Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Wednesday, March 19, 2008: You
have to wonder where Wall Street's head is at. The longer it messes around before
solving the liquidity crisis in auction rate preferreds, the more the damages
will mount up and the more expensive the final result. If you wanted to believe
in conspiracies, you could argue that the longer Wall Street's lawyers mess
around, the more work they will have. And since they typically bill by the hour,
this is a good thing -- at least for them.
longer this thing drags on, the more horrific the damage stories I hear -- about
people who've lost their deposit on the house they couldn't close on, about
the medical bills that can't be paid, about the businesses and buildings that
can't be bought because the money is locked up in ARPs and the seller shrugs
and says "Ain't my fault you bought that ARPs crap."
are key to what settling a class action suit will ultimately cost. See below.
ask myself what would I do if I were a broker or banker who sold this stuff
to my unsuspecting clients?
personally go to each and every customer and say, "I am truly sorry
this happened. If you wish I will buy all or some of your ARPs from you today,
or any time in the next year." I see five benefits in doing this:
1. Huge customer
goodwill. All broker/dealers are severely underestimating the loss in goodwill
and loss in brokerage business from this dragging on and on.
2. One year
paper thats paying nice returns. The broker/bank will own paper that's
paying more than most anything else safe they can own -- especially after yesterday's
big 75 basis point rate cut. I suspect most brokers and banks may also be surprised
how little will be redeemed. After all, the interest being paid on most ARPs
is pretty good. And "the run on the bank" will now be over.
3. Huge savings
in legal bills. The first class action suits have already started. Many
more will follow. It's not cheap to defend against them. But it cheap to start
them. The lawyers are working on contingency. See below.
4. Great bargaining
ability. If a broker suddenly owns many ARPs, that will give them huge bargaining
power with the likes of Nuveen, BlackRock, Eaton Vance, etc. Get them off their
backside and get the redemptions moving.
free publcity. The first one who announces the immediate buyback will earn
screaming positive headlines in the financial press. To me, it's a no-brainer.
But then I'm not the president of a broker or bank that sold ARPs. I'm just
a guy who tries to think logically. I once ran a successful business. I really
valued my customers. I would never treat them as Wall Street is currently treating
all of us.
Make sure you
send today's column to your broker, bank or whoever sold you your ARPs. Up till
now, I have counseled against legal action. I still believe it to be premature.
The stories I hear from Wall Street is that things will become much clearer
after the end of this quarter (March 31) and the end of the present reporting
season. But we do need to understand what legal action means, how it works and
what it costs. And that's what I've done down below.
Air Cargo Alleges Merrill Lynch Fraud;
Files Complaint Regarding Auction Rate Securities
For the rest of this
here or click
Or Google "ASTAR Air Cargo alleges Merrill Lynch Fraud."
ASTAR Air Cargo
(ASTAR) announced today (March 18, 2008) that it has filed an arbitration
claim against Merrill Lynch, Pierce, Fenner & Smith, Inc. seeking compensatory
damages of $9.125 million and punitive damages of at least $27.375 million.
ASTAR's counsel, Dimond Kaplan & Rothstein, P.A. of Miami, filed the claim
with the Financial Industry Regulatory Authority (FINRA) to gain access to
ASTAR's funds that currently are frozen in illiquid Auction Rate Securities
(ARS) in the company's Merrill Lynch account.
As alleged in
its Statement of Claim, ASTAR instructed Merrill Lynch to place its cash reserves
in products that would provide complete safety of principal and complete liquidity.
In response, Merrill Lynch recommended that the company purchase various ARS.
Merrill Lynch told ASTAR that ARS were completely safe and extremely liquid,
with auctions occurring no less frequently than every 35 days. ASTAR agreed
to invest significant amounts of cash in ARS sold by Merrill Lynch. In early
2008, ASTAR's investments became locked up and entirely illiquid. As a direct
result of Merrill Lynch's fraudulent misconduct, ASTAR is now unable to access
substantial assets critical to its business operations.
decided to saddle ASTAR with an illiquid investment rather than risk more
of its own capital in the ARS market,' said Scott Dimond, ASTAR's lead litigation
counsel. 'When Merrill Lynch concluded that ARS were a 'hot potato' they decided
that ASTAR would be the one to get its hands burned. ASTAR never would have
invested any of its money in ARS if Merrill Lynch had informed the company
of the true liquidity risks of the securities and of the apparent liquidity
problems at Merrill,' Dimond said.
touchy-feely statement, that says nothing:
(This one from last Friday.)
