Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Wednesday, March 26, 2008: Brokers
have told me they could make zillions if their brokerage house announced it
would redeem the auction rate preferred securities they had foolishly sold their
clients as "cash."
one is stepping up to the plate, despite plummeting client goodwill.
are real, honest, caring folk working on Wall Street who think about their customers
long-term. Right now, it's hard to find them.
to what we do next? I think all of us who own ARPs need to keep up the barrage
of letters, emails, phone calls, complaints to our brokers, to our issuers,
to the SEC, to Congresspeople, etc. Some people are filing class action suits,
though I'm not joining one, yet.
mulling my next steps. My ARPs are all Nuveen. I'm mulling the idea of funding
a full-blown advertising program. The headline on my Wall Street Journal
ads would be, "Why You Should Never, Ever, Do Business With Nuveen."
David Chandler emails me:
My wife and I were unfortunate to have placed very large amounts into auction
rated securities (over $1 million), while we were looking for other investments.
We are now trapped. I recently joined the class action (and at the moment
am the lead plaintiff) against UBS filed by Girard Gibbs, after detailed conversation
with Jonathan Levine, who tells me he has spoken to you.
Some quick thoughts:
1. Please keep writing on this subject. You are now acting as something of
a clearing house of information, a very valuable function;
2. Is there any way that we ARS victims can organize? We need a coherent spokesman
and several representative individuals to present our situation before the
public. For example, are there any plans to hold congressional hearings on
this subject? If so, there should be members of the public who have gotten
entangled in this mess to testify before Congress. Do you have any ideas how
this can be organized?
Your suggestions, either directly or in your column would be most appreciated.
To answer David,
I find that most ARPs investors are reluctant to come forward publicly at present.
Money is a private thing and all that. Stupidity is to be concealed, etc. I
suspect that, once this drags on for another month or two, more people will
come out of the closet and then we'll have the beginnings of a revolution. Right
now, it's early. Wait for the howl when people send their end-March brokerage
By the way, I
suspect most of us won't get cash out of our ARPs money in time for April
15. I don't see the IRS being sympathetic to our plight.
action suit filed against Morgan Stanley. The New York law firm of
Levi & Korsinsky, LLP has filed
this class action complaint
on behalf of purchasers of auction rates securities from Morgan Stanley. According
to Joseph Levi of the firm, "The suit seeks recission of the ARS sold by
Morgan Stanley and/or damages for the period of time investors were unable to
sell their holdings. Accordingly, even if a particular ARS becomes liquid, an
investor should receive some compensation from the broker for the illiquid period.
The damage measure will likely be greater if/when a secondary market emerges
in which investors can sell their ARS at a discount to par. We therefore see
the class action suits as an adjunct to any other business solutions that emerge
to help make investors whole."
According to TradingMarkets.com,
Mar 26, 2008:
-- Investor Gary Miller has filed a lawsuit in the U.S. District Court in
Manhattan against Morgan Stanley (NYSE: MS | news | PowerRating | PR Charts
) accusing the company of deceptively marketing auction rate securities.
which seeks class-action status, said Morgan Stanley and other broker dealers
had artificially supported the auction rate securities market and recklessly
misrepresented the risks of such investments.
securities are bonds that banks typically pitched as a safe alternative to
cash. They are long-term securities, but the investment banks hold periodic
auctions to set the interest rates and give holders the option to sell the
securities. The securities have become harder to sell in recent months as
auctions have failed to attract bidders.
The firm said
it was working with clients to resolve their individual liquidity needs through
various alternatives, including lending. Miller said in the lawsuit that the
value of auction rate securities had been artificially inflated and that he
and other investors were now stuck with investments they could not sell.
He is seeking
an injunction that would compel Morgan Stanley to rescind millions of dollars
it executed in auction rate transactions from March 2003 through February
2008, as well as compensatory damages for himself and other investors in those
was also sued in a
class action suit.
