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Auction-Rate Securities: The Fraud Continues

Posted by Larry Doyle on May 3, 2010 10:57 AM |

To: Wall Street, Washington, and State Capitols

From: Sense on Cents

Re: Auction-Rate Securities Fraud and Financial Regulatory Reform

To all those enmeshed on both sides of the political-financial incest and currently debating and lobbying on the merits of proposed financial regulatory reform, you are proving yourselves to be nothing more than massive frauds yourselves by not fully addressing and exposing the single greatest financial fraud perpetrated on American investors, that is the world of auction-rate securities.

To President Obama, members of Congress, financial regulators, and Wall Street executives, your unwillingness and inability to openly and honestly address the perpetuation of the fraud surrounding ARS ($150 billion ARS remain outstanding) paints you as nothing more than aiding and abetting the fraud itself. Who amongst you is even willing to fully address this topic?

Your silence speaks volumes as to your allegiances and your willingness to allow the interests of American investors to be trampled. You think I am off base? Let’s ponder the pain and anguish expressed by an ARS investor who was fraudulently sold this garbage by Oppenheimer:

Is there no end to the amount of abuse auction rate securities victims still have to put up with? Now we have Nuveen CEF common share holders suing Nuveen for redeeming the preferred share holder’s ARS. It seems that every individual, company, regulator or attorney general that has something to gain by keeping our auction rate security money frozen is working real hard to do just that.

Nuveen has been the only company that has actively been setting this injustice right by consistently redeeming their preferred share holders. Now that I have experienced first hand the way things work in the financial/regulatory world someone should find out who these common share holders are. My guess is they represent other CEF like Blackrock, Eaton Vance, Van Kampen, Neuberger and Pimco who have done nothing for their preferred share holders.

Nuveen has been making these firms look very bad. All of the firms mentioned above could do the right thing and redeem their ARS if they wanted to. Nuveen has made it apparent they have no interest at all in doing the right thing. I’m sure they are very motivated to stop Nuveen’s redemptions.

Nuveen was a bright light for some of us. That light seems to be getting extinguished. Otherwise all remains the same. Over 2 years and we are farther away now then we ever were of getting our money back.

Oppenheimer & Co was brilliant. They showed us how useless Cuomo and his Martin Law can be when they want to be. It’s amazing what getting off the hook for a billion dollars of misrepresented securities they pushed on us has done for their business. Their CEO and other top exec that dumped their ARS before the market collapsed have full use of their cash and Cuomo found nothing wrong with their behavior.

Cuomo has proven to Wall Street that he can be very friendly to them if he wants to be. All at our expense. I’m sure this will pay a big dividend during his run for governor. If my attorney general continues to favor companies like Oppenheimer and support their immoral behavior and ignore the plight of those that suffer because of such behavior I will oppose him every way I can in his bid to be governor.

Who needs a governor that fails to protect it’s residents?

Who amongst the aforementioned political and financial executives are willing to stand up for this American citizen and the thousands more who are in the same bind because our regulatory system and, in turn, our government failed them?

Financial regulatory reform? Not when $150 billion dollars from a prior fraud, that being auction-rate securities, remain in the hands of the banks and dealers who fraudulently marketed and distributed these securities.


. . . and Wall Street execs and Washington pols wonder why America detests them so much? The ARS fraud provides 150 billion reasons!!

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  • phil trupp

    This fraud isn’t going to go away. Larry Doyle should be congratulated for speaking truth to power, even when that power is wasted or corrupted or indifferent. It’s well-known among thousands of ARS victims that my book, RUTHLESS, is due for publication in late September; it deals directly with the fraud and its convolutions. It is a first-hand account of the struggle. A major PR blitz is planned. It won’t get as much attention as Goldman Sach’s predations, but it will definitely spill into the public arena. A lot of people on Wall Street and in Washington are going to hate this book. So be it. I didn’t write it to be loved. I intend to stay in the fight until some justice is achieved. If it hadn’t been for the concerted actions of many ARS victims, it’s possible that virtually none of these securities would have been redeemed. Thus Larry’s point is well-taken: There’s plenty of shame (and blame) to go around among those who manufactured the fraud, and among those charged with seeking justice for victims but failed in their duties. We are painfully aware of the smugness, the indifference and deceit that characterizes Wall Street. Your dirty laundry, along with your stupidity, will be on display. As for those regulators who failed to do their jobs, you will not be neglected. I have no idea if the book will make a difference. The best I can hope for is to hold up a mirror to people who would rather not be reflected there. Wall Street and Washington: You are not off the hook. The fight will continue until you find the guts and the decency to make things right. Maybe that’s too much to expect from the tin ears and those number crunchers with inflated egos who believe crime always pays.

  • jim

    Once again, thanks for continuing your fight to expose the ARS fraud. Over two years and 150 billion still frozen! I send all your posts to my congressman – have never received a reply..further proof of their collusion in this whole fraud!

  • Freedom

    I am writing of a specific but unnamed real fund. Should attention be directed toward fund companies that will not deleverage? This is a real case but for some reason after reading all of your accusations and name calling I am holding back on which fund and fund company this is. But understand I have been attempting to get people in Washington to listen. No luck. Maybe you will. By the way I am not a fraud.