Steers Seeking Alternatives to Auction Market Preferreds
NEW YORK, March
14, 2008Cohen & Steers announced today that it is actively seeking
alternative financing for eight of its closed-end funds that have issued auction
market preferred securities (AMPS). We are very sensitive to the liquidity
issues facing our funds preferred shareholders, said Robert Steers,
Cohen & Steers co-chairman and co-chief executive officer, and we
are evaluating potential solutions to this industry-wide situation.
Steers senior management is working with all major industry participants
commercial banks and broker/dealers, among others to evaluate
ways to provide liquidity at par value to its AMPS holders. The firm is arranging
lines of credit for its funds and is evaluating other alternatives, such as
commercial paper and new forms of preferred stock that will replace the existing
AMPS. The goal is to redeem the funds AMPS as soon as possible, although
the timing is uncertain.
further that the firm is working closely with the funds board of directors
to address the situation and find the best long-term solution for the funds
one that balances the interests of common and preferred shareholders.
Investors and financial advisors are encouraged to visit Cohen & Steers
Web site (cohenandsteers.com),
where it has posted an AMPS report and updates AMPS rates weekly.
class action suits work. When you Google "Auction
Rate Preferreds," the first ad that comes up is from a law firm called
Gibbs, in San Francisco. As I reported yesterday,
they have already filed a class action suit against Deutsche Bank. I called
them and they told me they were investigating possible class action suits against
UBS, Citigroup/Smith Barney, Wachovia, Merrill Lynch, Wells Fargo, J.P. Morgan
Chase and TD Ameritrade. As a result of their Google ad, they are receiving
inquiries from about 20-30 people each day. I asked them how class action suits
worked and they replied:
securities laws allow investors to recover losses on securities attributable
to false or misleading statements or omissions of material fact made by the
issuing company, its officers and directors, and in certain circumstances,
its underwriters, auditors and attorneys.
securities cases are brought under Section 10(b) of the Securities Exchange
Act of 1934. The statute makes it unlawful for any person "[t]o use or
employ, in connection with the purchase or sale of any security . any manipulative
or deceptive device or contrivance." Section 10(b) creates liability
for materially misleading statements and omissions. To bring a claim for violation
of Section 10(b), a plaintiff must show that:
made a misrepresentation or omission of material fact;
acted with an intent to deceive or severe recklessness;
* In buying
the securities, the plaintiff relied on the misrepresentation or omission,
or on the integrity of the market in which the securities were sold;
* The misrepresentation
affected the price of the securities; and
* The plaintiff
suffered damages as a result.
Once a class
action is filed, counsel must publish notice of the filing in a national publication
or on a wire service. For example, Girard Gibbs issued a press release concerning
the Deutsche Bank case yesterday. Within sixty (60) days of the publication
of notice, investors who suffered losses may request that the court appoint
them as lead plaintiffs. A lead plaintiff is a proactive member of the plaintiff
class who acts as a representative party for all of the shareholders. The
lead plaintiff will consult with counsel during the litigation. Lead plaintiffs
are typically appointed by the court as the class members most capable of
representing the interests of the entire class.
represents clients in securities class actions on a contingency fee basis.
Our clients do not pay out-of-pocket fees or expenses, regardless of the outcome
of the case. If we are successful in obtaining a recovery for the class, Girard
Gibbs will apply to the court for a fee that fairly represents the work we
performed and the risk we assumed. In securities class actions, attorneys'
fees typically are awarded as a percentage of the relief achieved for the
class. These percentages vary considerably based on the size of the recovery
for the class, the length and complexity of the litigation, and other factors.
They also sent
me their resume and some questions
and answers (also called FAQs, as in frequently asked questions):
1. What is
a class action?
A class action
is a representative lawsuit which allows an individual or entity to commence
a lawsuit on behalf of other individuals who are in the same or similar circumstances
with respect to a given defendant. A class action is appropriate when many
people have been affected by a company's course of conduct in a similar fashion.
2. What is
a class period?
A class period
is a range of dates within which a company is alleged to have been engaged
in improper conduct. The attorneys investigating a case will review the facts,
and along with the court-appointed Lead Plaintiff, determine the appropriate
beginning and end of a class period. Sometimes the class period will be lengthened
or shortened as an investigation continues.
3. What are
the benefits of a securities class action?
class action provides shareholders with the ability to litigate on an equal
playing field with the large corporations who have a lot of money to spend
on defending lawsuits. A class action allows many people who would never have
brought an individual action or arbitration against a company to seek recovery
from the company without having to individually retain a lawyer and incur
a legal fee.
4. What is
a lead plaintiff?
