid as cash. Merrill has said it's cooperating with government probes.
Wednesday, August 20, 2008
NASAA's Statement on FINRA Arbitration Pilot Program
The following is a statement by North American Securities Administrators Association (NASAA) President and North Dakota Securities Commissioner Karen Tyler regarding the Financial Industry Regulatory Authority (FINRA) pilot program to allow certain investors making arbitration claims to choose a panel made up of three public arbitrators instead of the current system, which requires the inclusion of a mandatory industry representative on arbitration panels.
“NASAA has long advocated a series of constructive steps to restore choice, fairness, and balance to the securities arbitration process. The first step toward improving the integrity of the arbitration system must be the removal of the mandatory industry arbitrator coupled with a prohibition on ties to the industry on the part of the public arbitrator. FINRA’s pilot program, while a positive step, does not go far enough toward resolving immediate investor harm. Since the pilot program will include just a fraction of the arbitration cases that will occur during the next two years, only a select few customers will realize the benefit of having a panel where there is no mandatory industry representative, but thousands of others will not have that choice. Investor protection demands that all investors be given that choice immediately.
“A recent study released by the Securities Industry Conference on Arbitration (SICA) found that most investors view the current securities arbitration forum as biased and unfair. Because the arbitration system has evolved into a mandatory condition imposed by the industry, it is imperative that the system of dispute resolution be fair, transparent and free from bias. Even without this pilot, we would hope that FINRA would agree that the immediate removal of the mandatory industry arbitrator is a critical step toward restoring investor confidence in the fairness of the securities arbitration process.”
For details, please click here.
“NASAA has long advocated a series of constructive steps to restore choice, fairness, and balance to the securities arbitration process. The first step toward improving the integrity of the arbitration system must be the removal of the mandatory industry arbitrator coupled with a prohibition on ties to the industry on the part of the public arbitrator. FINRA’s pilot program, while a positive step, does not go far enough toward resolving immediate investor harm. Since the pilot program will include just a fraction of the arbitration cases that will occur during the next two years, only a select few customers will realize the benefit of having a panel where there is no mandatory industry representative, but thousands of others will not have that choice. Investor protection demands that all investors be given that choice immediately.
“A recent study released by the Securities Industry Conference on Arbitration (SICA) found that most investors view the current securities arbitration forum as biased and unfair. Because the arbitration system has evolved into a mandatory condition imposed by the industry, it is imperative that the system of dispute resolution be fair, transparent and free from bias. Even without this pilot, we would hope that FINRA would agree that the immediate removal of the mandatory industry arbitrator is a critical step toward restoring investor confidence in the fairness of the securities arbitration process.”
For details, please click here.
Secondary Dealers Not Excluded from Auction Rate Securities Probe
Christopher Cox, chairman of the Securities and Exchange Commission (SEC), has passed his verdict after investigations into the collapse of the auction rate securities market, Cox has determined that the blame will indeed extend beyond major Wall Street investment banks to include secondary dealers who sold the securities.
Cox’s clarification follows recent criticism by smaller brokerages like Fidelity investments and Oppenheimer & Co., which contend they should not be obligated to buy back billions of dollars of auction rate securities from investors based on the fact they didn’t underwrite the securities nor run the auctions for the securities. The big investment banks did.
Moreover, the brokerages say that when it came to knowing about potential problems brewing in the auction rate market, they were kept in the dark right along with investors.
The finger pointing over who’s at fault over auction rate securities has gained momentum in the past week after several of Wall Street’s biggest players - including UBS, Citigroup, JP Morgan Chase and Wachovia - agreed to settle claims of auction rate fraud with New York Attorney General Andrew Cuomo and buy back more than $42 billion of auction rate securities from their customers. Now, smaller brokerages say even though some of Wall Street’s larger investment banks are agreeing to Cuomos terms, it doesn’t mean they need to follow suit.
As reported Aug. 19, 2008 in the Wall Street Journal, secondary dealers of auction rate securities like Fidelity and Oppenheimer believe regulators should put the onus of blame for the auction markets demise - as well as any agreements to buy back auction rate securities from investors - solely on the underwriters of the securities and the controllers of the auctions: Wall Street investment banks. None of the rest of the market knew about how auction dealers allegedly controlled the whole auction process for 25 years said Michael Decker, chief executive of the association that represents regional brokerages, in the Wall Street Journal article.
Whether regional brokers had prior knowledge about the inner workings of the auction rate process may be irrelevant. At the heart of the state and federal investigations regarding auction rate securities is the issue of whether the securities were presented and sold to investors as safe and liquid when, in fact, they were not. In many cases, investors contend brokers sold them the instruments as cash alternatives - investments they could cash out of at will.
When the market collapsed in February of 2008 and the investments became illiquid investors learned their cash alternative investments strayed far from the promises of brokers. Moving forward, the issue of culpability for smaller brokerage houses will only be determined through further investigations. Interestingly, several of the brokerages mentioned in the Aug. 19, 2008 Wall Street Journal story, including Oppenheimer, E-Trade Financial Corp. and Fidelity Investments, have refused to specify the dollar amount in auction rate securities their clients held.
Cox’s clarification follows recent criticism by smaller brokerages like Fidelity investments and Oppenheimer & Co., which contend they should not be obligated to buy back billions of dollars of auction rate securities from investors based on the fact they didn’t underwrite the securities nor run the auctions for the securities. The big investment banks did.
Moreover, the brokerages say that when it came to knowing about potential problems brewing in the auction rate market, they were kept in the dark right along with investors.
The finger pointing over who’s at fault over auction rate securities has gained momentum in the past week after several of Wall Street’s biggest players - including UBS, Citigroup, JP Morgan Chase and Wachovia - agreed to settle claims of auction rate fraud with New York Attorney General Andrew Cuomo and buy back more than $42 billion of auction rate securities from their customers. Now, smaller brokerages say even though some of Wall Street’s larger investment banks are agreeing to Cuomos terms, it doesn’t mean they need to follow suit.
As reported Aug. 19, 2008 in the Wall Street Journal, secondary dealers of auction rate securities like Fidelity and Oppenheimer believe regulators should put the onus of blame for the auction markets demise - as well as any agreements to buy back auction rate securities from investors - solely on the underwriters of the securities and the controllers of the auctions: Wall Street investment banks. None of the rest of the market knew about how auction dealers allegedly controlled the whole auction process for 25 years said Michael Decker, chief executive of the association that represents regional brokerages, in the Wall Street Journal article.
Whether regional brokers had prior knowledge about the inner workings of the auction rate process may be irrelevant. At the heart of the state and federal investigations regarding auction rate securities is the issue of whether the securities were presented and sold to investors as safe and liquid when, in fact, they were not. In many cases, investors contend brokers sold them the instruments as cash alternatives - investments they could cash out of at will.
When the market collapsed in February of 2008 and the investments became illiquid investors learned their cash alternative investments strayed far from the promises of brokers. Moving forward, the issue of culpability for smaller brokerage houses will only be determined through further investigations. Interestingly, several of the brokerages mentioned in the Aug. 19, 2008 Wall Street Journal story, including Oppenheimer, E-Trade Financial Corp. and Fidelity Investments, have refused to specify the dollar amount in auction rate securities their clients held.
Tuesday, August 19, 2008
Auction Rate Securities Cause Uproar among Brokers
Time to think again, it seems as though the auction rate securities ordeal is nowhere near an end - and investors who had been pitched the instruments as cash alternatives will not get their money back.
In the past two weeks, New York Attorney General Andrew Cuomo has succeeded in getting several major Wall Street players - Citigroup, UBS, JP Morgan Chase, Morgan Stanley and Wachovia, among them - to pony up billions of dollars to buy back the auction rate securities they sold to investors. The catch is in the fine print of the agreements orchestrated by Cuomo: The Wall Street firms only have to pay back the auction rate bonds they sold, not the billions more they actually underwrote.
That small detail could have big repercussions for millions of investors holding illiquid auction rate securities bought through mutual fund firms or individual brokers. As reported Aug. 18, 2008 on CNBC.com, a number of regional firms and discount brokerage houses say the blame for the auction rate securities scandal rests firmly with the major underwriters of the securities - Wall Street powerhouse firms that decided to no longer support the auction rate market and dropped out entirely in February.
According to the CNBC article, the Regional Bond Dealers Association, a brokerage trade association, has written a letter to Cuomo and the Securities and Exchange Commission (SEC) in which it claims the real auction rate fraud was conducted by the underwriters of auction rate securities. The Wall Street firms dominated the auction rate market, the letter says, and sold the auction bonds to regional firms and discount brokerages with the promise to hold auctions. The brokers who sold the securities to customers contend they acted in good faith and relied on information about liquidity risks from those underwriters.
And that’s where problems arise. Many regional firms and brokers do not have the financial prowess of major Wall Street banks. Forcing them to buy back auction rate securities from investors at par value could financially bury many of them. The Regional Bond Dealers Association, in its letter to the SEC, said that the only practical solution for making investors whole is to include ARS customers of distributing firms in the settlements with large lead managers.
In the past two weeks, New York Attorney General Andrew Cuomo has succeeded in getting several major Wall Street players - Citigroup, UBS, JP Morgan Chase, Morgan Stanley and Wachovia, among them - to pony up billions of dollars to buy back the auction rate securities they sold to investors. The catch is in the fine print of the agreements orchestrated by Cuomo: The Wall Street firms only have to pay back the auction rate bonds they sold, not the billions more they actually underwrote.
That small detail could have big repercussions for millions of investors holding illiquid auction rate securities bought through mutual fund firms or individual brokers. As reported Aug. 18, 2008 on CNBC.com, a number of regional firms and discount brokerage houses say the blame for the auction rate securities scandal rests firmly with the major underwriters of the securities - Wall Street powerhouse firms that decided to no longer support the auction rate market and dropped out entirely in February.
According to the CNBC article, the Regional Bond Dealers Association, a brokerage trade association, has written a letter to Cuomo and the Securities and Exchange Commission (SEC) in which it claims the real auction rate fraud was conducted by the underwriters of auction rate securities. The Wall Street firms dominated the auction rate market, the letter says, and sold the auction bonds to regional firms and discount brokerages with the promise to hold auctions. The brokers who sold the securities to customers contend they acted in good faith and relied on information about liquidity risks from those underwriters.
And that’s where problems arise. Many regional firms and brokers do not have the financial prowess of major Wall Street banks. Forcing them to buy back auction rate securities from investors at par value could financially bury many of them. The Regional Bond Dealers Association, in its letter to the SEC, said that the only practical solution for making investors whole is to include ARS customers of distributing firms in the settlements with large lead managers.
Auction Rate-Securities: Repurchases Do Not Create A Significant Financial Impact on Wall Street's Bottom Line
The announced repurchase of some $35 billion in auction rate securities by major Wall Street firms is not expected to have a material effect on most of the companies.
Citigroup Inc. and Merrill Lynch & Co. Inc., both of New York, UBS AG of Zurich, Switzerland, and Wachovia Corp. of Charlotte, N.C., have all said their announced buybacks will not create major financial strains.
“Wachovia does not currently expect that the purchase of ARS ... will have a material effect on capital, liquidity or overall financial results,” the bank said in announcing its settlement with regulators last Friday.
Citigroup said in a statement that the capital effect of bringing an estimated $7.3 billion onto its balance sheet “is expected to be de minimis.”
In its second-quarter financial report, released this month, UBS said its $8.3 billion buyback will create an “immaterial increase in risk-weighted assets” on its balance sheet, although the firm will be taking on other risks with its buyback.
Citigroup, Wachovia and UBS are taking pretax charges to cover estimated market losses and other costs related to repurchasing ARS.
Merrill has not yet announced any charge-offs.
Citigroup Inc. and Merrill Lynch & Co. Inc., both of New York, UBS AG of Zurich, Switzerland, and Wachovia Corp. of Charlotte, N.C., have all said their announced buybacks will not create major financial strains.
“Wachovia does not currently expect that the purchase of ARS ... will have a material effect on capital, liquidity or overall financial results,” the bank said in announcing its settlement with regulators last Friday.
Citigroup said in a statement that the capital effect of bringing an estimated $7.3 billion onto its balance sheet “is expected to be de minimis.”
In its second-quarter financial report, released this month, UBS said its $8.3 billion buyback will create an “immaterial increase in risk-weighted assets” on its balance sheet, although the firm will be taking on other risks with its buyback.
Citigroup, Wachovia and UBS are taking pretax charges to cover estimated market losses and other costs related to repurchasing ARS.
Merrill has not yet announced any charge-offs.
Monday, August 18, 2008
Stock Exchanges Improve Insider Trading Oversight
Ten American exchanges have agreed to give two market watchdogs more power to ferret out insider trading regardless of where it occurs in the United States, regulators said Wednesday.
Under the proposal, the exchanges will give NYSE Regulation, which oversees the New York Stock Exchange, and the Financial Industry Regulatory Authority, which is known as Finra and is responsible for Nasdaq, the responsibility for detecting illegal trading.
The move aims to improve the surveillance, investigation and enforcement of fraudulent trading in equities securities.
Each exchange is now responsible for monitoring trading on its market as well as any investigations and enforcement actions.
The deal between NYSE Regulation, Finra and the exchanges is subject to approval from the Securities and Exchange Commission, and has been submitted to the S.E.C.
Under the proposal, the exchanges will give NYSE Regulation, which oversees the New York Stock Exchange, and the Financial Industry Regulatory Authority, which is known as Finra and is responsible for Nasdaq, the responsibility for detecting illegal trading.
The move aims to improve the surveillance, investigation and enforcement of fraudulent trading in equities securities.
Each exchange is now responsible for monitoring trading on its market as well as any investigations and enforcement actions.
The deal between NYSE Regulation, Finra and the exchanges is subject to approval from the Securities and Exchange Commission, and has been submitted to the S.E.C.
