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Will Ignorance Defense Continue to Screw Auction-Rate Securities Investors?

Posted by Larry Doyle on December 18, 2009 8:03 AM |

Auction-rate securities investors remain at a decided disadvantage when it comes to pursuing legal claims. Misrepresentation by those distributing the auction-rate securities does not seem sufficient to warrant a claim, let alone retribution. The fact that investors are having difficulties bringing suit against Wall Street firms which distributed auction-rate securities should be further reason for investors to be cautious in engaging brokers and financial planners. Why? The fact that selected cases of auction-rate securities distribution have been designated as having occurred in a fraudulent fashion would seem to have established a significant precedent. The fact that the precedent has not been established is mind boggling.

$149 BILLION in auction-rate securities held by thousands of investors remain frozen. Where’s the justice?

Bloomberg provides a recent review of these developments in writing, Auction-Rate Investors Get Redo After Loss of First Fraud Suits:

Auction-rate securities investors who sued banks including Citigroup Inc. and UBS AG to recoup billions of dollars in losses went 0 for 5 as their first cases were thrown out. Now some are gearing up for a rematch over part of the $149 billion in securities that remain outstanding.

In three of the class actions, judges allowed the investors to refile their complaints after finding the initial suits failed to prove they lost money or satisfy a 1995 federal securities-fraud law designed to discourage frivolous stock-loss suits. Citigroup, UBS and Raymond James Financial Inc. have again asked that the cases be tossed out.

“The private litigation has run into a brick wall,” said James Cox, a law professor at Duke University in Durham, North Carolina. The legal bar for bringing such lawsuits has been too high for auction-rate investors to surmount, he said.

Those investors may need a change in federal law if the 1995 act proves too big an obstacle for genuine claims, said Elizabeth Warren, who chairs the congressional oversight panel monitoring the Troubled Asset Relief Program. She suggested the idea for a Consumer Financial Protection Agency.

“The rules in place for liability and the right to bring a lawsuit under these circumstances are determined by a combination of case law and legislation,” Warren said. “If we don’t like where the balance point is, we at least have the legal capacity to change that.”

What may investors need to change? Check what is on the side of the banks and brokers in cases such as these. Bloomberg highlights:

The judges who ruled on the motions to dismiss in the auction-rate cases decided against the investors because they didn’t lose money or didn’t satisfy the tough legal standards for bringing securities-fraud suits, according to their rulings.

Those standards include backing up allegations of wrongdoing with what the statute calls particular detail. This means investors must show, to the satisfaction of a judge, that the company probably knew it was doing something wrong.

Thus, the burden is put upon the ARS investors to prove that the banks and brokers were not merely ignorant in the distribution of ARS, but that they were well aware they were misrepresenting the product. Clearly, there may have been many salespeople,brokers, and financial planners who were ignorant of the particular risks embedded in ARS. I will, however, NEVER accept that the management of these institutions were ignorant of the risks in ARS.

ARS were continually marketed as cash, but  they were NEVER cash or cash-like. Who knew? The NASD. I wrote as much this past May in my piece “NASD Knew Auction Rate Securities Weren’t Cash.” What was the NASD and its successor FINRA charged to do? Protect investors. They failed miserably.

Will the Wall Street banks be able to hide behind the ignorance of their own salespeople and will ARS investors continue to get screwed not only by the banks but now by the courts as well?

Where’s the justice?

What happened to my country?


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