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UBS Loses Huge Auction-Rate Securities Case

Posted by Larry Doyle on August 5, 2010 7:40 AM |

Morning in America!!!

Are auction-rate securities holders gaining the upper hand against Wall Street in the fight to gain full justice and restitution with penalties for the improper marketing and distribution of ARS? While 2009 brought many judicial and arbitration defeats for ARS holders, lately we witness a shift in the tide. Thank you to a reader of Sense on Cents for sharing that UBS (Union Bank of Switzerland) not only lost an ARS case, but the Swiss bank has to repay ten times the initial ARS investment. WOW!!

What happened here? Why such a large settlement? Let’s navigate as The Wall Street Journal reports, UBS To Pay $81 Million in Auction-Rate Case:

UBS AG has been ordered to pay 10 times the amount a Maryland marketer of cellphones originally invested in auction-rate securities, in another sign of the reckoning still dogging Wall Street for its role in investor losses during the meltdown.

UBS was ordered to reimburse Kajeet Inc., which markets cellphones for kids, $80.8 million for damage to its business when Kajeet’s cash was frozen in auction-rate securities in early 2008. Kajeet had invested only $8 million in the securities through UBS, according to people familiar with the case.

A spokeswoman for Switzerland-based UBS said, “We strongly disagree with the arbitration panel’s decision.” She said UBS plans to file a motion to overturn it: “We believe the outcome is unwarranted under both the facts and the law.”


The award, disclosed late Tuesday, is an unusual example of how Wall Street’s bills for the market meltdown are still growing more than three years after the crisis first struck in mid-2007. Investors have filed more than 650 claims to recover auction-rate losses or damages through the end of June, according to the Financial Industry Regulatory Authority.

The entire $330 billion market for auction-rate securities froze in February 2008, when Wall Street dealers pulled back from auctions held weekly and monthly to set their interest rates. UBS had more than $35 billion in such auction-rate investments held by 40,000 customers who suddenly couldn’t get access to their money, the Securities and Exchange Commission said in a 2008 complaint. Regulatory settlements eventually required major brokerages to buy back more than $60 billion from investors.

“This case sends a shot across the bow for Wall Street firms that if they violate securities laws, they can be held liable for consequential damages,” said investors’ lawyer Jacob Zamansky.

What happened to Kajeet due to its inability to gain access to the funds it held but were frozen in ARS?

Without access to its funds, Bethesda, Md.-based Kajeet had to cut its 60-member work force in half and lost a key distribution deal with a well-known national retail chain, stunting its growth, the same people said. Kajeet currently has 15 employees.

I am thrilled for Kajeet, but let’s frame this case properly.

1. Kajeet’s investment of $8 million represented .000053 of the approximately $150 billion ARS still outstanding and frozen. Kajeet deserves every penny of this award BUT….there are thousands more investors also deserving justice. As such, there are truly many more rounds to this fight.

2. Kajeet asserts it cut 30 employees due to this ARS debacle. At that rate, the remaining $150 billion ARS would equate to a job loss approaching 560, 000 jobs!!! Obviously, this line of reasoning is not purely theoretical but anybody with a degree of sense on cents can appreciate my point.

3. I am thrilled for Kajeet, but what about every other ARS investor? Where is their justice? Where is their restitution? Where is their penalty payment?

4. One final point. I do not hold out this WSJ reporter, Randall Smith,  accountable for what is written or not in The Wall Street Journal. That said, the WSJ editors who decided to allow Randall to pursue this story did not allow him to pursue the fact that FINRA owned and fortuitously (for FINRA, at least) liquidated $647 million auction-rate securities in its own internal investment  portfolio in mid-2007.  I shared FINRA’s ownership with Randall in late January 2009. Fast forward to August 2010, and Sense on Cents is still punching and looking for answers on FINRA’s liquidation. How many jobs could FINRA have saved if it had performed in its responsibility to protect investors?

With this decision for Kajeet, today was a good day for ARS holders everywhere. That said, the fight continues.

Keep punchin’!


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