Chad Bray of Dow
Jones Newswires wrote this piece yesterday::
NEW YORK (Dow
Jones)-- Morgan Stanley (MS) and Merrill Lynch & Co. (MER) were separately
sued Tuesday over alleged deceptive marketing of auction-rate securities.
lawsuits, both filed in U.S. District Court in Manhattan, allege that Morgan
Stanley and Merrill Lynch represented auction-rate securities to investors
as liquid, cash alternatives equivalent to money-market funds and failed to
make material disclosures about those securities.
of disclosing the true nature of ARS and the substantial liquidity risks associated
with them, Morgan Stanley continued to push as many ARS as possible onto its
customers in order to unload the inventory off its already troubled balance
sheet," said the lawsuit against Morgan Stanley.
each are seeking class-action status on behalf of thousands of investors who
purchased auction-rate securities through either Morgan Stanley or Merrill
Lynch between March 25, 2003, and Feb. 13, 2008.
Lynch complaint was filed on behalf of Frederick Burton, who allegedly purchased
auction-rate securities underwritten and sold by the investment bank, according
to the suit. The Morgan Stanley lawsuit was filed on behalf of Gary Miller,
who purportedly purchased auction-rate securities from Morgan Stanley.
securities are long-term bonds that have a short-term debt component, in which
interest rates are reset in auctions on a daily, weekly or monthly basis.
several auctions failed, driving up the interest rates for issuers such as
municipalities, student-loan providers and museums. The collapse of the auction-rate
securities market has left investors locked into those illiquid investments.
and the other broker-dealers stopped artificially supporting and manipulating
the auction market, the market immediately collapsed and the auction rate
securities by Merrill became illiquid," according to the lawsuit against
The suits comes
on the heels of similar cases filed against Deutsche Bank AG (DB) and UBS
AG ( UBS) earlier this month over their marketing of auction-rate securities.
Stanley denies the allegations in the complaint. The challenges of the auction
rate markets are industry-wide, and result from broader credit-market conditions,"
said Christine Pollak, a Morgan Stanley spokeswoman, in a statement. "The
auction-rate securities market has existed for over 20 years without significant
disruption until recent market events. In response to these events, Morgan
Stanley is working to address its clients' liquidity needs, on a case-by-case
basis, through various alternatives including lending."
A Merrill Lynch
spokesman didn't immediately have a comment on the lawsuit late Tuesday.
Auction Rate Lawsuits and Other Web Notes by
Kevin M. LaCroix of The
Lynch and Morgan Stanley to the growing list of companies that have been sued
in securities class action lawsuits by investors for allegedly deceptive representation
in connection with the sale of auction rate securities. According to the plaintiffs
attorneys March 25, 2008 press release, the plaintiffs have filed
a securities class action lawsuit in the United States District Court for
the Southern District of New York against Merrill Lynch and its asset management
company on behalf of investors who purchased auction rate securities from
Merrill Lynch between March 25, 2003 and February 13, 2008. A copy of the
complaint can be found here.
the press release, Merrill Lynch offered and sold auction rate securities
to the public as highly liquid cash-management vehicles and as suitable alternatives
to money market mutual funds. The complaint alleges that Merrill Lynch
failed to disclose that
(1) the auction
rate securities were not cash alternatives, like money market funds, but were
instead, complex, long-term financial instruments with 30 year maturity dates,
or longer; (2) the auction rate securities were only liquid at the time of
sale because Merrill Lynch and other broker-dealers were artificially supporting
and manipulating the auction rate market to maintain the appearance of liquidity
and stability; (3) Merrill Lynch and other broker-dealers routinely intervened
in auctions for their own benefit, to set rates and prevent all-hold auctions
and failed auctions; and (4) Merrill Lynch continued to market auction rate
securities as liquid investments after it had determined that it and other
broker dealers were likely to withdraw their support for the periodic auctions
and that a freeze of the market for auction rate securities would
news reports, plaintiffs also filed a separate but substantially similar lawsuit
against Morgan Stanley, raising more or less the same allegations on behalf
of a class of investors who purchased auction rate securities from Morgan
Stanley during the same class period as proposed in the Merrill Lynch lawsuit.
