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ARS Update: Raymond James and Morgan Keegan ARS Investors’ ‘Nightmare Over’

Posted by Larry Doyle on June 30, 2011 4:29 AM |

I strongly believe that the marketing and distribution of auction-rate securities was the single greatest scam perpetrated on investors by Wall Street.

While a full forty months have passed since the ARS market failed that fateful day in February 2008, approximately $100 billion of the original $330 billion ARS remain frozen.

Many thousands of investors continue to wonder if they will ever get a full return of their cash locked up in what were supposedly ‘cash-alternative’, ‘cash-surrogate’, ‘totally liquid’, ‘as good as cash’, ‘money market type’ instruments.

Forty plus months. $100 billion. You think you have stress. Place yourself in the position of these investors. Sense on Cents continues to bang the drum for ARS investors and now we witness two more ‘wins’ but one real ‘disappointment’ on the ARS front. Let’s navigate.

Last we heard from the crowd at Raymond James, they were claiming they had a ‘meritorious defense’ in their marketing and distribution of auction-rate securities. Well, it would now appear that RJ’s meritorious defense was not all that meritorious. A little bluster on the part of RJ, perhaps? How so?

The Associated Press and Forbes report, Raymond James Settles Charges for Up to $350 Million,

Raymond James & Associates Inc. will pay up to $350 million to settle state and federal charges that it lied to clients about auction-rate securities, telling them the investments were as safe as cash before the credit crisis made the bonds impossible to sell.

The investment management and brokerage company said Wednesday that it will rebuy all of the outstanding bonds for face value – about $350 million, according to officials with Securities and Exchange Commission. The company did not admit or deny the charges.

Raymond James, based in St. Petersburg, Fla., said the cost will be closer to $280 million. The settlement will force it to take a pretax charge of about $50 million in the third fiscal quarter ending June 30, the company said.

Raymond James also will pay fines to the states totaling $1.75 million.

The SEC said Raymond James lied to its clients about the investments, calling them “safe, liquid alternatives” to money-market funds and other investments that can be converted into cash quickly and easily.

The settlement also resolves separate charges brought by state securities regulators in Florida, Texas, Indiana, New York, North Carolina, Pennsylvania and South Carolina, the North American Securities Administrators Association said in a statement. That group said there are about $300 million of the bonds still in clients’ hands.

This news is outstanding for all those who had purchased ARS via Raymond James and maintained exposure to the firm. Your nightmare will soon be over.

While those ARS investors who had purchased these securities from Morgan Keegan will soon also be made whole, a fraud claim against Morgan Keegan was dismissed.

The Wall Street Journal highlights the good news in writing, Morgan Keegan to Repurchase Remaining ARS to End $2B Program,

Morgan Keegan said it will repurchase all remaining auction-rate securities sold by the firm and held by retail investors, including securities issued to debt-laden Jefferson County, Ala., a move that will conclude a program initiated in early 2009.

The company, a unit of Regions Financial Corp. (RF), said the purchases would “restore liquidity to retail investors who had purchased approximately $2 billion of auction-rate securities through the firm.”

While ARS investors clearly want this nightmare over, I remain concerned that the business practices utilized in the distribution of these securities have never received their proper adjudication. I believe the marketing and distribution of ARS rose to the level of fraud. Who else held that opinion? U.S. District Judge in New York Lawrence M. McKenna. He offered as much in early 2009. I highlighted that in writing, “Before Any Fraud Ensued”,

Let’s review what the judge in this case has to say:

“Given that plaintiffs have availed themselves of the relief provided for in the regulatory agreement, plaintiffs now cannot allege out-of-pocket damages,” McKenna ruled yesterday. The investors “have already been returned to the position they were in before they purchased the ARS and before any fraud ensued.”

While I would assume that those investors who purchased the ARS from Morgan Keegan are happy to have this nightmare over, the fact is I believe real and total justice has been denied. Bloomberg Businessweek highlights this reality in writing, Judge Rejects SEC Claim That Morgan Keegan Misled ARS Investors,

A U.S. judge rejected Securities and Exchange Commission claims that Regions Financial Corp.’s Morgan Keegan brokerage unit misled investors about $2.2 billion in auction-rate securities before the market for the instruments collapsed in 2008.

“The SEC has not introduced any evidence to show that Morgan Keegan instituted a companywide policy encouraging its brokers to misrepresent ARS liquidity risks,” U.S. District Judge William S. Duffey Jr. said today in a summary judgment in Atlanta. The “failure to predict the market does not amount to securities fraud.”

The SEC sued Morgan Keegan in July 2009, claiming it encouraged brokers to push the debt before the $330 billion market froze in February 2008, and customers weren’t told about the growing risk the securities could become difficult to sell. Since then, dozens of banks have returned billions of dollars to harmed investors.

John Nester, an SEC spokesman, said the agency is considering whether to appeal. A phone call after normal business hours to Tim Deighton, a spokesman for Birmingham, Alabama-based Regions, wasn’t immediately returned.

Federal and state regulators have sanctioned banks for selling auction-rate securities as safe, cash-like investments. The instruments are typically municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through an auction.

The SEC cited testimony of four customers claiming they were misled by Morgan Keegan brokers who allegedly said ARS were “cash equivalents” and “completely liquid,” according to the judgment. Duffey faulted the agency for arguing those investors’ claims were true for others.

“The SEC is attempting to bootstrap the investor-specific impact of the misrepresentations alleged by four individual investors as a grounds to seek relief for a whole class of investors without any evidence that the other investors received similar oral misrepresentations,” Duffey said in the judgment.

One may wonder if Judge Duffey is a descendant of Rip van Winkle. I have yet to hear from any single individual investor involved in the ARS web who was not pitched these securities in such a fashion. How hard did Duffey probe? How badly did he care to find out the real truth? Has he been sleeping for the last 40 months?

Anybody connected to the Raymond James and/or Morgan Keegan cases, we would love to hear from you.

$230 billion down….$100 billion or so to go.

Larry Doyle

Sense on Cents Related Commentary
Sense on Cents/Auction-Rate Securities

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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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