Auction Rate Securities Settlements Exclude Some Holders
The New York State Attorney General's effort to force buybacks by Wall Street banks and brokers of auction-rate securities may not help some individual and institutional investors.
The New York AG reached agreements with Citigroup Inc., UBS AG, Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp. to begin buying back $42 billion of the debt they sold directly to individuals. The accords don't extend to investors holding most of the remaining $160 billion bought through mutual fund firms or brokers that didn't underwrite the debt.
Investors have been stuck in the securities, which are long-term debt that have interest rates typically set every seven, 28 or 35 days through periodic auctions, since the market collapsed in February. Dealers, who for two decades bought debt that went unsold at auctions, suddenly pulled back because of widening credit-market losses.
The market has shrunk to about $200 billion from $330 billion as borrowers refinanced the securities using other types of debt. Individuals are the biggest holders, followed by publicly traded companies, which own about $32 billion, according to Pluris Valuation Advisors LLC in New York.
The New York AG reached agreements with Citigroup Inc., UBS AG, Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp. to begin buying back $42 billion of the debt they sold directly to individuals. The accords don't extend to investors holding most of the remaining $160 billion bought through mutual fund firms or brokers that didn't underwrite the debt.
Investors have been stuck in the securities, which are long-term debt that have interest rates typically set every seven, 28 or 35 days through periodic auctions, since the market collapsed in February. Dealers, who for two decades bought debt that went unsold at auctions, suddenly pulled back because of widening credit-market losses.
The market has shrunk to about $200 billion from $330 billion as borrowers refinanced the securities using other types of debt. Individuals are the biggest holders, followed by publicly traded companies, which own about $32 billion, according to Pluris Valuation Advisors LLC in New York.
Sunday, August 17, 2008
Merrill to face legal action for Auction Rate Securities Sale
New York Attorney General Andrew Cuomo says he will send a letter to Merrill Lynch & Co. notifying the investment bank it will commence a legal action against it as part of wide-ranging investigation into the collapse of the auction-rate securities market.
Cuomo announced his plans in a conference call with reporters Friday morning.
Five banks have already settled with the attorney general's office and other state regulators, including UBS AG, Citigroup Inc., Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp. The banks agreed to buy the securities back from investors.
Auction-rate securities are investments that resembled corporate debt, except the interest rates were reset at regular auctions.
The market for the securities collapsed in February amid deterioration in the broader credit markets.
Cuomo announced his plans in a conference call with reporters Friday morning.
Five banks have already settled with the attorney general's office and other state regulators, including UBS AG, Citigroup Inc., Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp. The banks agreed to buy the securities back from investors.
Auction-rate securities are investments that resembled corporate debt, except the interest rates were reset at regular auctions.
The market for the securities collapsed in February amid deterioration in the broader credit markets.
Saturday, August 16, 2008
Jefferson County Bonds on Verge of Default
U.S. investors were solicited to purchase $3.2 billion of Jefferson County bonds by stockbrokers and financial advisors at firms like JP Morgan, Bank of America, Bear Stearns and Lehman Brothers. These investments were pitched to investors as ultra safe, triple AAA rated bonds that were one of the safest investments one could purchase. The bonds were portrayed as insured and only slightly riskier than a money market fund.
Jefferson County, because of misleading and deceptive representations made by brokers at JP Morgan, Bank of America, Bear Stearns and Lehman Brothers, were sold complex investments that caused massive losses to the retail investors at these firms. Stockbrokers and financial advisors at these firms then turned around and pitched these investments to firm clients as ultra safe, ultra secure, triple A rated bonds.
Jefferson County, because of misleading and deceptive representations made by brokers at JP Morgan, Bank of America, Bear Stearns and Lehman Brothers, were sold complex investments that caused massive losses to the retail investors at these firms. Stockbrokers and financial advisors at these firms then turned around and pitched these investments to firm clients as ultra safe, ultra secure, triple A rated bonds.
Securities Regulators Announce Settlement With Wachovia Over Sale of Auction Rate Securities
WASHINGTON, D.C. August 15, 2008 — Karen Tyler, President of the North American Securities Administrators Association (NASAA), today announced that a settlement in principle has been reached between Wachovia Securities and state and federal securities regulators. The settlement will provide thousands of Wachovia clients with access to billions of dollars in funds that have been frozen in the auction rate securities market (ARS).
The agreement follows an investigation led by the Office of the Missouri Secretary of State into complaints from investors that Wachovia misled them by portraying ARS securities as cash equivalents. The ARS markets froze in February this year, leaving thousands of investors across the country without access to their money.
“This settlement is yet another important step in our ongoing effort to make sure that investors across the country quickly regain access to their funds that were placed in auction rate securities,” said Tyler. “Missouri Secretary of State Robin Carnahan and her staff in the Securities Division deserve enormous credit for spearheading the investigation and leading the negotiations that resulted in an excellent settlement.”
Under the terms of the agreement announced today, Wachovia will repurchase illiquid ARS securities from all non-profit charities, as well as all individuals and businesses with account or household values up to $10 million, no later than November 28, 2008. All other investors will be able to redeem their ARS securities no later than June 30, 2009.
Wachovia will also:
Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed in February 2008;
Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds, in which Wachovia will not contest its liability related to the sale of ARS securities; and
Reimburse all refinancing fees to municipal issuers who issued auction rate securities through Wachovia since August 1, 2007, and who refinanced those securities after the market failed.
In addition, as part of the settlement, Wachovia will pay a $50 million penalty to be apportioned among the states.
“Today’s settlement is a major step towards making these investors whole,” Carnahan said. “I have received hundreds of calls from Missourians and investors around the nation who need their money to make medical payments, run their businesses, or retire as planned. I am pleased that six months of uncertainty and worry is over and that these investors will soon get their money back.”
Tyler and Carnahan both thank the New York Attorney General for their efforts in achieving today’s settlement, as well as the enforcement staff of the Securities and Exchange Commission for their cooperation in the auction rate securities investigations.
The investigation into Wachovia’s role in the marketing of ARS securities is part of a larger state-led effort to address problems in connection with ARS securities. Earlier this year, state offices began receiving complaints from Main Street investors throughout the country. As a result, in April, NASAA announced the formation of a multi-state Task Force, comprised of securities regulators in 12 states, to investigate whether the nation’s prominent Wall Street firms had systematically misled investors when placing them in ARS securities.
The members of the NASAA Task Force are continuing their investigations into possible misconduct by other firms.
The agreement follows an investigation led by the Office of the Missouri Secretary of State into complaints from investors that Wachovia misled them by portraying ARS securities as cash equivalents. The ARS markets froze in February this year, leaving thousands of investors across the country without access to their money.
“This settlement is yet another important step in our ongoing effort to make sure that investors across the country quickly regain access to their funds that were placed in auction rate securities,” said Tyler. “Missouri Secretary of State Robin Carnahan and her staff in the Securities Division deserve enormous credit for spearheading the investigation and leading the negotiations that resulted in an excellent settlement.”
Under the terms of the agreement announced today, Wachovia will repurchase illiquid ARS securities from all non-profit charities, as well as all individuals and businesses with account or household values up to $10 million, no later than November 28, 2008. All other investors will be able to redeem their ARS securities no later than June 30, 2009.
Wachovia will also:
Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed in February 2008;
Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds, in which Wachovia will not contest its liability related to the sale of ARS securities; and
Reimburse all refinancing fees to municipal issuers who issued auction rate securities through Wachovia since August 1, 2007, and who refinanced those securities after the market failed.
In addition, as part of the settlement, Wachovia will pay a $50 million penalty to be apportioned among the states.
“Today’s settlement is a major step towards making these investors whole,” Carnahan said. “I have received hundreds of calls from Missourians and investors around the nation who need their money to make medical payments, run their businesses, or retire as planned. I am pleased that six months of uncertainty and worry is over and that these investors will soon get their money back.”
Tyler and Carnahan both thank the New York Attorney General for their efforts in achieving today’s settlement, as well as the enforcement staff of the Securities and Exchange Commission for their cooperation in the auction rate securities investigations.
The investigation into Wachovia’s role in the marketing of ARS securities is part of a larger state-led effort to address problems in connection with ARS securities. Earlier this year, state offices began receiving complaints from Main Street investors throughout the country. As a result, in April, NASAA announced the formation of a multi-state Task Force, comprised of securities regulators in 12 states, to investigate whether the nation’s prominent Wall Street firms had systematically misled investors when placing them in ARS securities.
The members of the NASAA Task Force are continuing their investigations into possible misconduct by other firms.
Evergreen Sale Considered by Wachovia
Wachovia may not be keen to sell its asset management unit, Evergreen Investments, but the fourth-largest U.S. bank may do just that if the credit crisis worsens and its capital needs increase.
Robert Steel, hired last month from the U.S. Treasury to replace the ousted Ken Thompson as Wachovia chief executive, has said he might sell assets to help generate $5 billion of fresh capital by the end of 2009.
In an August 5 meeting, management including Steel said a sale of Evergreen was unlikely, UBS analyst Matthew O'Connor wrote. But experts said Steel could reconsider.
Bankers were split on how much the unit, which manages $245.9 billion, was worth, with one saying it could be sold in a multibillion-dollar transaction.
Robert Steel, hired last month from the U.S. Treasury to replace the ousted Ken Thompson as Wachovia chief executive, has said he might sell assets to help generate $5 billion of fresh capital by the end of 2009.
In an August 5 meeting, management including Steel said a sale of Evergreen was unlikely, UBS analyst Matthew O'Connor wrote. But experts said Steel could reconsider.
Bankers were split on how much the unit, which manages $245.9 billion, was worth, with one saying it could be sold in a multibillion-dollar transaction.
Friday, August 15, 2008
Stephen Dunbar Barred by FINRA
Stephen Patrick Dunbar (CRD #2041644, Registered Representative, Atlanta, Georgia) was barred from association with any FINRA member in any capacity. The sanction was imposed by the National Adjudicatory Council (NAC) following appeal of a hearing decision. The sanction was based on findings that Dunbar engaged in unsuitable trading in public customers’ accounts. The findings stated that,in an effort to conceal the unsuitable trading in the accounts, Dunbar provided the customers with false andmisleading account summaries. The findings also stated that Dunbar exercised discretion in the customers’ accounts without written authorization.
FINRA Case #C0720050050)
FINRA Case #C0720050050)
Jumbo Loans To Be Included In Mortgage Backed Pools
House Financial Services Chairman Barney Frank, D-Mass., praised the Securities Industry and Financial Markets Association for its decision Thursday to allow larger loans to be included in to-be-announced mortgage-backed securities.
The move came on the heels of a letter Frank and Rep. Gary Miller, R-Calif., sent Wednesday to SIFMA, the industry trade group, urging it to permit the co-mingling of all conforming mortgages in to-be-announced, or TBA, pools sold to investors.
"I appreciate the action taken today by SIFMA allowing newly originated high-cost area loans to be included in TBA mortgage pools," Frank said. "This move should help to reduce the cost of mortgages to borrowers in high-cost areas without any negative effect on rates for smaller loans."
The TBA market is a crucial source of liquidity for the so-called conforming loans that Fannie Mae (FNM) and Freddie Mac (FRE) can buy. It allows lenders to sell loans in advance of originating them, which helps them determine the rate charged to borrowers.
SIFMA had resisted calls to include the bigger mortgages in TBA pools after Congress earlier this year temporarily raised the caps on conforming loans to nearly $730,000 from $417,000.
It cited concerns about disrupting an already jittery secondary mortgage market, particularly since the new limits were temporary.
However, Congress has now lifted the loan limits permanently to $625,500 as part of a new federal law enacted earlier this month.
In their letter, Frank and Miller said they "understood SIFMA's decision to exclude the larger loans" from the TBA market.
The move came on the heels of a letter Frank and Rep. Gary Miller, R-Calif., sent Wednesday to SIFMA, the industry trade group, urging it to permit the co-mingling of all conforming mortgages in to-be-announced, or TBA, pools sold to investors.
"I appreciate the action taken today by SIFMA allowing newly originated high-cost area loans to be included in TBA mortgage pools," Frank said. "This move should help to reduce the cost of mortgages to borrowers in high-cost areas without any negative effect on rates for smaller loans."
The TBA market is a crucial source of liquidity for the so-called conforming loans that Fannie Mae (FNM) and Freddie Mac (FRE) can buy. It allows lenders to sell loans in advance of originating them, which helps them determine the rate charged to borrowers.
SIFMA had resisted calls to include the bigger mortgages in TBA pools after Congress earlier this year temporarily raised the caps on conforming loans to nearly $730,000 from $417,000.
It cited concerns about disrupting an already jittery secondary mortgage market, particularly since the new limits were temporary.
However, Congress has now lifted the loan limits permanently to $625,500 as part of a new federal law enacted earlier this month.
In their letter, Frank and Miller said they "understood SIFMA's decision to exclude the larger loans" from the TBA market.
Evergreen Investments to be sold by Wachovia as Part of Auction Rate Deal
Following a streak of bad luck, staggering losses tied to mortgage debt, and massive job cuts, Wachovia could be forced to sell its asset management unit, Evergreen Investments, to raise much-needed capital.
Speculation of the Evergreen Investments sale first surfaced following an announcement that the nation’s fourth-largest bank has agreed to buy back $8.5 billion in auction rate securities as part of a fraud investigation led by Missouri Secretary of State Robin Carnahan.
Wachovia’s agreement with Carnahan, as well as New York Attorney General Andrew Cuomo and the Securities and Exchange Commission (SEC), is the latest in several recent settlements by Wall Street investment banks and securities firms as they try to put claims of auction rate abuses behind them. As part of its deal, Wachovia will pay a $50 million fine, and must buy back all illiquid auction rate securities from retail customers, charities and small businesses by Nov. 28, 2009
In addition, Wachovia is required to make no-interest loans immediately available for any investor who needs liquidity before the auction buyouts are finalized.