    My disclaimer is that I believe I obtained this information from sources believed to be reliable and of course cannot be held responsible for mistakes or missing details which I really do not think there are so read on.

    I took some time to evaluate the ***** Municipal Bond This closed end municipal fund’s prospectus states,” The fund seeks to maximize current income exempt from federal income tax to the extent believed by ***** to be consistent with the preservation of capital”. I also looked at the comments from ***** chief investment officer, Mr. …… They can be found on the company’s web site.

    Mr. …….. January’s commentary says, “We expect rising rates. Ten year treasury yields will likely be above 5% before year end”. If he is correct, the holder of a ten year treasury bond will suffer a (9.4%) principal loss. The bond will generate a 3.8% current yield – so the net loss on the investment would be (5.6%). I don’t think you would want to use borrowed money to achieve that return – regardless of how low the borrowing costs.

    I studied the funds holdings. The fund owns $590mil worth of bonds. There is $186mil of auction rate securities outstanding. The company charges management and administrative fees that currently total 65basis points on the assets managed (including the money “borrowed” from preferred shareholders). They are temporarily waiving another 10 basis points. When that waiver expires, the fee goes back to 75 basis points. There are other fees, of course. I am only looking at the charges that are paid directly to the ***** Company.

    The fund holds $139mil of pre-refunded securities. The yield to maturity on these kinds of bonds is extremely low in today’s environment. All of these bonds are short to intermediate term. The bond-buyer scale for pre-refunded bonds ranges from .24% for one year paper, to 2.52% for issues to be called in eight years. I believe that most of the pre-refunded bonds in this portfolio are scheduled to be called on the shorter end of that range.

    What are the costs to the fund for using leverage? Rates have bottomed out – really can’t go any lower. They are now paying .365% to the preferred shareholders. They also pay .15%-.25% for auction costs. Let’s say .15%. They charge .65% to manage the assets that they bought with the borrowed money.

    So: common shareholders are paying: .365% + .15% + .65% = 1.165% on money that is invested in pre-refunded bonds that are currently priced to yield between .24% and 2.52%. I can not access the portfolio details necessary to determine the average yield on the pre-refunded portion of the portfolio. Reasonable assumptions would indicate that the pre-re portion is priced for a yield to call of less than 1.165%.

    The board of this fund should direct the management to liquidate the pre-refunded portion of this fund. Proceeds should be used to redeem auction rate preferred shares. The fund has accumulated a capital loss carryover that is available to absorb tax liabilities associated with selling the bonds. In Fact $9,253,314 of $52,897,603 carryover will expire in fiscal 2010, if unused.

    This fund is maintaining leverage that is both counterproductive to the goal of maximizing current income ($139mil of pre-refunded bonds priced to generate total returns that are less than the borrowing cost to shareholders), and defies their goal of capital preservation (their own forecast expects higher interest rates).

    The only reasonable explanation for using the leverage is to maintain the fees paid to *****. The board has a fiduciary responsibility to protect the interest of the shareholders.

    Let’s call these people out. Can we get someone with regulatory or legislative authority to pressure these companies?

    • LD


      Thanks for taking the time to write such a detailed analysis. Certainly I would not think any investor would want to purchase a fund that continues to hold auction-rate bonds or auction-rate preferred shares.

      to that end, I would hope that you would share with our audience which fund you are describing.

      In regard to getting regulators and/or legislators to respond, I am not holding my breath. Although I wish I had the ability to make an immediate impact I do think that by highlighting issues along with detailed instances, we can help people. To that end, I would hope you would feel comfortable sharing which fund you are describing here. We can apply a disclaimer if you would prefer.

  • john w

    Thanks again for continuing to expose this ON-GOING fraud.

    E*Trade is putting me through hell and at every turn and is painting themselves as the victium. This situation has gone beyond the absurd. The hold-outs like E*Trade and Schwab and some others need to be bill-boarded as a hazard to anyone’s financial and mental well-being.
    I cannot even begin to share the personal agnst and levels of frustration from mental to physical that I have experienced. E*Trade and their amoral attorneys continue to stone-wall and deny any responsibility, and E*Trade reps at one point even threathened me. They have literally stolen over two years of my life, and railroaded some of my retirement plans. LD is right on, the government wonders why we detest them all so much. I have written every Regulator and politico, media; from Bush/Obama to my local state rep. that I can imagine.. all but no avail. They are all too busy rewarding the deadbeats and criminals on Wall Street. They are all in on it? Or the brokers and funds are just writing them checks?
    The closed end fund Advent Claymore just laughs at me while they use my money at .25%, and pay common holder almost 7%.. who have liquidity. The ratings agengies never even response to inquiries as to why they still rate this crap AAA. I hope they all burn in hell, and they will, as karma will get them.
    Phil Trupp is my hero also, thanks Phil, and please be sure to include E*Trade in your book as perhaps in a race for the worse of the worst on the broker level.
    What in God’s name will it take?
    Anyone able to contact Bill O’Reilly or Michael Morre?

