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“Retired Securities Attorney Sues Nuveen Over Auction-Rate Shares”

Posted by Larry Doyle on August 27, 2009 5:03 AM |

Wall Street can keep its arbitration hearings, it is time to sue banks and brokers over the frauds perpetrated in the sales and marketing of auction-rate securities. A securities arbitrator by the name of Howard Kastel is taking that very approach.

Every individual who opens a brokerage account typically signs a statement indicating that disputes will be addressed through an arbitration process. I find it fascinating that Kastel, a retired securities attorney who served as an arbitrator, has chosen to sue rather than arbitrate over his purchase of ARS.

You can’t make this stuff up!!

The Wall Street Journal highlights this case in reporting, Retired Securities Atty Sues Nuveen Over Auction-Rate Shares:

A retired securities attorney is suing Nuveen Investments and others in federal court over a $2 million investment in now-frozen auction-rate securities, contending that his case is too complex for arbitration.

Howard Kastel, 77, and his wife, Joan, filed suit Friday in the U.S. District Court for the Middle District of North Carolina against Deutsche Bank AG (DB), Nuveen Investments Inc. (JNC), Merrill Lynch & Co. and others. It alleges the couple were victims of a “fraudulent scheme” in which markets for the securities were manipulated.

I would maintain that Mr. and Mrs. Kastel should not be subjected to arbitration nor should any investor in auction-rate securities. I have yet to come across an ARS investor who was not a victim of the fraudulent scheme in which ARS were marketed and sold.  The WSJ continues:

Investor complaints are generally handled in arbitration, but Kastel, who has been an arbitrator for years and still does some arbitration work, said that as a complex fraud case his complaint is inappropriate for arbitration. As a former securities attorney, Kastel said, he would also be an inappropriate plaintiff in a class-action lawsuit.

Arbitration is CLEARLY NOT the forum for any ARS investor. Who hosts arbitration hearings? FINRA. Yes, the same FINRA which owned and liquidated upwards of $647 million ARS from its own investment portfolio in 2007. Can you say, ‘conflict of interest?’ Do you think FINRA front-ran the market in the process of liquidating its ARS position?

Mr. Kastel feels he would be an inappropriate plaintiff in a class-action lawsuit, but how about the thousands of other investors with upwards of $165 billion remaining frozen in ARS? Perhaps a sizable class-action lawsuit should be filed on all their behalf. The WSJ further adds:

The Kastels are seeking the return of more than $2 million, which was invested in auction-rate preferred securities issued by three Nuveen North Carolina Funds in August and September 2007, as well as damages and attorney’s fees. They currently cannot redeem the shares, and the interest paid on them is “unconscionably inadequate and low,” the lawsuit says.

The Kastels purchased ARS in August and September 2007, a point in time when the ARS market had clearly already started to fail. Why hadn’t FINRA apprised investors of that fact by publishing a notice on its website? Could the Kastels actually have purchased ARS which had previously been owned by FINRA and liquidated earlier in 2007?

Kastel said Tuesday in an interview that he is disappointed that the Securities and Exchange Commission has not taken action against Nuveen, which sold auction-rate securities to retail investors.

Kastel should not only be disappointed in the SEC, but FINRA as well. FINRA has regulatory oversight of broker-dealers. The WSJ provides further grist for the ARS mill:

A spokesman said the SEC declined to comment, but noted that it continues to monitor settlements it has made with six firms involving auction-rate securities.

The suit also names Robert Bremner, chairman of the board of Nuveen North Carolina Funds; CitiGroup Global Markets; and Mesirow Financial Inc. of Delaware, which acted as Kastel’s broker-dealer.

Deutsche Bank acted as the auction agent in concert with Merrill Lynch and CitiGroup, according to Kastel. Merrill Lynch was one of the underwriters for the funds, and, as an underwriter, was an authorized broker-dealer to participate in the auctions, he said.

CitiGroup Global Markets, the legal entity for Citigroup Inc.’s (C) broker-dealer, and Mesirow Financial declined to comment.

In addition to a return of principal and damages, the lawsuit seeks a preliminary injunction that would prohibit Nuveen North Carolina Funds from paying fees to Nuveen, Mesirow and other defendants, from paying interest or dividends to the common shareholders and from using money held by the funds to purchase or make investments in new securities until the funds have redeemed the Kastel’s auction-rate preferred shares and the auction-rate preferred shares held by other investors.

Lots of questions from lots of angles in this greatest of Wall Street frauds known as auction-rate securities.

I can only hope that FINRA is compelled to open its books and records to reveal details on all its activities, including its liquidation of ARS in 2007. (Amerivet Complaint Against FINRA Alleges Madoff Investment)

From there, I can only hope Mr. and Mrs. Kastel’s suit is properly adjudicated.

If these two cases are properly addressed, perhaps every ARS investor may move a few steps closer to receiving full and proper restitution and this fraud can be put to bed forever.


Related Sense on Cents Commentary:
For newer readers here at Sense on Cents, you can access my extensive writing on ARS, FINRA, and all other angles on this fraud by utilizing the search window in the upper right of any page.

Feel free to ask questions or leave comments as well. Best of luck.  ~LD

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