In the past week-and-a-half, Citigroup, UBS, JP Morgan Chase and Morgan Stanley all have agreed to repurchase a combined total of $32.6 billion in auction rate securities and pay fines of more than $300 million. As with a number of Wall Street investment banks, the collapse of the auction rate securities market in February created a public relations nightmare for Wachovia. In July, after being deluged with complaints from investors who said Wachovia brokers had intentionally misled them about the liquidity risks of the auction rate bonds, securities regulators from several states launched a surprise raid at the St. Louis headquarters of Wachovia Securities.
Trouble over auction rate securities sales may be minuscule, however, compared to Wachovia’s other problems. On Aug. 11, 2008 the bank was forced to revise its second-quarter loss from the prior month to $8.92 billion from $8.66 billion. It is the worst loss in the company’s history. Wachovia also plans to cut nearly 7,000 jobs, 600 more than it said three weeks ago.
Wachovia attributes much of its recent difficulties to the disastrous purchase of Golden West Financial, a California mortgage company specializing in loans that enabled borrowers to pay less than their full mortgage payment. Wachovia purchased Golden West in 2006 for $25 billion. The acquisition of Golden West turned out to be anything but golden for Wachovia following last year’s collapse of the housing market. Wachovia’s stock is down 53 percent this year.
And now Evergreen Investments potentially could be on the selling block. Evergreen made headlines in June, when it announced plans to liquidate its Ultra Short Opportunities Fund. The fund, which had more than 70% of its assets tied to toxic subprime mortgages, lost 20% over a period of 16 days. In 2008, it was named as one of the two worst-performing ultra short bond funds of the year.
Several investors have filed lawsuits against Evergreen and Wachovia, alleging that the fund’s managers withheld information from them about the extent of investments made by the fund in risky mortgage-backed securities. Several investors have since filed lawsuits against Evergreen and Wachovia.
Speculation of the Evergreen Investments sale first surfaced following an announcement that the nation’s fourth-largest bank has agreed to buy back $8.5 billion in auction rate securities as part of a fraud investigation led by Missouri Secretary of State Robin Carnahan.
Wachovia’s agreement with Carnahan, as well as New York Attorney General Andrew Cuomo and the Securities and Exchange Commission (SEC), is the latest in several recent settlements by Wall Street investment banks and securities firms as they try to put claims of auction rate abuses behind them. As part of its deal, Wachovia will pay a $50 million fine, and must buy back all illiquid auction rate securities from retail customers, charities and small businesses by Nov. 28, 2009
In addition, Wachovia is required to make no-interest loans immediately available for any investor who needs liquidity before the auction buyouts are finalized.
In the past week-and-a-half, Citigroup, UBS, JP Morgan Chase and Morgan Stanley all have agreed to repurchase a combined total of $32.6 billion in auction rate securities and pay fines of more than $300 million. As with a number of Wall Street investment banks, the collapse of the auction rate securities market in February created a public relations nightmare for Wachovia. In July, after being deluged with complaints from investors who said Wachovia brokers had intentionally misled them about the liquidity risks of the auction rate bonds, securities regulators from several states launched a surprise raid at the St. Louis headquarters of Wachovia Securities.
Trouble over auction rate securities sales may be minuscule, however, compared to Wachovia’s other problems. On Aug. 11, 2008 the bank was forced to revise its second-quarter loss from the prior month to $8.92 billion from $8.66 billion. It is the worst loss in the company’s history. Wachovia also plans to cut nearly 7,000 jobs, 600 more than it said three weeks ago.
Wachovia attributes much of its recent difficulties to the disastrous purchase of Golden West Financial, a California mortgage company specializing in loans that enabled borrowers to pay less than their full mortgage payment. Wachovia purchased Golden West in 2006 for $25 billion. The acquisition of Golden West turned out to be anything but golden for Wachovia following last year’s collapse of the housing market. Wachovia’s stock is down 53 percent this year.
And now Evergreen Investments potentially could be on the selling block. Evergreen made headlines in June, when it announced plans to liquidate its Ultra Short Opportunities Fund. The fund, which had more than 70% of its assets tied to toxic subprime mortgages, lost 20% over a period of 16 days. In 2008, it was named as one of the two worst-performing ultra short bond funds of the year.
Several investors have filed lawsuits against Evergreen and Wachovia, alleging that the fund’s managers withheld information from them about the extent of investments made by the fund in risky mortgage-backed securities. Several investors have since filed lawsuits against Evergreen and Wachovia.
Massachusetts Accuses UBS in Auction Rate Investigation
UBS AG was accused by New Hampshire securities regulators of failing to inform a nonprofit student-loan corporation that the auction-rate market where the agency raised $1.5 billion was on the verge of collapse.
Regulators in Concord allege UBS was moving to withdraw its support for the long-term debt with rates reset through periodic bidding, even as the Zurich-based bank encouraged New Hampshire Higher Education Loan Corp. to extend its commitment to the market and entice buyers by raising limits on interest rates.
New Hampshire's regulatory action is the first to focus on the plight of borrowers who depended on selling auction-rate debt to raise funding. They were hit by rising costs after the market froze in mid-February when dealers stopped buying unwanted securities at auction. UBS and other banks this month agreed in other settlements to buy back holdings from individual investors.
Federal and state regulators are probing the sale of auction-rate bonds across the securities industry after the $330 billion market seized up six months ago, leaving holders unable to sell investments pitched to them as cash equivalents and sending debt costs soaring for some issuers.
Settlements with UBS and New York-based Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley have focused on remedying small investors' inability to sell, with more limited provisions for institutional buyers and issuers. Besides student-loan companies, state and local governments as well as closed-end mutual funds used the auction-rate market to borrow.
UBS underwrote about $25 billion of the roughly $80 billion student-loan-backed debt subject to periodic auctions, "more than any other broker-dealer on Wall Street,'' according to the staff petition for relief released yesterday by the New Hampshire Bureau of Securities Regulation.
Regulators in Concord allege UBS was moving to withdraw its support for the long-term debt with rates reset through periodic bidding, even as the Zurich-based bank encouraged New Hampshire Higher Education Loan Corp. to extend its commitment to the market and entice buyers by raising limits on interest rates.
New Hampshire's regulatory action is the first to focus on the plight of borrowers who depended on selling auction-rate debt to raise funding. They were hit by rising costs after the market froze in mid-February when dealers stopped buying unwanted securities at auction. UBS and other banks this month agreed in other settlements to buy back holdings from individual investors.
Federal and state regulators are probing the sale of auction-rate bonds across the securities industry after the $330 billion market seized up six months ago, leaving holders unable to sell investments pitched to them as cash equivalents and sending debt costs soaring for some issuers.
Settlements with UBS and New York-based Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley have focused on remedying small investors' inability to sell, with more limited provisions for institutional buyers and issuers. Besides student-loan companies, state and local governments as well as closed-end mutual funds used the auction-rate market to borrow.
UBS underwrote about $25 billion of the roughly $80 billion student-loan-backed debt subject to periodic auctions, "more than any other broker-dealer on Wall Street,'' according to the staff petition for relief released yesterday by the New Hampshire Bureau of Securities Regulation.
Thursday, August 14, 2008
Morgan Stanley, JPMorgan Settle Auction Rate Probe
Morgan Stanley and JPMorgan Chase & Co. agreed to pay fines and buy back auction-rate securities that state regulators said were fraudulently sold to investors.
The New York-based banks, among the largest underwriters of the securities, will pay fines totaling $60 million and redeem at face value more than $7 billion of auction-rate debt sold to individuals, charities and small businesses under a settlement with New York Attorney General Andrew Cuomo and a group of other state regulators, according to terms announced yesterday.
The agreements are the latest arising from a nationwide investigation of how auction-rate securities were marketed before the $330 billion market collapsed in February. Investors purchased the debt on the advice of bankers who pitched it as a cash equivalent, regulators said, only to find they couldn't sell the bonds as demand dried up.
The New York-based banks, among the largest underwriters of the securities, will pay fines totaling $60 million and redeem at face value more than $7 billion of auction-rate debt sold to individuals, charities and small businesses under a settlement with New York Attorney General Andrew Cuomo and a group of other state regulators, according to terms announced yesterday.
The agreements are the latest arising from a nationwide investigation of how auction-rate securities were marketed before the $330 billion market collapsed in February. Investors purchased the debt on the advice of bankers who pitched it as a cash equivalent, regulators said, only to find they couldn't sell the bonds as demand dried up.
So far, Citigroup, UBS and Merrill Lynch all have agreed to repurchase billions of dollars of the now-illiquid auction rate securities, and with New York Attorney General Andrew Cuomo’s vigilant pursuit of Wall Street investment banks for their mishandling of auction rate securities sales Goldman Sachs might be next on his list.
So far, Citigroup, UBS and Merrill Lynch all have agreed to repurchase billions of dollars of the now-illiquid auction rate securities, and with New York Attorney General Andrew Cuomo’s vigilant pursuit of Wall Street investment banks for their mishandling of auction rate securities sales Goldman Sachs might be next on his list.
Other firms are said to be close to reaching similar settlements with state and federal regulators. Goldman Sachs, however, has remained silent on the auction rate securities issue. As reported Aug. 14, 2008 in the Wall Street Journal, Goldman is a major player in the auction rate arena. Between 2003 and 2007, the firm was the No. 5 underwriter of the instruments.
When the auction rate market came to an abrupt halt in February, following an exit by Wall Street firms like Goldman Sachs which stopped serving as buyers of the last resort for the securities, investors were suddenly left holding illiquid securities. Some of those investors are Goldman Sachs clients, and they want to know what the company plans to do about their situation.
Goldman’s clients could be in for a long wait. Despite disclosing back in April that it had received requests from various governmental agencies and self regulatory organizations for information relating to auction products and recent auction failures, Goldman has so far refused to settle the matter and, according to the Wall Street Journal article, has no intention to buy back clients’ auction rate paper.
The Wall Street Journal cites the case of Carl Everett, a Goldman Sachs client who rates the service at Goldman as top of the line - until now. Everett apparently has money tied up in auction rate securities, and faces the same situation as thousands of other investors: stuck with illiquid investments. Recent settlements by investment banks like Citigroup and UBS to resolve the matter focused on small investors, leaving wealthier investors like Everett, institutional clients and corporate buyers of auction rate securities out of the picture thus far. Everett says that on Aug. 9, 2008 he was told by Goldman Sachs that the company would not be buying back his auction rate securities.
“That’s disappointing to me - my expectation is high for the Goldman Sachs brand”, said Everett in the Wall Street Journal article. My expectation for that is they would honor their position and statement of these securities as cash and cash equivalents’. With Wall Street’s image already tattered and tarnished - some say beyond repair - Goldman Sachs might want to rethink its position in the days ahead.
Other firms are said to be close to reaching similar settlements with state and federal regulators. Goldman Sachs, however, has remained silent on the auction rate securities issue. As reported Aug. 14, 2008 in the Wall Street Journal, Goldman is a major player in the auction rate arena. Between 2003 and 2007, the firm was the No. 5 underwriter of the instruments.
When the auction rate market came to an abrupt halt in February, following an exit by Wall Street firms like Goldman Sachs which stopped serving as buyers of the last resort for the securities, investors were suddenly left holding illiquid securities. Some of those investors are Goldman Sachs clients, and they want to know what the company plans to do about their situation.
Goldman’s clients could be in for a long wait. Despite disclosing back in April that it had received requests from various governmental agencies and self regulatory organizations for information relating to auction products and recent auction failures, Goldman has so far refused to settle the matter and, according to the Wall Street Journal article, has no intention to buy back clients’ auction rate paper.
The Wall Street Journal cites the case of Carl Everett, a Goldman Sachs client who rates the service at Goldman as top of the line - until now. Everett apparently has money tied up in auction rate securities, and faces the same situation as thousands of other investors: stuck with illiquid investments. Recent settlements by investment banks like Citigroup and UBS to resolve the matter focused on small investors, leaving wealthier investors like Everett, institutional clients and corporate buyers of auction rate securities out of the picture thus far. Everett says that on Aug. 9, 2008 he was told by Goldman Sachs that the company would not be buying back his auction rate securities.
“That’s disappointing to me - my expectation is high for the Goldman Sachs brand”, said Everett in the Wall Street Journal article. My expectation for that is they would honor their position and statement of these securities as cash and cash equivalents’. With Wall Street’s image already tattered and tarnished - some say beyond repair - Goldman Sachs might want to rethink its position in the days ahead.
Auction Rate Probe Settled for Mega Banks Morgan Stanley, JP Morgan
The self-appointed cop of Wall Street, New York Attorney General Andrew Cuomo, Known for his aggressive efforts to right the wrongs of investment banks over deceptive sales of auction rate securities, has hailed another victory.
Two more Wall Street investment banks - JPMorgan Chase and Morgan Stanley- have agreed to Cuomo’s terms and will buy back the illiquid instruments from investors. The banks, which are two of the largest underwriters of auction rate securities, will pay fines totaling $60 million and redeem at face value more than $7 billion of auction rate securities sold to individual investors, charities and small to mid-sized businesses.
The agreement with Morgan Stanley, which is paying a $35 million penalty, and JPMorgan, a $25 million penalty, brings the total number of Wall Street firms to settle state investigations of fraudulent auction rate securities sales to four. Last week, Citigroup, followed by UBS, agreed to buy back nearly $30 billion of auction rate securities and pay fines of $250 million. Merrill Lynch later voluntarily said it would repurchase about $10 billion. In Merrill’s case, however, no deal was reached with state or federal regulators.
At the time that Citigroup agreed to settle with Cuomo and other state regulators and the Securities and Exchange Commission (SEC), Morgan Stanley said it would buy back $4.5 billion in auction rate securities. Cuomo immediately dismissed the offer as insufficient.