    I am at the breaking point of mental and physical exhaustion over this matter, and FINRA can bite me!

  • john w


    UBS units agree to buy back $456M in auction-rate securities
    Denver Business Journal – by Renee McGaw


    Those two pieces of intransigent crimminal pond scum brokers are in a race to the bottom for worst of the worst.

  • John W

    E*TRADE Loses Big Auction Rate Security Arbitration Ruling; ETFCD, SCHW, AMTD hahahahah

    | 10 June 2010
    Baby JailE*TRADE Financial Corporation (ETFCD) lost an arbitration ruling in the case of a New Jersey couple seeking $1.3 million. The couple purchased auction-rate securities through E*TRADE in 2008 when they were allegedly sold as a safe alternative to cash. They were awarded $1.25 million plus $70,000 in legal fees.

    We first started writing about the ARS debacle back in July of last year. The auction rate securities market collapsed in February 2008 and left many investors wondering what just happened. They had good reason to scratch their heads. Individual investors, charities, and small business were sold the opportunity to play in a market usually reserved for larger players. But rarely were they made aware of the real risks and in fact often they were told their investments were just as safe as cash.

    While TD Ameritrade (AMTD) quickly settled for $304 million, Schwab (SCHW) and Raymond James held out, claiming the debacle was the fault of the underwriters and had nothing to do with their sales practices.

    At issue for Schwab was roughly $780 million in securities purchased by about 900 individuals. As more and more banks and brokerages settled with the SEC and more details were revealed, we surmised that Schwab was going to be fighting an uphill battle. And in fact, Schwab had a little spat with the SEC in February related to he YieldPlus fund and ultimately has settled out of court in that case.

    We think the surrounding circumstances in this case are similar to those of the Yield plus case for Schwab. In other words, as more firms settle or start to get tagged in FINRA rulings the pressure will build for Schwab and they’re likely to look for a settlement.

    When it comes to E*TRADE, however, it’s unclear to us how much risk is at play. We know TD Ameritrade settled for $304 and Schwab is currently on the hook for about $800 million. The problem with E*TRADE is it doesn’t have the cash to spare. In fact, they recently raised $147 million through a secondary offering in order to improve their balance sheet — not because they wanted to but because the Office of Thrift Supervision demanded it.

    • LD


      The question I have is how and why does this couple get their ARS refunded and others do not. I would venture to say that so many investors have very similar if not identical stories.

      If that is the case, then why the differentiation in how investors are treated?

      That differentiation does not seem to me to be a whole lot of ‘sense on cents.’

      Thanks for the story.

      • John W


        Thanks Larry

        exactly !!!! I have $50,000 in my IRA they stonewall my access to. E*Trade is the most worthless piece of pond scum on the planet, one would have a better chance as a pelican surviving the oil spill in Gulf, than ETrade’s thefts!

        Hope this come out in other web sites.

        I thank you over and over for all your hard word, and read and refer your web site daily.

  • John W

    ps refernce on the ASRPS decision vs ETrade
    Yahoo ETFCD message board with a link to FINRA arbs cases setteled.
    The original source is right off FINRA’s case file.

  • John W
  • John W

    If E*trade Securitiescrapola was in better shape they would have made her whole as have other larger, healthier sellers of ARS products. It’s bad biz to have these small victims understandably wailing about their losses.It’s past time for ETFC to do the right thing here.
    And there has been a history of abuses of these products.

    “The SEC Cease-and-Desist Order of 2006

    In 2006, the SEC concluded an investigation of 15 firms, representing the Auction Rate Securities industry. The SEC summarized its findings: “between January 2003 and June 2004, each firm engaged in one or more practices that were not adequately disclosed to investors, which constituted violations of the securities laws.” The SEC issued a cease-and-desist order to stop these violations.[6]

    The SEC order listed several illegal practices in the conduct of auctions, and noted: “In addition, since the firms were under no obligation to guarantee against a failed auction, investors may not have been aware of the liquidity and credit risks associated with certain securities. By engaging in these practices, the firms violated Section 17(a)(2) of the Securities Act of 1933, which prohibits material misstatements and omissions in any offer or sale of securities.”

    The auction failures in February 2008 led to industry-wide freezing of clients’ accounts while requiring municipalities to pay excessive interest rates, reported to exceed 20% in some cases. A renewed investigation of the auction rate securities industry was led by Andrew Cuomo, the Attorney General of New York, and William Galvin, Secretary of the Commonwealth of Massachusetts. These investigations discovered continued industry-wide violations of the law by misrepresenting auction rate securities as liquid cash alternatives while failing to meet the SEC order to disclose to clients the liquidity and credit risks involved. Many, but not all, of the firms involved in these practices chose to settle out of court, refund the auction rate securities they sold to clients and pay respective penalties.”

  • T Green

    I have a substantial sum of ARS through E*Trade what is the best method to get them redeemed?

    • LD

      T Green,

      As a disclaimer, I do not provide personal financial advice. You could look to sell your holdings in the secondary market. I would strongly encourage you to track the E*Trade complaint that is proceeding in Colorado.

      Sense on Cents/E*Trade

  • Bob S. Sponge

    comedy, pure comedy

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