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Auction Rate Securities Update: Raymond James Claims ‘Meritorious Defenses’

Posted by Larry Doyle on May 11, 2011 9:14 AM |

Three plus years and counting and with little indication that a full blown settlement of the auction-rate securities nightmare is close to happening, the crowd at Raymond James asserts it has ‘meritorious defenses’ against making its clients whole.

Really? How interesting.

Does Raymond James hold a trump card that nobody else is even aware is in the deck? Why is it that Raymond James provides such bluster at this time? Is the heat rising in Ray Ja’s kitchen? Let’s navigate as Investment News yesterday highlighted, ARS Mess Could Cost Raymond James Up to $50 Million,

Raymond James Financial Inc. said today it could face a loss of $25 million to $50 million if it immediately has to buy back distressed auction-rate securities from clients. 

The Securities and Exchange Commission, the New York attorney general’s office and the Florida Office of Financial Regulation have been investigating the firm, which has had negotiations with the regulators to resolve the matter.

“Were we to repurchase that ARS portfolio, the fair value could be less than the par value of such securities by an amount ranging from $25 million to $50 million,” the company said in a filing with the SEC. “This estimate does not include any ARS held by our clients who transferred to another broker-dealer.”

The company did not say if a settlement is pending.

At the end of March, Raymond James clients held about $370 million in auction-rate securities, the market for which seized up during the winter of 2008.

That ‘fair value’ assessment implies a discount to par value of approximately 7-13%. If that is the entirety of the loss, then why isn’t Raymond James eating it and ending this nightmare? What aren’t they revealing?

Would they be willing to pay even 85 cents on the dollar, let alone 87-93 cents, for Jefferson County, Alabama auction-rate securities? Why Jefferson County ARS? Here’s why. Last August an individual named Mark, who asserts to be a Raymond James client, offered the following here at Sense on Cents:

Mark wrote,

August 16, 2010 at 2:31 PM

I have ARS tied up with Raymond James. Can we talk about the unbelievable stance they have taken with these. Mine are ARS backed by Jefferson County Alabama. I have what may be an unusual case in that my advisor is backing me 100% and actually left Raymond James over the ARS problems. He will work with us and provide any information we may need. Please contact me.

Who might that broker be? What might he be able to share? What do we know about Jefferson County, Alabama? That county is the poster child for municipal malfeasance and is on the brink of default. A little over a month ago, The Wall Street Journal highlighted, Bankruptcy Threatens County,

Officials of Alabama’s Jefferson County are expected to meet with state lawmakers Wednesday to discuss how to avoid filing the largest municipal bankruptcy in U.S. history after a court disallowed a local tax.

The county, which has said its expenses will exceed its income by sometime in July, has been staving off bankruptcy for about three years, after absorbing $3.2 billion of debt resulting from a series of corrupt and disastrous decisions in financing a sewer-improvement project.

The debt is the product of several financing decisions in the 2000s, such as borrowing at variable interest rates and using bond insurers that were later weakened in the credit crisis. Compounding problems was Jefferson County’s use of derivatives called interest-rate swaps, with which it bet the wrong way on the direction of interest rates.

Variable interest rates? Yes, those would certainly include the auction-rate securities issued by Jefferson County, Alabama. In addition to this specific situation, let’s quickly review Sense on Cents commentary from August 27, 2010, Raymond James Taking Center Stage in ARS Tragedy, in which a Ray Ja client asserted,

Raymond James was still advising him to buy auction-rate securities into February 2008, when the auction market froze, and made one purchase the day after that occurred, Mr. Merdinger alleged. The market for auction-rate securities remains frozen, leaving many investors stranded.

Copies of emails that were considered during the proceeding allegedly showed that Raymond James financial managers knew there were problems in the auction-rate market well before it failed, according to Lawrence Byrne, a securities lawyer in Chicago who represented the investor.

Against this backdrop, what do the powers at be at Raymond James have to say? As Investment News reported,

“We believe we have meritorious defenses, and therefore, any action by a regulatory authority to compel us to repurchase the outstanding ARS held by our clients would likely be vigorously contested by us,” the firm said.

Well Raymond–you don’t mind if I call you Raymond, do you–let’s see those meritorious defenses!! What do you have to say to Mark and every other client? Why don’t you publicly release the e-mails to which Mr. Byrne refers.

Three plus years and counting….meritorious defenses?


On behalf of all Raymond James ARS clients as well as all those who are still frozen in ARS, …..LET’S SEE YOUR MERITORIOUS DEFENSES!!

Are there any former Raymond James’ brokers in the audience? Can you enlighten us?

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.


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