As part of the Aug. 14 agreement with JPMorgan and Morgan Stanley, JPMorgan will repurchase the auction rate securities it sold to nearly 10,000 clients by Nov. 12. In addition, the bank will buy back any securities sold by Bear Stearns, which it acquired in May.
Morgan Stanley will repurchase its securities by Dec. 11, 2008 About 20,000 customers are involved in that deal. As is the case with Citigroup and UBS, JPMorgan and Morgan Stanley did not admit or deny any wrongdoing over how they marketed or sold auction rate securities to investors. The SEC is not part of the settlement agreement with JPMorgan or Morgan Stanley.
30 Wall Street banks have found themselves under investigation as part of fact-finding mission into the alleged mishandling of auction rate dealings. Other states and the SEC are investigating the issue, as well.
Two more Wall Street investment banks - JPMorgan Chase and Morgan Stanley- have agreed to Cuomo’s terms and will buy back the illiquid instruments from investors. The banks, which are two of the largest underwriters of auction rate securities, will pay fines totaling $60 million and redeem at face value more than $7 billion of auction rate securities sold to individual investors, charities and small to mid-sized businesses.
The agreement with Morgan Stanley, which is paying a $35 million penalty, and JPMorgan, a $25 million penalty, brings the total number of Wall Street firms to settle state investigations of fraudulent auction rate securities sales to four. Last week, Citigroup, followed by UBS, agreed to buy back nearly $30 billion of auction rate securities and pay fines of $250 million. Merrill Lynch later voluntarily said it would repurchase about $10 billion. In Merrill’s case, however, no deal was reached with state or federal regulators.
At the time that Citigroup agreed to settle with Cuomo and other state regulators and the Securities and Exchange Commission (SEC), Morgan Stanley said it would buy back $4.5 billion in auction rate securities. Cuomo immediately dismissed the offer as insufficient.
As part of the Aug. 14 agreement with JPMorgan and Morgan Stanley, JPMorgan will repurchase the auction rate securities it sold to nearly 10,000 clients by Nov. 12. In addition, the bank will buy back any securities sold by Bear Stearns, which it acquired in May.
Morgan Stanley will repurchase its securities by Dec. 11, 2008 About 20,000 customers are involved in that deal. As is the case with Citigroup and UBS, JPMorgan and Morgan Stanley did not admit or deny any wrongdoing over how they marketed or sold auction rate securities to investors. The SEC is not part of the settlement agreement with JPMorgan or Morgan Stanley.
30 Wall Street banks have found themselves under investigation as part of fact-finding mission into the alleged mishandling of auction rate dealings. Other states and the SEC are investigating the issue, as well.
Wednesday, August 13, 2008
Closed-End Funds Might Suffer at the Hands of Early ARPS Redemption Plans
Some closed-end fund firms that were first on the scene to bail out investors by redeeming their auction rate preferred shares (ARPS) are now wondering if they did the right thing after several Wall Street investment banks recently agreed to buy back billions of dollars of illiquid auction rate securities from investors. Their puzzlement is because some closed-end funds resorted to using expensive lines of credit and syndicated bank loans to finance the redemptions of auction rate preferred shares for investors. Now, those funds could be facing potential financial issues of their own.
An August 12, 2008 article in the Wall Street Journal highlights the dilemma confronting closed-end funds that that initiated plans on their own to help disgruntled investors get rid of their auction securities when the market seized up six months ago. Auction rates securities are long-term bonds but act like short debt, with interest rates that reset at auctions held every seven, 14, 28 or 35 days. Issuers of auction rate securities include municipalities, student loan companies and closed-end funds, the latter of which uses preferred shares in auction bonds to provide create higher returns for common shareholders.
Following the collapse of the auction market in February, investors holding auction rate preferred shares, or ARPS, found themselves in the same boat as thousands of other auction rate investors: unable to access their cash. Some closed-end funds, including Nuveen Investments, BlackRock and Eaton Vance, were quick to address investors’ concerns about their illiquid, auction rate preferred shares and voluntarily began developed redemption plans. Other closed-end funds simply have waited it out.
At the start of 2008, closed-end funds had about $64 billion of auction rate securities outstanding. Now, the figure is closer to $40 billion, a 37% decline, including what various closed-end funds have said they plan to redeem, according to an August 11, 2008 article in Barron’s. Such help could come at a cost for a few funds, however.
As reported in the Wall Street Journal article, some of the auction-rate preferreds issued by closed-end funds were pitched by Wall Street investment banks - many of which are the same banks at the center of state and federal investigations for marketing auction rate securities to clients as cash-alternative investments. Last week, Citigroup, UBS and Merrill Lynch agreed to buy back nearly $40 billion in auction rate securities. The settlement offers are expected to create a template for other firms to make amends with auction rate customers and resolve alleged claims of auction rate deception.
The recent turn of events means closed-end funds that waited on the sidelines rather than seek alternative or expensive forms of financing to help their investors out of auction-rate preferreds might be better off now financially. Meanwhile, the auction rate scandal continues on.
On August 11, 2008 New York Attorney General Andrew M. Cuomo announced that his office is expanding its investigation, and notified JPMorgan Chase, Morgan Stanley and Wachovia that he will be looking into the their behavior and whether the firms sold auction rate securities to investors as safe, cash-equivalent products, when in fact the market was headed for disaster.
An August 12, 2008 article in the Wall Street Journal highlights the dilemma confronting closed-end funds that that initiated plans on their own to help disgruntled investors get rid of their auction securities when the market seized up six months ago. Auction rates securities are long-term bonds but act like short debt, with interest rates that reset at auctions held every seven, 14, 28 or 35 days. Issuers of auction rate securities include municipalities, student loan companies and closed-end funds, the latter of which uses preferred shares in auction bonds to provide create higher returns for common shareholders.
Following the collapse of the auction market in February, investors holding auction rate preferred shares, or ARPS, found themselves in the same boat as thousands of other auction rate investors: unable to access their cash. Some closed-end funds, including Nuveen Investments, BlackRock and Eaton Vance, were quick to address investors’ concerns about their illiquid, auction rate preferred shares and voluntarily began developed redemption plans. Other closed-end funds simply have waited it out.
At the start of 2008, closed-end funds had about $64 billion of auction rate securities outstanding. Now, the figure is closer to $40 billion, a 37% decline, including what various closed-end funds have said they plan to redeem, according to an August 11, 2008 article in Barron’s. Such help could come at a cost for a few funds, however.
As reported in the Wall Street Journal article, some of the auction-rate preferreds issued by closed-end funds were pitched by Wall Street investment banks - many of which are the same banks at the center of state and federal investigations for marketing auction rate securities to clients as cash-alternative investments. Last week, Citigroup, UBS and Merrill Lynch agreed to buy back nearly $40 billion in auction rate securities. The settlement offers are expected to create a template for other firms to make amends with auction rate customers and resolve alleged claims of auction rate deception.
The recent turn of events means closed-end funds that waited on the sidelines rather than seek alternative or expensive forms of financing to help their investors out of auction-rate preferreds might be better off now financially. Meanwhile, the auction rate scandal continues on.
On August 11, 2008 New York Attorney General Andrew M. Cuomo announced that his office is expanding its investigation, and notified JPMorgan Chase, Morgan Stanley and Wachovia that he will be looking into the their behavior and whether the firms sold auction rate securities to investors as safe, cash-equivalent products, when in fact the market was headed for disaster.
Early ARS Redemptions Could Hurt Closed-End Funds
When several Wall Street investment banks recently agreed to buy back billions of dollars of illiquid auction rate securities from investors, some closed-end fund firms that were first on the scene to bail out investors by redeeming their auction rate preferred shares (ARPS) are now wondering if they did the right thing.
Their puzzlement is because some closed-end funds resorted to using expensive lines of credit and syndicated bank loans to finance the redemptions of auction rate preferred shares for investors. Now, those funds could be facing potential financial issues of their own.
An Aug. 12, 2008 article in the Wall Street Journal highlights the dilemma confronting closed-end funds that that initiated plans on their own to help disgruntled investors get rid of their auction securities when the market seized up six months ago.
Auction rates securities are long-term bonds but act like short debt, with interest rates that reset at auctions held every seven, 14, 28 or 35 days. Issuers of auction rate securities include municipalities, student loan companies and closed-end funds, the latter of which uses preferred shares in auction bonds to provide create higher returns for common shareholders.
Following the collapse of the auction market in February, investors holding auction rate preferred shares, or ARPS, found themselves in the same boat as thousands of other auction rate investors: unable to access their cash. Some closed-end funds, including Nuveen Investments, Black Rock and Eaton Vance, were quick to address investors’ concerns about their illiquid, auction rate preferred shares and voluntarily began developed redemption plans. Other closed-end funds simply have waited it out.
At the start of 2008, closed-end funds had about $64 billion of auction rate securities outstanding. Now, the figure is closer to $40 billion, a 37% decline, including what various closed-end funds have said they plan to redeem, according to an Aug. 11 article in Barron’s.
Such help could come at a cost for a few funds, however. As reported in the Wall Street Journal article, some of the auction-rate preferred issued by closed-end funds were pitched by Wall Street investment banks - many of which are the same banks at the center of state and federal investigations for marketing auction rate securities to clients as cash-alternative investments. Last week, Citigroup, UBS and Merrill Lynch agreed to buy back nearly $40 billion in auction rate securities. The settlement offers are expected to create a template for other firms to make amends with auction rate customers and resolve alleged claims of auction rate deception.
The recent turn of events means closed-end funds that waited on the sidelines rather than seek alternative or expensive forms of financing to help their investors out of auction-rate preferreds might be better off now financially. Meanwhile, the auction rate scandal continues on. On Aug. 11, 2008 New York Attorney General Andrew M. Cuomo announced that his office is expanding its investigation, and notified JPMorgan Chase, Morgan Stanley and Wachovia that he will be looking into the their behavior and whether the firms sold auction rate securities to investors as safe, cash-equivalent products, when in fact the market was headed for disaster.
Their puzzlement is because some closed-end funds resorted to using expensive lines of credit and syndicated bank loans to finance the redemptions of auction rate preferred shares for investors. Now, those funds could be facing potential financial issues of their own.
An Aug. 12, 2008 article in the Wall Street Journal highlights the dilemma confronting closed-end funds that that initiated plans on their own to help disgruntled investors get rid of their auction securities when the market seized up six months ago.
Auction rates securities are long-term bonds but act like short debt, with interest rates that reset at auctions held every seven, 14, 28 or 35 days. Issuers of auction rate securities include municipalities, student loan companies and closed-end funds, the latter of which uses preferred shares in auction bonds to provide create higher returns for common shareholders.
Following the collapse of the auction market in February, investors holding auction rate preferred shares, or ARPS, found themselves in the same boat as thousands of other auction rate investors: unable to access their cash. Some closed-end funds, including Nuveen Investments, Black Rock and Eaton Vance, were quick to address investors’ concerns about their illiquid, auction rate preferred shares and voluntarily began developed redemption plans. Other closed-end funds simply have waited it out.
At the start of 2008, closed-end funds had about $64 billion of auction rate securities outstanding. Now, the figure is closer to $40 billion, a 37% decline, including what various closed-end funds have said they plan to redeem, according to an Aug. 11 article in Barron’s.
Such help could come at a cost for a few funds, however. As reported in the Wall Street Journal article, some of the auction-rate preferred issued by closed-end funds were pitched by Wall Street investment banks - many of which are the same banks at the center of state and federal investigations for marketing auction rate securities to clients as cash-alternative investments. Last week, Citigroup, UBS and Merrill Lynch agreed to buy back nearly $40 billion in auction rate securities. The settlement offers are expected to create a template for other firms to make amends with auction rate customers and resolve alleged claims of auction rate deception.
The recent turn of events means closed-end funds that waited on the sidelines rather than seek alternative or expensive forms of financing to help their investors out of auction-rate preferreds might be better off now financially. Meanwhile, the auction rate scandal continues on. On Aug. 11, 2008 New York Attorney General Andrew M. Cuomo announced that his office is expanding its investigation, and notified JPMorgan Chase, Morgan Stanley and Wachovia that he will be looking into the their behavior and whether the firms sold auction rate securities to investors as safe, cash-equivalent products, when in fact the market was headed for disaster.
Fed’s Lending Facility May be the Answer to ARS Buybacks
During normal circumstance, the Federal Reserve’s Primary Dealer Credit Facility (PDCF) is supposed to serve as a lender of the last resort’ - intended to keep the country’s financial markets functioning properly by providing loans to securities firms at a discount.
Now the Fed’s facility could be tapped for an entirely different purpose: lending money to investment banks that are buying back illiquid auction rate securities (ARS) from investors.
According to an August 11, 2008 article on Bloomberg.com, some analysts predict that Wall Street banks will turn to the Fed and its discount interest rates to finance the billions of dollars in auction securities they’ve agreed to repurchase, even using some of the ARS paper as collateral. Ultimately, banks might borrow upwards of $100 billion from the Federal Reserve, according to the article.
Last week, Citigroup and UBS became the first two firms to pony up approximately $30 billion to buy back auction rate securities from investors, as well as pay $250 million in fines. Merrill Lynch voluntarily announced its own auction rate plans shortly thereafter, agreeing to purchase $10 billion of the securities.
For the past five months, New York Attorney General Andrew Cuomo has led a nationwide investigation into the February collapse of the auction rate securities market, targeting Wall Street firms that allegedly deceived investors about ARS liquidity risks.
On August 11, 2008 Cuomo turned up the heat on his investigation by strongly encouraging three major underwriters of auction rate securities – JPMorgan Chase, Morgan Stanley and Wachovia Corp - to take immediate actions to resolve investigations into their auction rate securities sales. Later that same day, Morgan Stanley agreed to repurchase some $4.5 billion of auction rate securities from investors.
