Securities Lawyer Files Lawsuit In Response To Auction-Rate Securities Loss

Nuveen Investments, Merrill Lynch, Citigroup, Deutsche Bank, and Mesirow Financial came under fire last year after Howard Kastel, a retired securities lawyer, filed a suit against them for $2-million in losses that he and his wife suffered as a result of recommendations to invest in auction-rate securities. According to the lawsuit filed in August of 2009, Howard and Joan Kastel alleged that they suffered at the hand of a “fraudulent scheme” in which the markets associated with the securities were negligently negotiated.

The lawsuit says that in August and September 2007 Mesirow Financial purchased 88 shares of auction-rate preferred securities for the Kastels’ account. The shares, which cost $25,000 per share, were issued by three Nuveen North Carolina funds through Nuveen Investments LLC, the Chicagobasedbroker-dealer, at auctions conducted by Deutsche Bank. As reported in an Aug. 26 article by Investment News, Merrill Lynch and Citigroup participated in the auction, as well.

When the $330 billion auction-rate securities market suddenly froze up in February 2008, the Kastels’ were unable to access their cash. According to their lawsuit, they are now stuck with 85 shares of Nuveen North Carolina ARPS, which pay “unconscionably inadequate” interest that “does not fairly compensate” the couple.

The Kastels are suing Mesirow, Nuveen and Merrill Lynch for approximately $6-million. In addition, they are seeking compensation for emotional distress. Prior to the collapse of the ARS market, thousands of retail and institutional investors purchased auction-rate securities on the premise they were cash equivalents.The markets were subject to a major crash in 2008 after which the Kastels discovered that their investments had lost near enough all of their value.

Shortly following the filing of lawsuits by state and federal regulators, a number of investment firms and Wall Street Banks began negotiations to buy back a substantial amount of the securities from retail investors which were estimated cost billions of dollars, while other firms decided to maintain their stance and refused at any attempts to buy back investor losses.