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Wall Street ARS Betrayal Brings Losses and Sleepless Nights

Posted by Larry Doyle on August 28, 2009 9:19 AM |

Those who would betray the trust and integrity of a market and investment must be held to account.

Such is the current dynamic within Wall Street’s greatest fraud that encompasses Auction-Rate Securities.

At times, I wonder if I focus too much on the ARS debacle. Then, when I read of the depths of despair experienced by ARS investors, both institutions and individuals, I personally seethe at the injustice of it all.

Bloomberg provides a wide ranging review of institutional investors who were defrauded by Wall Street in purchasing auction-rate securities. Bloomberg writes Wall Street Betrayal Seen in $4.8 Billion Company Debt Losses. The highlights in this article are almost too numerous to single out, but suffice it to say this fraud has likely touched almost every investor in either a direct or indirect fashion.

I am heartened that the fraud is finally receiving significant focus. That said, how will Wall Street be held accountable and how will investors be made whole? Let’s address some specific details as highlighted by Bloomberg:

Bristol-Myers Squibb Co. the New York-based pharmaceutical company, took an 82 percent loss in 2008 when it sold a portion of its auction-rate debt with a $642 million face value.

The maker of Plavix, the world’s second best-selling medicine behind Pfizer Inc.’s Lipitor, continues to hold $169 million worth of auction-rate bonds. It wrote them down by $75 million in the second quarter, according to regulatory filings.

An 82% loss on a supposed cash surrogate! A 44% writedown on cash!

The market’s collapse also caused “staggering losses” to Teva, according to a lawsuit filed Aug. 6 against Bank of America’s New York-based Merrill Lynch & Co. unit, which sold $273 million of obligations to the Petah Tikva, Israel-based drugmaker.

The securities are now worth $10 million, according to the suit, which said that “Merrill Lynch was engaged in an elaborate scheme to deceive investors about its involvement in the auction-rate market.”

Elaborate scheme to deceive investors! How could that happen on a cash surrogate?

In April, Texas Instruments, the second-largest U.S. semiconductor maker, sued New York-based Citigroup Inc., Morgan Stanley and BNY Capital Markets Inc., now part of Bank of New York Mellon Corp., over $521 million in auction-rate securities bought since 2005.

“They let us believe they would be liquid,” the Dallas- based company’s treasurer, Charlie Tobin, said in a telephone interview. “At the same time, within their institutions, they knew it was coming to an end.”

While the Wall Street bank coffers are being filled by the easy money provided by the Fed, so many ARS investors are receiving little gratification.

Who was mandated to protect investors and oversee the ARS market? The SEC and FINRA, the Wall Street self-regulatory organization. Yes, the same FINRA which owned and liquidated $647 million ARS in 2007. How was FINRA so fortunate to get its money out of the ARS market? FINRA has shown no measure of responsibility or obligation in opening its books to reveal all details of its ARS liquidation. FINRA’s day of reckoning will come.

Those in Washington and on Wall Street will be exposed as total hypocrites if they do not support the Amerivet Securities complaint against FINRA requiring FINRA to open its books.


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