The offer, however, was disregarded by Cuomo, who called it too little, too late. Reportedly, Cuomo, along with multiple state regulators and the Securities and Exchange Commission (SEC) are close to reaching a settlement with a number of other banks.
Now the Fed’s facility could be tapped for an entirely different purpose: lending money to investment banks that are buying back illiquid auction rate securities (ARS) from investors.
According to an August 11, 2008 article on Bloomberg.com, some analysts predict that Wall Street banks will turn to the Fed and its discount interest rates to finance the billions of dollars in auction securities they’ve agreed to repurchase, even using some of the ARS paper as collateral. Ultimately, banks might borrow upwards of $100 billion from the Federal Reserve, according to the article.
Last week, Citigroup and UBS became the first two firms to pony up approximately $30 billion to buy back auction rate securities from investors, as well as pay $250 million in fines. Merrill Lynch voluntarily announced its own auction rate plans shortly thereafter, agreeing to purchase $10 billion of the securities.
For the past five months, New York Attorney General Andrew Cuomo has led a nationwide investigation into the February collapse of the auction rate securities market, targeting Wall Street firms that allegedly deceived investors about ARS liquidity risks.
On August 11, 2008 Cuomo turned up the heat on his investigation by strongly encouraging three major underwriters of auction rate securities – JPMorgan Chase, Morgan Stanley and Wachovia Corp - to take immediate actions to resolve investigations into their auction rate securities sales. Later that same day, Morgan Stanley agreed to repurchase some $4.5 billion of auction rate securities from investors.
The offer, however, was disregarded by Cuomo, who called it too little, too late. Reportedly, Cuomo, along with multiple state regulators and the Securities and Exchange Commission (SEC) are close to reaching a settlement with a number of other banks.
Tuesday, August 12, 2008
2008 2ND Quarter Results Amount to Huge Disappointment for Investment Bank UBS
Wary of mounting losses at the Swiss-based bank, clients apparently are walking away in droves. Total outflows in UBS’ wealth management units totaled nearly $40 billion in the second quarter - more than triple the amount in the first quarter - and contributed to second-quarter losses of $331 million for UBS. It is UBS’ fourth consecutive quarterly loss and negates a prediction of only a month ago when UBS said it expected to break-even in the second quarter.
Following the second-quarter losses and another set of write-downs totaling $5.1 billion, UBS says it is now planning to separate its investment banking and wealth management divisions into three autonomous units: wealth management, investment banking and asset management. In addition to the restructuring plans, UBS also announced the replacement of Chief Financial Officer Marco Suter with John Cryan, a British banker.
UBS’ disappointing second-quarter results follow a string of problems plaguing the beleaguered company. As one of the hardest hit by the subprime crisis, UBS has taken more than $43 billion in write-downs from exposure to risky mortgage assets so far this year. (Collectively, financial institutions worldwide report nearly $500 billion of write-downs related to the collapse of the U.S. subprime market.)
Included in UBS’ second-quarter results is a provision of $900 million for its Aug. 8 settlement with state and federal regulators over sales of auction rate securities. In agreeing to the settlement, UBS will buy back nearly $19 billion of the illiquid securities from retail clients. It also will pay a fine of $150 million.
The settlement with UBS is the largest to date in a broader investigation into the auction rate securities market and claims by investors that Wall Street investment banks and securities firms failed to provide adequate information about the inherent risks of the instruments. UBS also faces scrutiny from investigators who say the bank helped wealthy Americans evade U.S. taxes on offshore accounts. A congressional undeclared subcommittee looking into the matter stated that UBS had an estimated 19,000 accounts for U.S. citizens hiding $18 billion in assets from the Internal Revenue Service (IRS).
These and other issues hammered UBS’ stock prices this year, causing it to fall by almost two thirds since the beginning of 2008. Meanwhile, the damage to UBS’ reputation lingers on. And while its decision to depart from a one-bank strategy into three autonomous business units is a welcome sign for investors - and signals a nod to greater accountability and transparency - the fact remains: Reputation, once lost, can be very hard to reclaim.
Following the second-quarter losses and another set of write-downs totaling $5.1 billion, UBS says it is now planning to separate its investment banking and wealth management divisions into three autonomous units: wealth management, investment banking and asset management. In addition to the restructuring plans, UBS also announced the replacement of Chief Financial Officer Marco Suter with John Cryan, a British banker.
UBS’ disappointing second-quarter results follow a string of problems plaguing the beleaguered company. As one of the hardest hit by the subprime crisis, UBS has taken more than $43 billion in write-downs from exposure to risky mortgage assets so far this year. (Collectively, financial institutions worldwide report nearly $500 billion of write-downs related to the collapse of the U.S. subprime market.)
Included in UBS’ second-quarter results is a provision of $900 million for its Aug. 8 settlement with state and federal regulators over sales of auction rate securities. In agreeing to the settlement, UBS will buy back nearly $19 billion of the illiquid securities from retail clients. It also will pay a fine of $150 million.
The settlement with UBS is the largest to date in a broader investigation into the auction rate securities market and claims by investors that Wall Street investment banks and securities firms failed to provide adequate information about the inherent risks of the instruments. UBS also faces scrutiny from investigators who say the bank helped wealthy Americans evade U.S. taxes on offshore accounts. A congressional undeclared subcommittee looking into the matter stated that UBS had an estimated 19,000 accounts for U.S. citizens hiding $18 billion in assets from the Internal Revenue Service (IRS).
These and other issues hammered UBS’ stock prices this year, causing it to fall by almost two thirds since the beginning of 2008. Meanwhile, the damage to UBS’ reputation lingers on. And while its decision to depart from a one-bank strategy into three autonomous business units is a welcome sign for investors - and signals a nod to greater accountability and transparency - the fact remains: Reputation, once lost, can be very hard to reclaim.
Monday, August 11, 2008
Morgan Keegan Sold Toxic Debt To Seniors
The subprime securities that created carnage on Wall Street are bringing new pain to Main Street. Regulators in five states are investigating whether Memphis brokerage Morgan Keegan failed to disclose the risks of seven mutual funds stuffed with toxic debt and whether it inappropriately sold them to seniors and other small investors. Six lawsuits and dozens of arbitration cases claim it did.
Three years ago Katherine and Lester Poer needed a safe place to tuck away $250,000, part of a windfall from a land sale. With no investing experience, the retired couple from Gulf Shores, Ala., sought advice from Morgan Keegan, which manages $80 billion in assets. Lester Poer, 81, says he told the adviser "not to take any chances." The recommendation: an in-house fund, RMK Select Intermediate Bond.
But that portfolio was loaded with risky securities, including some backed by subprime mortgages. Collateralized debt obligations, the same investments that have wiped out billions on Wall Street, made up a quarter of the holdings. RMK Intermediate has lost 86% in the past year, making it the worst-performing fund in its category, according to research firm Morningstar (MORN). When the Poers sold the fund earlier this year, the account had $37,000 left.
The investigations, lawsuits, and arbitration cases focus on bond funds formerly run by Keegan's James C. Kelsoe, once a star manager. Unlike many peers, Kelsoe sidestepped the problems in the bond market when WorldCom imploded in 2002. His RMK Select High Income ranked in the top 1% of its category every year but one between 2000 and 2005, according to Morningstar.
Morgan Keegan promoted Kelsoe's funds as a stable source of income. Sales materials for the High Income fund noted its "relative conservative credit posture" without "excessive credit risk."
Three years ago Katherine and Lester Poer needed a safe place to tuck away $250,000, part of a windfall from a land sale. With no investing experience, the retired couple from Gulf Shores, Ala., sought advice from Morgan Keegan, which manages $80 billion in assets. Lester Poer, 81, says he told the adviser "not to take any chances." The recommendation: an in-house fund, RMK Select Intermediate Bond.
But that portfolio was loaded with risky securities, including some backed by subprime mortgages. Collateralized debt obligations, the same investments that have wiped out billions on Wall Street, made up a quarter of the holdings. RMK Intermediate has lost 86% in the past year, making it the worst-performing fund in its category, according to research firm Morningstar (MORN). When the Poers sold the fund earlier this year, the account had $37,000 left.
The investigations, lawsuits, and arbitration cases focus on bond funds formerly run by Keegan's James C. Kelsoe, once a star manager. Unlike many peers, Kelsoe sidestepped the problems in the bond market when WorldCom imploded in 2002. His RMK Select High Income ranked in the top 1% of its category every year but one between 2000 and 2005, according to Morningstar.
Morgan Keegan promoted Kelsoe's funds as a stable source of income. Sales materials for the High Income fund noted its "relative conservative credit posture" without "excessive credit risk."
Auction Rate Securities - Merrill Lynch Follows Citigroup’s Lead
Following on the heels of Citigroup’s tentative settlement with federal and state regulators, Merrill Lynch has announced that it will offer to buy-back, at face value, auction-rate securities which were sold to individual investors, charitable institutions and small businesses. Merrill Lynch’s offer will be effective January 15, 2009 and run through January 15, 2010 according to the firm. Merrill has estimated that this offer will cost the firm approximately $10 billion.
Merrill’s actions may be indicative of the types of settlements that other major Wall Street firms will try to negotiate in the coming days with state and federal regulatory authorities. At present, numerous other firms are the subject of ongoing regulatory investigations. Those firms include the following: Morgan Stanley, Goldman Sachs, Bank of America, JP Morgan Chase, RBC, UBS, Wachovia/A.G. Edwards, Lehman Brothers, Oppenheimer, and Credit Suisse, among others.
Unlike the tentative Citigroup settlement, Merrill’s offer has not been approved by state and federal regulators and may not resolve the firm’s auction-rate securities regulatory issues. In fact, Massachusetts’ Secretary of State, William Galvin, one of the leaders of the state task force investigating the sale of auction-rate securities who recently sued Merrill Lynch over auction-rate securities, stated that “Its not satisfactory from our point of view in terms of the timeliness of redemption. Therefore, clearly, we’ll pursue our complaint.” Among other things, Merrill still must negotiate any regulatory sanctions.
Merrill’s actions may be indicative of the types of settlements that other major Wall Street firms will try to negotiate in the coming days with state and federal regulatory authorities. At present, numerous other firms are the subject of ongoing regulatory investigations. Those firms include the following: Morgan Stanley, Goldman Sachs, Bank of America, JP Morgan Chase, RBC, UBS, Wachovia/A.G. Edwards, Lehman Brothers, Oppenheimer, and Credit Suisse, among others.
Unlike the tentative Citigroup settlement, Merrill’s offer has not been approved by state and federal regulators and may not resolve the firm’s auction-rate securities regulatory issues. In fact, Massachusetts’ Secretary of State, William Galvin, one of the leaders of the state task force investigating the sale of auction-rate securities who recently sued Merrill Lynch over auction-rate securities, stated that “Its not satisfactory from our point of view in terms of the timeliness of redemption. Therefore, clearly, we’ll pursue our complaint.” Among other things, Merrill still must negotiate any regulatory sanctions.
Sunday, August 10, 2008
Citigroup Advises Jefferson County on Bond Debacle
Citigroup Inc., which is advising Jefferson County on how to pay off $3.2 billion in sewer bonds, agreed Thursday to settle claims it improperly saddled its own customers with untradeable bonds.
The New York-based company agreed to pay a $100 million fine and buy back or help clients unload $19.5 billion in auction-rate securities to settle regulatory claims.
Citigroup will buy back about $7.5 billion in securities from individual customers, charities and small businesses under a settlement with New York State Attorney General Andrew Cuomo, the Securities and Exchange Commission and a group of states led by Texas.
Auction-rate securities are bonds whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck in what had been pitched to them as money-market-like instruments.
That is what led to Jefferson County hanging on the brink of the largest municipal bankruptcy in U.S. history. The county has about $3 billion of variable-rate debt, including $2.2 billion in auction-rate securities that were attracting no bidders.
Because the auctions dried up, interest rates the county was paying bondholders more than tripled, some to 10 percent. It cost the county an extra $700,000 a week in interest payments, and led to the current forbearance agreements that are keeping the county from formally defaulting on the money it borrowed to expand and repair the sewer system.
Citigroup had no role in devising or underwriting Jefferson County's sewer bonds. The New York firm was hired last month to advise the county on a rescue plan.
Jefferson County Commission President Bettye Fine Collins said Thursday that Citigroup isn't the only Wall Street firm facing troubles because of auction securities. Merrill Lynch & Co., which served as county's adviser before Citigroup, also has its share of problems, she said.
The New York-based company agreed to pay a $100 million fine and buy back or help clients unload $19.5 billion in auction-rate securities to settle regulatory claims.
Citigroup will buy back about $7.5 billion in securities from individual customers, charities and small businesses under a settlement with New York State Attorney General Andrew Cuomo, the Securities and Exchange Commission and a group of states led by Texas.
Auction-rate securities are bonds whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck in what had been pitched to them as money-market-like instruments.
That is what led to Jefferson County hanging on the brink of the largest municipal bankruptcy in U.S. history. The county has about $3 billion of variable-rate debt, including $2.2 billion in auction-rate securities that were attracting no bidders.
Because the auctions dried up, interest rates the county was paying bondholders more than tripled, some to 10 percent. It cost the county an extra $700,000 a week in interest payments, and led to the current forbearance agreements that are keeping the county from formally defaulting on the money it borrowed to expand and repair the sewer system.
Citigroup had no role in devising or underwriting Jefferson County's sewer bonds. The New York firm was hired last month to advise the county on a rescue plan.
Jefferson County Commission President Bettye Fine Collins said Thursday that Citigroup isn't the only Wall Street firm facing troubles because of auction securities. Merrill Lynch & Co., which served as county's adviser before Citigroup, also has its share of problems, she said.