A lead plaintiff
is a proactive member of the plaintiff class who acts as a representative
party for all of the shareholders. The lead plaintiff is the client(s) with
whom counsel will consult during the litigation. Lead plaintiffs are typically
appointed by the court as the class member or members most capable of representing
the interests of the entire class. Courts have appointed individuals, groups
of individuals, institutional investors, groups of institutions, or even combinations
of both as lead plaintiffs as the circumstances of each case may dictate.
The lead plaintiff selects counsel to represent the lead plaintiff and the
class, and these attorneys if approved by the court are lead counsel or class
counsel. The lead plaintiffs are encouraged to have oversight of, and input
into, the litigation of a class action beyond that of other class members.
5. How does
one become a lead plaintiff?
Under the Private
Securities Litigation Reform Act of 1995, courts will appoint a lead plaintiff
or plaintiffs to represent a class from the member or members of a class who
(i) request to be a lead plaintiff within 60 days of the publication of a
notice of the pendency of a class action; (ii) are most capable of adequately
representing the interests of the class; and (iii) determined by the court
to have the largest financial interest in the relief sought by the class,
among those investors who seek to be appointed lead plaintiff.
6. How long
does it take to prosecute a class action?
The time to
prosecute each class action varies based on the facts, parties, and jurisdiction
of a particular case. Some cases settle shortly after the action is brought
and some cases may be litigated for years and eventually go to trial. It is
not unusual for a class action to take a few years to complete.
7. What will
it cost me to be involved in a class action?
handles class actions on a contingency fee basis. There are no out-ofpocket
fees or expenses paid by the client, regardless of the outcome of the case.
If successful in obtaining a recovery for the class, our law firm will apply
to the court for a fee that fairly represents the work performed and risk
assumed by the firm. In securities class actions, attorneys' fees typically
are awarded as a percentage of the relief achieved by the attorneys for the
class. These percentages vary considerably based on the size of the recovery
for the class, the length and complexity of the litigation, and several other
8. What is
contingency fee litigation?
fee litigation, attorneys only get paid if they win the case at trial or if
the case settles. Attorneys who practice on a contingent fee arrangement typically
do not receive any form of monetary payment from a client at the outset of
an action and are paid only once there is a successful resolution from any
settlement or judgment that is achieved.
9. How much
money will I receive from this class action?
paid to shareholders vary depending on the amount of total loss suffered by
all class members and the agreed settlement or court-ordered judgment.
10. I acquired
my securities in my 401(k) or IRA account. Can I still participate?
Yes, you may
participate as long as the shares were acquired during the class period.
11. I live
outside the United States. Can I still participate?
Yes, you may
participate as long as you purchased the securities at issue during the class
period. Some classes are defined only to include U.S. residents, but most
12. Can I
participate in more than one class action at a time?
Yes, if you
had losses in different securities for which class actions have been filed.
I posted five items of news on ARPs, including one I posted after
9 AM. If you missed the column, click
here. Sometimes my column is late. Mostly it's my fault. But occasionally
it's the fault of Web.com, my hosting service. Tip: If it's not up, keep checking.
Computers aren't reliable.
IPO is not for you or me. I'm a client at one
of the lead underwriters. I asked for a small allocation of Visa shares. I got
told in no uncertain terms, that "the best deals were for institutions."
The "logic" apparently is that institutions have "a long-term
horizon." They won't sell the shares the moment it comes out. Of course,
this is horseshit. If you think Wall Street has changed, you're wrong.
catch a falling knife: Joseph Lewis, the billionaire
investor who bought a 9.4 percent of Bear Stearns last year, lost $1.16 billion
on his stake after the firm agreed to sell itself to JPMorgan Chase.
TV Schedule - 2008 Pacific Life Open at Indian Wells: Federer,
Nadal, Djokovic, Roddick and Blake are playing. Also Sharapova, Hantuchova,
Kuznetsova and Safina. The problem is finding Fox Sports Network on your cable
or satellite TV. Clue: Sometimes they hang out with MSG (Madison Square Garden).
This schedule is not accurate, but it's the best I can do.
First-year students at Texas A&M's Vet school were receiving
their first anatomy class, with a real dead cow. They all gathered around the
surgery table with the body covered with a white sheet.
started the class by telling them, "In Veterinary Medicine it is necessary
to have two important qualities as a doctor: The first is that you not be disgusted
by anything involving the animal body. For an example, the Professor pulled
back the sheet, stuck his finger in the butt of the dead cow, withdrew it and
stuck it in his mouth. "Go ahead and do the same thing," he told his
The students freaked
out, hesitated for several minutes. But eventually took turns sticking a finger
in the anal opening of the dead cow and sucking on it.
finished, the Professor looked at them and said, "The second most important
quality is observation. I stuck in my middle finger and sucked on my index finger.
Now learn to pay attention. Life's tough, it's even tougher if you're stupid."
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
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