Just when investors thought financial relief was on the way over their auctionrate securities (ARS) nightmares, yet another headache may be right around the corner. Case in point: A recent filing by UBS with the Securities and Exchange Commission (SEC), which sheds light on the convoluted and highly technical process attached to the settlement offers made by brokerage and financial firms with ARS investors.
As background, UBS is one of the two largest participants in the auction-rate securities market. In late April 2008, the Swiss-based banking giant became the focus of an investigation by the Securities and Exchange Commission (SEC), as well as state securities regulators over its marketing and sales of auction-rate securities. During the course of the investigations, evidence was uncovered showing UBS intentionally made material misrepresentations and omissions to customers in connection to auction-rate securities.
The SEC’s investigation also revealed that until the auction-rate market seized up in February 2008, UBS marketed auction-rate securities to clients as safe and highly liquid investments, characterizing the instruments as similar to money-market funds. UBS further described auction-rate securities as “cash alternatives.”
At the same time, UBS kept investors in the dark about the liquidity and investment risks of auction-rate securities, as well as neglected to warn them that those risks would increase significantly when UBS and other firms decided to no longer support the auction market in late 2007 and early 2008.
On Aug. 8, 2008 the SEC’s Enforcement Division, the New York Attorney General and Massachusetts and Texas securities authorities announced settlements-inprinciple with UBS, in which the firm agreed to purchase $19.4 billion of the controversial bonds from retail customers, small businesses, and charitable organizations at 100 cents on the dollar. Under the terms of the settlement, UBS customers with less than $1 million in auction-rate securities would get their money back by Oct. 31, while others were to receive refunds by the end of the year. The firm also was fined $150 million.
For investors who had been misled by UBS about the financial risks of auctionrate securities - and who subsequently lost their life savings because of that product misrepresentation - the buy-back news appeared to be a win for them. Now, however, it seems their headaches may be just beginning. On Oct. 7, 2008, UBS filed what’s known as a “Form F-3 Registration Statement” with the SEC as part of the legal process in connection with its auction-rate securities settlement with investors. According to the filing, each auction-rate securities investor will receive a prospectus from UBS outlining the mechanism in which the settlements are to be implemented.
According to the prospectus - which is overly complicated and written in legalese - auction-rate securities investors will have the opportunity to exchange their auction-rate securities for one or more of seven series of auction-rate securities rights, each of which has its own terms and conditions. Some of the terms in UBS’ auction-rate securities settlement will come as a surprise to investors. For instance:
• Perhaps most important, the prospectus clearly states that any settlement with investors is contingent on UBS’ financial resources and that, “UBS AG may not have sufficient financial resources to satisfy its obligations under the ARSrights.”
• In many cases, investors will not receive immediate payment for their auctionrate securities. Instead, they will receive “auction-rate securities rights.” These auction-rate securities rights expire between early Jan. 2011 and early July 2012 (depending on the series). Based on information in the prospectus, investors will receive a payment at par when UBS sells or disposes of the auction-rate securities received from the investor. Apparently this will happen periodically over the next two-plus years.
• If a holder purchased auction-rate securities from UBS between Oct. 1, 2007, to Feb. 13, 2008 but transferred those auction-rate securities to another firm before Feb. 13, 2008, the investor must then transfer the auction-rate securities back to the investor’s original UBS account in order to accept the offer and become eligible to receive auction-rate securities rights.
• Investors will have approximately 30 days to review the prospectus from UBS and decide whether to accept its offer.
• Accepting the offer will require investors to effectively forego any legal claims against UBS, except for claims regarding consequential damages that are subject to a special arbitration process.
• Investors may be offered auction-rate securities rights in different series, which means they will be required to complete a whole new set of forms in order to receive any settlement from UBS.
The bottom line: Investors who have been sold auction-rate securities by UBS in the past and who now agree to the company’s terms for a settlement may be in for a long and tedious process in trying to collect their money.
For them and other ARS investors, this summer’s news of ARS settlements by Wall Street banks over their mishandling of auction-rate securities is by no means an end to investors’ financial turmoil.
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