Saturday, August 9, 2008
Citigroup Settles over Auction-Rate Securities
State securities regulators, the Securities and Exchange Commission and Citigroup announced a settlement, in principle, related to auction-rate securities marketed and sold by Citigroup. Under the settlement, Citigroup has offered to repurchase, for face value, all auction-rate securities that it sold to individual investors, small businesses (defined as institutions having brokerage accounts of $10 million or less), and charities. In addition, Citigroup has agreed to make whole any individual investors, small businesses and charitable organizations that sustained losses on auction-rate securities that they purchased prior to February 11, 2008 and sold after February 11, 2008. It is estimated that this resolution will cost Citigroup approximately $7.5 billion. This settlement is to be effected by November 5, 2008.
Unfortunately, the settlement does not treat retirement plans and other large institutional investors as well. Citigroup was only required to use its “best efforts” to liquidate, by December 31, 2009, another $12 billion worth of auction-rate securities that the firm sold to retirement plans and larger institutional investors. The agreement stopped short of requiring Citigroup to repurchase the $12 billion worth of auction-rate securities sold to institutional investors and does not require that such investors be compensated for any damages sustained if they sold such securities. These investors still face the risk of sustaining serious losses on auction-rate securities. This risk could become quite significant if similar settlements are reached with other firms – there are serious doubts that the market could absorb a flood of auction-rate securities. Furthermore, the timing of the “best efforts” obligation could result in the statute of limitations barring certain claims possessed by such institutional investors if they postpone action until after December 31, 2009.
As part of the settlement, Citigroup also agreed to pay a $100 million fine and to reimburse issuers of municipal auction-rate securities for all refinancing fees they have incurred on auction-rate securities issued through Citigroup between August 1, 2007 and February 11, 2008.
While the announced settlement is unprecedented in its scope and terms, investors should be aware that the “devil is in the details.” The ultimate settlement document needs to be carefully reviewed to determine any limitations or restrictions put on Citigroup’s obligations. Moreover, it is important to note that the agreement does not resolve all claims by investors who purchased auction-rate securities. Investors are encouraged to carefully review any documents that they receive from Citigroup in connection with the proposed settlement and to carefully evaluate what their options are. Investors are specifically cautioned to be careful about the execution of any release which would generally release Citigroup from all claims which the investor may have against Citigroup.
Statements issued by the state task force investigating auction-rate securities make it clear that the task force intends to seek similar relief from other firms that sold auction-rate securities. Investors in auction-rate securities are encouraged to carefully monitor these developments.
Unfortunately, the settlement does not treat retirement plans and other large institutional investors as well. Citigroup was only required to use its “best efforts” to liquidate, by December 31, 2009, another $12 billion worth of auction-rate securities that the firm sold to retirement plans and larger institutional investors. The agreement stopped short of requiring Citigroup to repurchase the $12 billion worth of auction-rate securities sold to institutional investors and does not require that such investors be compensated for any damages sustained if they sold such securities. These investors still face the risk of sustaining serious losses on auction-rate securities. This risk could become quite significant if similar settlements are reached with other firms – there are serious doubts that the market could absorb a flood of auction-rate securities. Furthermore, the timing of the “best efforts” obligation could result in the statute of limitations barring certain claims possessed by such institutional investors if they postpone action until after December 31, 2009.
As part of the settlement, Citigroup also agreed to pay a $100 million fine and to reimburse issuers of municipal auction-rate securities for all refinancing fees they have incurred on auction-rate securities issued through Citigroup between August 1, 2007 and February 11, 2008.
While the announced settlement is unprecedented in its scope and terms, investors should be aware that the “devil is in the details.” The ultimate settlement document needs to be carefully reviewed to determine any limitations or restrictions put on Citigroup’s obligations. Moreover, it is important to note that the agreement does not resolve all claims by investors who purchased auction-rate securities. Investors are encouraged to carefully review any documents that they receive from Citigroup in connection with the proposed settlement and to carefully evaluate what their options are. Investors are specifically cautioned to be careful about the execution of any release which would generally release Citigroup from all claims which the investor may have against Citigroup.
Statements issued by the state task force investigating auction-rate securities make it clear that the task force intends to seek similar relief from other firms that sold auction-rate securities. Investors in auction-rate securities are encouraged to carefully monitor these developments.
UBS Settlement Estimated to Reach Jaw-Dropping $19 Billion Buyback of Auction Rate Securities
In addition to Citigroup and Merrill Lynch, UBS has come forth as the latest Wall Street investment bank to settle charges levied by state and federal regulators over the inappropriate sale of auction-rate securities. As part of the settlement, UBS agrees to repurchase nearly $19 billion - the largest amount to date - of the frozen securities from investors.
The agreement with UBS is between the Swiss-based firm, the Securities and Exchange Commission (SEC) and regulators in several states, including Massachusetts and New York. Starting Jan. 1, 2009, UBS will buy back $8.3 billion of auction securities from individual investors, as well as $10.3 billion from institutional clients beginning June 2010. In addition, the firm has agreed to help its institutional clients sell $10.3 billion in securities.
UBS also will pay a fine of $150 million, which is to be split between Massachusetts and New York, both of which accused UBS of misleading clients about the liquidity risks of auction-rate securities. Resolving its auction rate troubles will not come easy for UBS. Analysts say the firm potentially could be looking at up to nearly $2 billion in write-downs, which is on top of the $37 billion it already has taken.
Prior to the August 8, 2008 settlement, UBS had been facing a tsunami of civil charges from securities regulators in multiple states, all accusing UBS of using deceptive marketing practices to pitch auction rate securities to investors as the market neared collapse. Once the market actually did seize up in February, 2008 thousands of investors were left holding millions of dollars in illiquid securities – investments they had been sold as cash equivalents.
In July 2008, UBS reached a settlement with the attorney general of Massachusetts in which it agreed to buy back $37 million of auction rate securities sold to 18 Massachusetts cities and towns. One month later, the firm paid authorities in Massachusetts $1 million to resolve claims that it violated Massachusetts law by selling the securities to municipalities.
Despite the August 8, 2008 settlement with UBS, Attorney General Cuomo apparently is not ruling out additional charges against select individuals at the firm who are alleged to have orchestrated internal campaigns to sell auction rate securities to unsuspecting investors.
According to Cuomo’s complaint filed July 25, 2008 at least seven UBS executives sold $21 million of their personal holdings in auction rate securities while continuing to promote the instruments to individual investors. Among those executives is David Aufhauser, UBS’ general counsel, who quit the firm earlier this month. UBS’ move to settle its auction rate problems follows similar actions taken earlier by Citigroup, Inc. On August 7, 2008 the nation’s largest bank agreed to buy $7.3 billion of the securities from individual investors and pay a $100 million fine.
Merrill Lynch, which had been sued by Massachusetts Secretary of State William Galvin, followed Citigroup’s lead and is voluntarily buying back about $10 billion auction rate securities starting in January. Meanwhile, the unusual actions taken by Wall Street banks over the past several days to settle charges brought by state and federal regulators are being called unprecedented - and perhaps a strong indication that evidence of deception and fraud was indeed too extensive to deny.
Looking ahead, however, UBS could still face an uphill battle over auction rate securities. As reported August 8, 2008 on Bloomberg.com, one of the higher costs UBS must address is liquidating the auction securities sold by student loan companies. Less than $3 billion in student loan-backed auction debt has been refinanced, which is minuscule compared with municipal and closed-end funds.
The agreement with UBS is between the Swiss-based firm, the Securities and Exchange Commission (SEC) and regulators in several states, including Massachusetts and New York. Starting Jan. 1, 2009, UBS will buy back $8.3 billion of auction securities from individual investors, as well as $10.3 billion from institutional clients beginning June 2010. In addition, the firm has agreed to help its institutional clients sell $10.3 billion in securities.
UBS also will pay a fine of $150 million, which is to be split between Massachusetts and New York, both of which accused UBS of misleading clients about the liquidity risks of auction-rate securities. Resolving its auction rate troubles will not come easy for UBS. Analysts say the firm potentially could be looking at up to nearly $2 billion in write-downs, which is on top of the $37 billion it already has taken.
Prior to the August 8, 2008 settlement, UBS had been facing a tsunami of civil charges from securities regulators in multiple states, all accusing UBS of using deceptive marketing practices to pitch auction rate securities to investors as the market neared collapse. Once the market actually did seize up in February, 2008 thousands of investors were left holding millions of dollars in illiquid securities – investments they had been sold as cash equivalents.
In July 2008, UBS reached a settlement with the attorney general of Massachusetts in which it agreed to buy back $37 million of auction rate securities sold to 18 Massachusetts cities and towns. One month later, the firm paid authorities in Massachusetts $1 million to resolve claims that it violated Massachusetts law by selling the securities to municipalities.
Despite the August 8, 2008 settlement with UBS, Attorney General Cuomo apparently is not ruling out additional charges against select individuals at the firm who are alleged to have orchestrated internal campaigns to sell auction rate securities to unsuspecting investors.
According to Cuomo’s complaint filed July 25, 2008 at least seven UBS executives sold $21 million of their personal holdings in auction rate securities while continuing to promote the instruments to individual investors. Among those executives is David Aufhauser, UBS’ general counsel, who quit the firm earlier this month. UBS’ move to settle its auction rate problems follows similar actions taken earlier by Citigroup, Inc. On August 7, 2008 the nation’s largest bank agreed to buy $7.3 billion of the securities from individual investors and pay a $100 million fine.
Merrill Lynch, which had been sued by Massachusetts Secretary of State William Galvin, followed Citigroup’s lead and is voluntarily buying back about $10 billion auction rate securities starting in January. Meanwhile, the unusual actions taken by Wall Street banks over the past several days to settle charges brought by state and federal regulators are being called unprecedented - and perhaps a strong indication that evidence of deception and fraud was indeed too extensive to deny.
Looking ahead, however, UBS could still face an uphill battle over auction rate securities. As reported August 8, 2008 on Bloomberg.com, one of the higher costs UBS must address is liquidating the auction securities sold by student loan companies. Less than $3 billion in student loan-backed auction debt has been refinanced, which is minuscule compared with municipal and closed-end funds.
Friday, August 8, 2008
Recovering Jefferson County Alabama Bond Losses
Investors with losses in Jefferson County bonds may have recourse. The investments were sold to investors as safe investment grade rated bonds – one of the safest categories of fixed income available for investors to purchase. Investors were told that Jefferson County bonds were insured and only slightly riskier than a investing in a money market fund.
Firms such as JP Morgan, Lehman Brothers, Morgan Keegan and Bank of America solicited thier customers to purchase the bonds which investments may total $3.2 billion.
Firms such as JP Morgan, Lehman Brothers, Morgan Keegan and Bank of America solicited thier customers to purchase the bonds which investments may total $3.2 billion.
Wachovia Escapes the Perils of Private Student Lending
After months of financial and personnel setbacks, including state and federal investigations over auction rate securities sales, dismal earnings and the ouster of CEO Ken Thompson, Wachovia Corp. has another issue to weather. As of the close of business on August 7, 2008 the North Carolina-based bank officially stopped accepting applications for private, undergraduate student loans.
Private student loans are considered more profitable for banks over federal student loans based on the higher interest rates they carry. At the same time, private loans have greater risks, because there is no guarantee by the government. Wachovia says it will continue to offer education loans for graduate and professional students, in addition to education loans backed by the federal government.
In recent months, the ongoing credit crunch has prompted a number of lenders to drop out of the business of making student loans. Many student loan companies raise capital by selling auction rate securities, but in February, as fallout from the subprime crisis hit a boiling point, the market for auction securities seized up, making it extremely difficult, if not impossible, for lenders to secure financing for the loans.
Compounding the problem for student lenders is last year’s change to a federal law, which cut interest rates on government-backed loans and drastically reduced the subsidies that lenders make as a profit on student loans. As of March 2008, approximately 100 lenders had suspended their government backed student loan programs, with about 30 others leaving the private student lending business altogether.
In May of 2008, the federal government took steps to bolster the student loan market with the Ensuring Continued Access to Student Loans Act, which was signed into law on May 7, 2008. Among other things, the Act allows the U.S. Department of Education to buy government-backed loans from student lenders, thereby providing them with additional capital to finance new loans.
Meanwhile, Wachovia potentially has an even bigger issue to face. In July, its securities division was raided by a team of regulators from more than five states as part of a probe into the company’s sales of auction-rate bonds. With news that Citigroup, Merrill Lynch and now UBS agreeing to settle claims of deceiving investors about the liquidity risks of the securities by buying back their auction rate investments, Wachovia could be inclined to follow suit.
At the same time, however, Wachovia is looking at long-term credit problems and losses connected to its high concentration of option adjustable-rate mortgages and other risky investments. Any move to buy back the illiquid auction securities it sold to individual investors could very well put its balance sheets in serious peril.
Private student loans are considered more profitable for banks over federal student loans based on the higher interest rates they carry. At the same time, private loans have greater risks, because there is no guarantee by the government. Wachovia says it will continue to offer education loans for graduate and professional students, in addition to education loans backed by the federal government.
In recent months, the ongoing credit crunch has prompted a number of lenders to drop out of the business of making student loans. Many student loan companies raise capital by selling auction rate securities, but in February, as fallout from the subprime crisis hit a boiling point, the market for auction securities seized up, making it extremely difficult, if not impossible, for lenders to secure financing for the loans.
Compounding the problem for student lenders is last year’s change to a federal law, which cut interest rates on government-backed loans and drastically reduced the subsidies that lenders make as a profit on student loans. As of March 2008, approximately 100 lenders had suspended their government backed student loan programs, with about 30 others leaving the private student lending business altogether.
In May of 2008, the federal government took steps to bolster the student loan market with the Ensuring Continued Access to Student Loans Act, which was signed into law on May 7, 2008. Among other things, the Act allows the U.S. Department of Education to buy government-backed loans from student lenders, thereby providing them with additional capital to finance new loans.
