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“Before Any Fraud Ensued”

Posted by Larry Doyle on March 31, 2009 1:31 PM |

There seems to be a growing stream of information and activity surrounding the travesty with Auction Rate Preferred Securities, otherwise known as ARPS.  Citigroup and Wachovia just settled a $4.7 billion claim brought by California investors. Oppenheimer Holdings, based in Toronto, is considering incorporating itself in the United States in an attempt to receive government funds via the TARP (Troubled Asset Recovery Program) to settle outstanding claims by ARPS investors. 

This morning, Bloomberg reports UBS Auction-Rate Securities Suit Dismissed by Judge. What is this? No fraud was perpetrated? Did the investors not properly make their claim? Was UBS not liable in the underwriting and selling of ARPS? Is Sense on Cents making no sense with all the writing on this topic? Let’s review what the judge in this case has to say:

March 31 (Bloomberg) — UBS AG, Switzerland’s biggest bank, won dismissal of a lawsuit brought by investors who bought auction-rate securities from it.

U.S. District Judge Lawrence M. McKenna in New York ruled against the investors because they were made whole from a settlement the Zurich-based bank reached in August with state and federal regulators in which it agreed to buy back $19.4 billion of the securities.

“Given that plaintiffs have availed themselves of the relief provided for in the regulatory agreement, plaintiffs now cannot allege out-of-pocket damages,” McKenna ruled yesterday. The investors “have already been returned to the position they were in before they purchased the ARS and before any fraud ensued.”

The judge’s statement highlights the fact that the investors in this suit have already been made whole in a prior settlement but also acknowledges that a fraud ensued. 

Given that there is public acknowledgement by a federal judge that a fraud had ensued in the marketing and distribution of ARPS, let us return to the case Sense on Cents has been highlighting. FINRA’s Annual Report for 2007 publicy records that FINRA owned $647 million ARPS at year end 2006.

The questions that need to be answered:

1. Was FINRA defrauded in the purchase and sale of their bonds?

2. If FINRA has sold their bonds subsequent to the publishing of that report in April 2008, to whom did they sell them? at what price? on what date?

3. Did FINRA have material non-public information at the time of sale, if in fact they sold them? Did they act on that information?

Let’s put this into layman’s terms. FINRA was supposed to be overseeing and regulating the casino on Wall Street. In the process of regulating the casino, it appears that they put some of their own chips into one of the games. That game, ARPS, turned out to be a fraud, as publicly acknowledged by U.S. District Judge Lawrence McKenna in this case with UBS. 



  • Bill

    Larry, I’m not aware of any enforcement actions by FINRA against any entity concerning irregularities in the sale of ARS or the auction rate process. Another salient question is whether FINRA’s ownership and divestment of ARS had any bearing on its lack of enforcement?

  • Larry Doyle

    Bill…what do we know?

    1. we know FINRA owned ARS…
    2. we know a fraud was perpetrated..
    3. we do not know but it certainly does not appear as if FINRA performed its regulatory duties…
    4. did points 1 and 2 conflict FINRA’s responsibility?

    Your points are well taken. I appreciate your sharing your insights.

  • Bill

    Larry, may be pointing out something you’ve already noted. But the notes to the 2007 FINRA financial accounts reflect that SMAs totalling $639.9 million and ARS totalling $646.9 were classified as Trading Investments under assets. Those two total $1,286.8, which is the listed total on the balance sheet for that asset classification as of 12/31/06. By 12/31/07 that total had dropped to $555.6 million. How much of that was ARS would be quite interesting to know. Of course, that figure is less than the total for SMAs as of 12/31/06.

  • Larry Doyle

    Bill….and that , as they say is the $64,000 question or perhaps it is the $647 million question.

    The SMAs (separately managed accounts) are the hedge funds, fund of funds, and private equity (I believe).

  • Kathy

    The Finra issue is the big one, so not to distract… but on the UBS issue, I believe clients had to sign away their rights to pursue other remedies in order to get their money back. On that basis, I’m not surprised that these clients lost (without knowing more details).

    The Finra case is huge. They have been notably absent in solving this problem, and we need to know why.

  • TeakWoodKite

    While I am reading your posts, I thought I’d pass this along.
    I not sure what it means.

    Big Banks’ Recent Profitability Due to AIG Scam?

  • Mikaele

    Good stuff,how do you bring all this into the light?
    Finra has not helped me at all. In fact after they contacted me I was told to speak with someone else @ their offices about my ARPS and they were clueless!

  • Larry Doyle

    Mikaele…in regard to your question about bringing it into light, I am working on it. Please check here regularly. Additionally if you know of others involved in the ARS mess, please give them the link to my site.

    I had a guest on my radio show last evening to discuss this situation. You can access that show via this link,

    Audio Recording: No Quarter Radio’s Sense on Cents with Larry Doyle

    When did you speak to the FINRA representative?

    I hate to say I am not surprized about their lack of help.

    For a more fully comprehensive listing of the posts addressing this topic, I will also provide:

    Will TARP Screw ARPS Even Tighter?

    Please visit and comment often.

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