Meanwhile, Wachovia potentially has an even bigger issue to face. In July, its securities division was raided by a team of regulators from more than five states as part of a probe into the company’s sales of auction-rate bonds. With news that Citigroup, Merrill Lynch and now UBS agreeing to settle claims of deceiving investors about the liquidity risks of the securities by buying back their auction rate investments, Wachovia could be inclined to follow suit.
At the same time, however, Wachovia is looking at long-term credit problems and losses connected to its high concentration of option adjustable-rate mortgages and other risky investments. Any move to buy back the illiquid auction securities it sold to individual investors could very well put its balance sheets in serious peril.
Thursday, August 7, 2008
FINRA Creates Process for Arbitrations Involving Auction Rate Securities
The Financial Industry Regulatory Authority (FINRA) announced today that it has established a special process for resolving auction rate securities-based claims in its arbitration forum. Qualifying investors will have the option of having their claims heard by a three-person panel of arbitrators, none of whom would be affiliated with a firm that recently sold auction rate securities. The new process comes as a result of the one developed by FINRA for the Securities and Exchange Commission’s settlement with Citigroup.
The arbitration panels will continue to consist of two public arbitrators and one non-public arbitrator.
To date, more than 170 cases involving auction rate securities have been filed in FINRA’s Dispute Resolution forum. Individuals who since Jan. 1, 2005, have either worked for a firm that sold auction rate securities or themselves sold or supervised someone who sold them will not appear on non-public arbitrator lists given to parties in these and future auction rate securities arbitration cases.
“In light of the settlement with Citigroup, FINRA believes it is a matter of fairness that all investors with auction rate securities claims, regardless of the firm involved in the dispute, be handled in this manner,” said Linda Fienberg, President of FINRA Dispute Resolution. “FINRA will work expeditiously with parties to put this process in place as soon as possible so these cases won’t be unduly delayed.”
The arbitration panels will continue to consist of two public arbitrators and one non-public arbitrator.
To date, more than 170 cases involving auction rate securities have been filed in FINRA’s Dispute Resolution forum. Individuals who since Jan. 1, 2005, have either worked for a firm that sold auction rate securities or themselves sold or supervised someone who sold them will not appear on non-public arbitrator lists given to parties in these and future auction rate securities arbitration cases.
“In light of the settlement with Citigroup, FINRA believes it is a matter of fairness that all investors with auction rate securities claims, regardless of the firm involved in the dispute, be handled in this manner,” said Linda Fienberg, President of FINRA Dispute Resolution. “FINRA will work expeditiously with parties to put this process in place as soon as possible so these cases won’t be unduly delayed.”
NY Attorney General Settles for $7 Billion with Citigroup
New York Attorney General Andrew Cuomo says he has reached a settlement worth more than $7 billion with Citigroup that requires the company to buy back auction-rate securities from about 40,000 customers in the U.S.Cuomo had threatened to charge the company with fraudulent sales of auction-rate securities and with the destruction of key documents.
The settlement announced Thursday requires Citigroup to buy back securities from retail customers, charities and small to mid-sized businesses by Nov. 5.Citigroup, the largest U.S. banking company by assets, will also have to pay New York state a $50 million civil penalty, and a separate $50 million civil penalty to the North American Securities Administrators Association.
The settlement announced Thursday requires Citigroup to buy back securities from retail customers, charities and small to mid-sized businesses by Nov. 5.Citigroup, the largest U.S. banking company by assets, will also have to pay New York state a $50 million civil penalty, and a separate $50 million civil penalty to the North American Securities Administrators Association.
Wednesday, August 6, 2008
General Counsel for UBS Resigns In Midst of ARS Investigation
Following an investigation by New York Attorney General Andrew Cuomo into his involvement over the sale of auction rate securities, David Aufhauser, general counsel of Swiss-based investment giant UBS, has resigned from his legal post.
News of Aufhauser’s resignation comes one week after the senior UBS executive became the focus of a lawsuit filed by Cuomo against UBS on July 24, 2008. In addition to accusing the investment bank of aggressive marketing tactics and promoting auction rate securities as safe, cash alternatives to investors, Cuomo charges that Aufhauser was among seven UBS executives who sold $21 million in personal auction holdings as soon as the market started to collapse. At the same time, the executives continued to push the securities onto unsuspecting clients.
Auction rate securities are long-term bonds that act as short-term debt because the interest rates reset at auctions held every seven, 14, 28 or 35 days. In February, the $330 billion market for the securities collapsed, creating millions of dollars in investment losses as countless individuals were left holding illiquid securities.
UBS customers currently hold approximately $25 billion in auction rate assets - assets they previously had been led to believe were the equivalent of cash. Cuomo says UBS customers are owed the full value of the securities they purchased and couldn’t resell when the auction market seized up in February. The value of UBS customers’ auction securities is now $37 billion, according to the lawsuit. Aufhauser’s hasty departure comes on the heels of a recent agreement by UBS to pay the state of Massachusetts $750,000 after it sued the bank on behalf of municipalities adversely affected by the sale of auction rate securities. A separate case against UBS involving auction rate securities is pending in Texas.
Prior to joining UBS, Aufhauser was the General Counsel of the U.S. Department of Treasury under President George W. Bush. Ironically - in light of the recent charges by Attorney General Cuomo - Aufhauser also served on the President’s corporate fraud and abuse task force. Meanwhile, the controversy now surrounding Aufhauser, 57, creates a black mark on a seemingly illustrious professional career
News of Aufhauser’s resignation comes one week after the senior UBS executive became the focus of a lawsuit filed by Cuomo against UBS on July 24, 2008. In addition to accusing the investment bank of aggressive marketing tactics and promoting auction rate securities as safe, cash alternatives to investors, Cuomo charges that Aufhauser was among seven UBS executives who sold $21 million in personal auction holdings as soon as the market started to collapse. At the same time, the executives continued to push the securities onto unsuspecting clients.
Auction rate securities are long-term bonds that act as short-term debt because the interest rates reset at auctions held every seven, 14, 28 or 35 days. In February, the $330 billion market for the securities collapsed, creating millions of dollars in investment losses as countless individuals were left holding illiquid securities.
UBS customers currently hold approximately $25 billion in auction rate assets - assets they previously had been led to believe were the equivalent of cash. Cuomo says UBS customers are owed the full value of the securities they purchased and couldn’t resell when the auction market seized up in February. The value of UBS customers’ auction securities is now $37 billion, according to the lawsuit. Aufhauser’s hasty departure comes on the heels of a recent agreement by UBS to pay the state of Massachusetts $750,000 after it sued the bank on behalf of municipalities adversely affected by the sale of auction rate securities. A separate case against UBS involving auction rate securities is pending in Texas.
Prior to joining UBS, Aufhauser was the General Counsel of the U.S. Department of Treasury under President George W. Bush. Ironically - in light of the recent charges by Attorney General Cuomo - Aufhauser also served on the President’s corporate fraud and abuse task force. Meanwhile, the controversy now surrounding Aufhauser, 57, creates a black mark on a seemingly illustrious professional career
Tuesday, August 5, 2008
Citi Hedge Fund Woes
After a run of previous failures, the Citibank is now closing its $400 million Tribeca Convertible LP arbitrage fund. It is the final chapter in Citigroup’s plan to shut down its Tribeca Global Investments hedge fund.
Investor redemptions are thought to be the reason behind the fund closing. According to an Aug. 4, 2008 article on Bloomberg.com, Tribeca Convertible was down less 5% this year, after rising 5% in 2007 and 20% in 2006. Tribeca Global Investments was created in 2004 as Citigroup’s flagship hedge fund group. At the time, the fund intended to raise $20 billion. Instead, it attracted $2 billion.
Cititgroup’s latest hedge fund troubles have become something of a pattern for the nation’s largest bank and its asset management business. In February, Citigroup suspended redemptions in CSO Partners, after investors tried to withdraw more than 30% of the fund’s $500 million in assets. In March, it was the bank’s Falcon strategies funds to encounter problems.
Despite attempts to stabilize the fund with more than $600 million, Falcon closed. And in June 2008, Citigroup shut down Old Lane Partners after investors redeemed more than $200 million. Citigroup’s CEO Vikram Pandit was one of the founders of Old Lane Partners, before selling it to the bank in 2007 for $800 million.
Volatile market conditions and credit concerns have created hard times overall for the hedge fund industry. In 2008, new hedge fund launches are half of what they were only a year ago. Meanwhile, liquidations continue to rise.
Several of the hedge funds closed by Citigroup initially had been pitched to investors as fixed income products - safe and secure investments designed to provide higher yields. As in the case of the ASTA and MAT funds, that wasn’t the reality. Instead, the funds were highly leveraged municipal bond funds whose assets had been invested in risky and speculative subprime mortgages.
The funds’ managers assured brokers and clients alike that they would rebound even as the ASTA fund and MAT fund began to plummet in value. In the end, the funds lost up to 90% of their original value.
Investor redemptions are thought to be the reason behind the fund closing. According to an Aug. 4, 2008 article on Bloomberg.com, Tribeca Convertible was down less 5% this year, after rising 5% in 2007 and 20% in 2006. Tribeca Global Investments was created in 2004 as Citigroup’s flagship hedge fund group. At the time, the fund intended to raise $20 billion. Instead, it attracted $2 billion.
Cititgroup’s latest hedge fund troubles have become something of a pattern for the nation’s largest bank and its asset management business. In February, Citigroup suspended redemptions in CSO Partners, after investors tried to withdraw more than 30% of the fund’s $500 million in assets. In March, it was the bank’s Falcon strategies funds to encounter problems.
Despite attempts to stabilize the fund with more than $600 million, Falcon closed. And in June 2008, Citigroup shut down Old Lane Partners after investors redeemed more than $200 million. Citigroup’s CEO Vikram Pandit was one of the founders of Old Lane Partners, before selling it to the bank in 2007 for $800 million.
Volatile market conditions and credit concerns have created hard times overall for the hedge fund industry. In 2008, new hedge fund launches are half of what they were only a year ago. Meanwhile, liquidations continue to rise.
Several of the hedge funds closed by Citigroup initially had been pitched to investors as fixed income products - safe and secure investments designed to provide higher yields. As in the case of the ASTA and MAT funds, that wasn’t the reality. Instead, the funds were highly leveraged municipal bond funds whose assets had been invested in risky and speculative subprime mortgages.
The funds’ managers assured brokers and clients alike that they would rebound even as the ASTA fund and MAT fund began to plummet in value. In the end, the funds lost up to 90% of their original value.
CNBC - Why the Investment Banking Model is Dead
The investment banking model that contributed to the subprime crisis is dead and investors will now refuse to buy products where the risk is not transparent, strategists told CNBC Europe Tuesday.
"I don't think life is going to come back into the kind of exotic credit-derivative, credit-default type products for many years," David Roche, global strategist at Independent Strategy, told "Squawk Box Europe." "I think that sort of business is just so dead."
The repackaging of debt that originated in the banking sector, such as mortgages, was originally thought to provide a cushion for the financial markets, but the collapse of US house prices last year slashed the value of the products and sent shock waves through the banks.
"From an investors' point of view there is going to be an investor strike, they will not buy anything where the risk is not transparent." Bob Parker, vice chairman at Credit Suisse Asset Management said. "That transparency applies to a lot of the instruments that were sold over the last two years."
Many investment banks are still struggling to find a true value for their collateralized debt obligations (CDOs) and the ones that have found buyers have sold at fire-sale prices.
"I don't think life is going to come back into the kind of exotic credit-derivative, credit-default type products for many years," David Roche, global strategist at Independent Strategy, told "Squawk Box Europe." "I think that sort of business is just so dead."
The repackaging of debt that originated in the banking sector, such as mortgages, was originally thought to provide a cushion for the financial markets, but the collapse of US house prices last year slashed the value of the products and sent shock waves through the banks.
"From an investors' point of view there is going to be an investor strike, they will not buy anything where the risk is not transparent." Bob Parker, vice chairman at Credit Suisse Asset Management said. "That transparency applies to a lot of the instruments that were sold over the last two years."
Many investment banks are still struggling to find a true value for their collateralized debt obligations (CDOs) and the ones that have found buyers have sold at fire-sale prices.
Lehman may sell entire investment management unit: report
CNBC reports Lehman Brothers Holdings Inc (NYSE:LEH - News) is considering selling its entire investment management business, including private equity and hedge fund stakes, rather than just its Neuberger Berman business, as the bank looks to raise capital.
FINRA Proposes New Rules For Variable Product Sales
A proposed rule from the securities industry's self-regulatory organization would provide enhanced consumer protections on marketing materials for variable-insurance products, though some critics have raised questions about the effectiveness of the regulation.
Provisions in the Financial Industry Regulatory Authority Inc.'s proposed rule, which would cover applicable insurers and broker- dealers, include a requirement that all marketing materials clearly identify the type of variable product that is being discussed and a prohibition against claims that the product is a mutual fund. Marketing materials will also be prohibited from presenting variable-insurance products as short-term liquid investments.
Finra of New York and Washington has also addressed guarantees and riders requiring a "fair and balanced" presentation of the features and forbidding member firms from exaggerating the features' benefits or from providing the insurer's credit rating or financial strength.
Limits would also be placed on how hypothetical illustrations of these products were presented; marketing materials would urge investors to get a personalized illustration reflecting fees and charges.
The proposed rule would codify existing rules and interpretations, including those governing broker-dealer communications. Currently, it is in its comment period, which will end Sept. 30.
Provisions in the Financial Industry Regulatory Authority Inc.'s proposed rule, which would cover applicable insurers and broker- dealers, include a requirement that all marketing materials clearly identify the type of variable product that is being discussed and a prohibition against claims that the product is a mutual fund. Marketing materials will also be prohibited from presenting variable-insurance products as short-term liquid investments.
Finra of New York and Washington has also addressed guarantees and riders requiring a "fair and balanced" presentation of the features and forbidding member firms from exaggerating the features' benefits or from providing the insurer's credit rating or financial strength.
Limits would also be placed on how hypothetical illustrations of these products were presented; marketing materials would urge investors to get a personalized illustration reflecting fees and charges.
The proposed rule would codify existing rules and interpretations, including those governing broker-dealer communications. Currently, it is in its comment period, which will end Sept. 30.
Monday, August 4, 2008
UBS Auction Rate Securities -- Top Lawyer Highlighted in Civil Fraud Complaint Resigns From UBS
David Aufhauser, a top lawyer at UBS AG, has resigned from the firm.
Mr. Aufhauser was general counsel of the investment bank in the U.S. and interim co-group general counsel of UBS AG. He was a figure highlighted in a civil fraud complaint filed by New York Attorney General Andrew Cuomo against UBS for its actions in the auction rate securities market, which collapsed earlier this year. The complaint did not specifically name Mr. Aufhauser, referring to him only as, "Executive A."
David Aufhauser when he worked at the Treasury Department.
UBS AG's chief executive officer Marcel Rohner and Jerker Johansson, Chairman and CEO of UBS's investment bank, said in a memo posted on UBS's internal Web site Monday that they accepted Mr. Aufhauser's resignation, said a person familiar with the matter. A UBS spokeswoman confirmed the departure.
Mr. Aufhauser was general counsel of the investment bank in the U.S. and interim co-group general counsel of UBS AG. He was a figure highlighted in a civil fraud complaint filed by New York Attorney General Andrew Cuomo against UBS for its actions in the auction rate securities market, which collapsed earlier this year. The complaint did not specifically name Mr. Aufhauser, referring to him only as, "Executive A."
David Aufhauser when he worked at the Treasury Department.
UBS AG's chief executive officer Marcel Rohner and Jerker Johansson, Chairman and CEO of UBS's investment bank, said in a memo posted on UBS's internal Web site Monday that they accepted Mr. Aufhauser's resignation, said a person familiar with the matter. A UBS spokeswoman confirmed the departure.
Fidelity Ultra-Short and Morgan Keegan Select High Income - Shocking Losers
All market rallies must one day end, but what's really been shocking in this downturn is the extent of losses in certain investments that were considered downright safe or that supposedly had a tight leash on risk. For example, the ultrashort-bond category, previously regarded as a safe-haven, cash-substitute investment, produced some severe blowups.
SSgA Yield Plus (which liquidated in June) and Fidelity Ultra-Short Bond (FUSFX, FUSFX); (FUSFX, FUSFX), for instance, suffered losses on a scale that would've been unthinkable based on their own or the category's past record. Regions Morgan Keegan Select High Income (MKHIX, MKHIX); (MKHIX, MKHIX), a high-yield bond fund, is another prominent example.
While that fund is in a risky category that is not foreign to sharp losses, veteran manager Jim Kelsoe had a stellar record in controlling downside. Over the last 12 months, however, the fund has posted a staggering loss of nearly 79%.
SSgA Yield Plus (which liquidated in June) and Fidelity Ultra-Short Bond (FUSFX, FUSFX); (FUSFX, FUSFX), for instance, suffered losses on a scale that would've been unthinkable based on their own or the category's past record. Regions Morgan Keegan Select High Income (MKHIX, MKHIX); (MKHIX, MKHIX), a high-yield bond fund, is another prominent example.
While that fund is in a risky category that is not foreign to sharp losses, veteran manager Jim Kelsoe had a stellar record in controlling downside. Over the last 12 months, however, the fund has posted a staggering loss of nearly 79%.
Auction Rate Securities - Merrill Lynch Emails Reveal Market Problems
Four days before Merrill Lynch & Co. stopped supporting the auction-rate securities market and left thousands of individual investors stuck with securities they couldn't sell, the firm's> analysts recommended clients buy.
"Reports of the imminent demise of the auction market seem to be greatly exaggerated, again,'' analyst Kevin Conery wrote in a Feb. 8 research note. "We continue to be impressed by the auction market's resiliency.''
The remarks show Merrill's researchers were "co-opted'' during a seven-month drive by the New York-based firm's sales force to prevent a meltdown in the $330 billion market, Massachusetts Secretary of State William Galvin alleged yesterday in an administrative complaint filed in Boston. As the sales desk pushed analysts to publish upbeat notes, managers used gallows humor to complain about a "collapsing'' market and the end of $2,000 dinners.
"Come on down and visit us in the vomitorium!!'' the auction-rate desk's managing director, Frances Constable, wrote to a co-worker in August, as demand began to dry up.
"Market is collapsing,'' another executive cited in Galvin's complaint said in a November 2007 personal e-mail. "No more $2K dinners at CRU,'' a Manhattan restaurant where the wine list includes dozens of bottles for more than $1,000.
Galvin, 57, wants the third-largest U.S. securities firm to "make good'' on sales of now-frozen holdings, compensate investors who disposed of their bonds or shares at a loss and pay an unspecified fine.
"Reports of the imminent demise of the auction market seem to be greatly exaggerated, again,'' analyst Kevin Conery wrote in a Feb. 8 research note. "We continue to be impressed by the auction market's resiliency.''
The remarks show Merrill's researchers were "co-opted'' during a seven-month drive by the New York-based firm's sales force to prevent a meltdown in the $330 billion market, Massachusetts Secretary of State William Galvin alleged yesterday in an administrative complaint filed in Boston. As the sales desk pushed analysts to publish upbeat notes, managers used gallows humor to complain about a "collapsing'' market and the end of $2,000 dinners.
"Come on down and visit us in the vomitorium!!'' the auction-rate desk's managing director, Frances Constable, wrote to a co-worker in August, as demand began to dry up.
"Market is collapsing,'' another executive cited in Galvin's complaint said in a November 2007 personal e-mail. "No more $2K dinners at CRU,'' a Manhattan restaurant where the wine list includes dozens of bottles for more than $1,000.
Galvin, 57, wants the third-largest U.S. securities firm to "make good'' on sales of now-frozen holdings, compensate investors who disposed of their bonds or shares at a loss and pay an unspecified fine.
Sunday, August 3, 2008
Ambac Settles CDO Exposure With Citigroup for $850 Million
Bond insurer Ambac Financial Group Inc. paid $850 million to Citigroup Inc. to terminate a guaranty contract tied to $1.4 billion in troubled mortgage-related securities.
The move sent shares of Ambac and other bond insurers higher, as investors anticipated more cancellations of similar contracts, which could help the insurers clear out some of their losing positions.
Ambac, based in New York, said it settled a contract that represented one of its largest exposures to problematic collateralized debt obligations, which are securities backed by pools of mortgage bonds or other debt.
The CDO in question was backed by securities issued by other CDOs, and was highly likely to default. Ambac had previously agreed to cover interest and principal payments on the $1.4 billion security.
The move sent shares of Ambac and other bond insurers higher, as investors anticipated more cancellations of similar contracts, which could help the insurers clear out some of their losing positions.
Ambac, based in New York, said it settled a contract that represented one of its largest exposures to problematic collateralized debt obligations, which are securities backed by pools of mortgage bonds or other debt.
The CDO in question was backed by securities issued by other CDOs, and was highly likely to default. Ambac had previously agreed to cover interest and principal payments on the $1.4 billion security.
Friday, August 1, 2008
NY AG Auction Rate Securities Investigation Into Citigroup
STATE OF NEW YORK
OFFICE OF THE ATTORNEY GENERAL
120 BROADWAY
NEW YORK, NY 10271
OFFICE OF THE ATTORNEY GENERAL
120 BROADWAY
NEW YORK, NY 10271
NOTICE OF IMMINENT ACTION UNDER THE NEW YORK
EXECUTIVE LAW 5 63(12) AND NEW YORK GENERAL
BUSINESS LAW 66 352 et seq. (THE "MARTIN ACT")
EXECUTIVE LAW 5 63(12) AND NEW YORK GENERAL
BUSINESS LAW 66 352 et seq. (THE "MARTIN ACT")
BY E-MAIL and FEDERAL EXPRESS
Michael J. Sharp
General Counsel, Citi Global Wealth Management
Citigroup Global Markets, Inc.
399 Park Avenue
New York, NY 10043
Re: Auction Rate Securities Investigation
Dear Mr. Sharp:
I write to provide notice that the Office of the New York Attorney General intends to imminently charge Citigroup Global Markets, Inc. and Citi Smith Barney (collectively "Citigroup") for its fraudulent marketing and sales of auction rate securities, pursuant to New York General Business Law $5 352 et seq. (the "Martin Act") and Executive Law 5 63(12), as well as for its destruction of documents under subpoena, pursuant to New York General Business Law 5 352(4).
Citigroup's Fraudulent Practices In Connection with the Marketing and Sale of Auction Rate Securities
Over the past five months, the Attorney General's Office has conducted a nationwide investigation into certain practices relating to auction rate securities by Citigroup. The investigation has revealed that Citigroup has repeatedly and persistently committed fraud by making material misrepresentations and omissions in connection with Citigroup's underwriting, distribution and sale of auction rate securities. Citigroup represented that auction rate securities
were safe, liquid, and cash equivalent securities. These representations were false, and had a severe detrimental impact on tens of thousands of Citigroup customers. Citigroup also failed to disclose to its retail clients and other customers that from August of 2007 up until widespread auction failures, which occurred in the early part of 2008, the auction rate securities market only continued as a result of Citigroup placing support bids. Since February 13,2008, Citigroup's customers who own auction rate securities have been unable to cash or sell the securities.
were safe, liquid, and cash equivalent securities. These representations were false, and had a severe detrimental impact on tens of thousands of Citigroup customers. Citigroup also failed to disclose to its retail clients and other customers that from August of 2007 up until widespread auction failures, which occurred in the early part of 2008, the auction rate securities market only continued as a result of Citigroup placing support bids. Since February 13,2008, Citigroup's customers who own auction rate securities have been unable to cash or sell the securities.
Consequences Resulting From Citigroup's Destruction of Documents
The Attorney General's investigation also uncovered that Citigroup failed to comply with its legal obligations under the Martin Act when it destroyed "recordings of telephone conversations concerning the marketing, sale, distribution or auction of Auction Rare Securities" called for by the Attorney General's Subpoena dated April 14,2008. This destruction occurred after Citigroup received this office's subpoena. Under section 352(4) of the Martin Act, a violation of the law occurs when ". . . a person subpoenaed to attend such inquiry fails to obey the command of a subpoena, without reasonable cause, or if a person in attendance upon such inquiry shall without reasonable cause, refuse to . . . produce a book or paper when ordered to do so by the officer conducting such inquiry, or if a person, partnership or corporation, company, trust or association fails to perform any act required hereunder to be performed . . ."
Citigroup initially failed to notify the New York Attorney General's Office about the destruction of the tapes even though Citigroup learned in mid-June that recordings of its Auction Rate Desk had been destroyed. It was not until June 30,2008, that the Attorney General's Office learned of this conduct, which significantly and materially interfered with the ability of the Office of the Attorney General to conduct its investigation.
Citigroup has informed the Attorney General's Office that it is likely unable to recover the lost information on the destroyed tapes. Verbatim records of the most important witness statements during the most relevant period were therefore destroyed after the issuance and service of the subpoena.
Citigroup Must Take Immediate Action
The Office of the Attorney General believes that a settlement with Citigroup must include terms to: buy back retail investors' securities at par in the immediate future; reimburse retail investors for damages they have incurred; undertake immediately to make institutional investors and corporations whole; and a significant penalty for Citigroup's misconduct during our investigation.
Thousands of customers nationwide have been damaged due to Citigroup's fraud.
The Attorney General's office will continue to work to achieve justice for these consumers.
David A. Markowitz
Chief, Investor Protection Bureau
More Morgan Keegan Mutual Fund Lawsuits Filed
Five separate class action lawsuits in the U.S. District Court for the Western District of Tennessee on behalf of all trusts and custodial accounts collectively known as "The Funds" during the period between Dec. 6, 2004 and Feb. 6, 2008.
Morgan Keegan is currently under fire because a number of funds managed by the company lost value once the market for collateral-backed debt obligations - underpinned by risky subprime mortgages - declined due to skyrocketing loan defaults and the U.S. housing market that tanked.
For example, its Select Intermediate Bond fell by more than 50 percent last year and the Select High Income fund fell 60 percent, according to documents published by Chicago-based Morningstar Inc.
Morgan Keegan and Co. is a subsidiary of Birmingham-based Regions Financial Corp. (NYSE:RF).
Morgan Keegan is currently under fire because a number of funds managed by the company lost value once the market for collateral-backed debt obligations - underpinned by risky subprime mortgages - declined due to skyrocketing loan defaults and the U.S. housing market that tanked.
For example, its Select Intermediate Bond fell by more than 50 percent last year and the Select High Income fund fell 60 percent, according to documents published by Chicago-based Morningstar Inc.
Morgan Keegan and Co. is a subsidiary of Birmingham-based Regions Financial Corp. (NYSE:RF).
Investigation of Citigroup's ASTA, MAT and Auction Rate Securities
Citigroup, Inc disclosed Friday that it has received subpoenas or requests for information from regulators, including the Securities and Exchange Commission, in connection with the company's handling of auction-rate securities.
The company said the SEC issued a formal order of investigation into whether various provisions of the federal securities laws have been violated over the sale of ARSs.
Separately, the company said it has received requests for information from various governmental and self-regulatory agencies relating to the Falcon, ASTA and MAT Citi-managed hedge funds. The company said it is cooperating fully with such requests.
The company said the SEC issued a formal order of investigation into whether various provisions of the federal securities laws have been violated over the sale of ARSs.
Separately, the company said it has received requests for information from various governmental and self-regulatory agencies relating to the Falcon, ASTA and MAT Citi-managed hedge funds. The company said it is cooperating fully with such requests.
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