These two new
lawsuits join a group of similar lawsuits, all filed by the same law firm
on behalf of auction rate securities investors, against Deutsche Bank, Wachovia,
TD Ameritrade and UBS. The law firms webpage describing these various
lawsuits can be found here.
With the addition
of these two new subprime-related securities class action lawsuits, my running
tally of subprime related securities lawsuits, which can be accessed here,
now stands at 59, of which 21 have been filed in 2008. Two of
these 59 represent lawsuits brought on behalf of investors against mortgage-backed
asset securitizers, six are class action lawsuits on behalf of auction rate
securities investors, two are brought on behalf of mutual fund investors,
and the remaining 49 of which are brought on behalf of public company
International held a F2Q08 Earnings Call. On that call:
Now, I will
briefly discuss the changes and key balance sheet items from the end of fiscal
2007 to the end of the second quarter of fiscal 2008. Our cash, restricted
cash, cash equivalent and marketable securities represented $24.4 million
of our total assets at the end of the second quarter as compared to $24.5
million at the end of fiscal 2007.
portfolio at the end of the second quarter included approximately $8.5 million
of auction-rate securities, which are investments with contractual maturities
between 5 to 35 years. As of the end of the second quarter of fiscal 2008,
these securities were re-classed from short term to long term as they are
currently not trading. Conditions in the debt markets have reduced the likelihood
that these securities will auction in the next 12 months. Of the auction-rates
securities held by us, $7 million are backed by student loans and are guaranteed
by the United States Federal Department of Education.
$1.5 million relates to manufactured housing thats collateralized by
the principal housing contract trust associated with related loans and are
insured by third party. In addition, all auction-rate securities held by us
are rated by the major independent rating agencies as either AAA or A, AA.
19, 2008 and forward, all of our auction-rate securities sales auction that
sell orders exceeded by orders. These failures are not believed to be a credit
issue but rather reflect a lack of liquidity. Under the contractual terms,
the issuer is obligated to pay penalty interest rate due to an auction sale.
And that we
need to access the funds associated with failed auctions, they are not expected
to be assessable until one of the following occurs: the successful auction
occurs; the issue or [redency] issue; a buyer is found outside of the auction
process; or the underlying securities that matured.
that no impairment losses existed as of March 1, 2008. However, if the issue
of the auction-rate securities is unable to successfully close future auctions,
it does not redeem the auction-rate securities or the United States government
fails to support its guarantee of the obligation. We may be required to adjust
the carrying value of the auction-rate securities and record impairment charges
in future periods, which could materially affect the results of operation
and financial condition.
Bryant Quinn writes in today's Bloomberg:
shares often come in the form of auction-rate securities. They're perpetual
investments with no fixed maturities but with short-term renewal dates, often
once a week. Because of their long-term nature, they pay higher dividend rates
than you get on cash.
The fund pays
the dividends, recently in the 3 percent to 5 percent range. At every renewal,
your shares go up for auction. You could either re-up at the current dividend
rate or sell your shares to a new investor. Your money was locked up for only
seven days at a time. Or so you thought.
When the markets
seized up, new investors quit bidding for these preferreds. Existing shareholders
couldn't sell. Their money is safe. In fact, they're earning a slightly higher
dividend rate than they did before. But they may be stuck with those shares
for months or even years.
A few taxable
funds have said they're borrowing money to buy out the preferred shareholders,
in whole or in part. Among them: Aberdeen Global Income Fund, three Eaton
Vance funds, five Calamos funds, 13 Nuveen funds and two ING funds.
That's not so
easy for the tax-exempt closed-ends. If they borrow at the higher rate applied
to taxable debt, they may hurt the common shareholders, says Anne Kritzmire,
a managing director at Nuveen Investments. Nuveen hopes to develop a new form
of preferred share that will do the job but it will take time.
in these closed ends can still trade freely. They're affected by the mess
in three ways: The bad headlines prompted some shareholders to sell, so the
market price of the fund probably declined. The higher cost of carrying the
frozen preferred shares may force the fund to cut its dividend. If the preferred
shareholders get bought out, the fund's leverage will probably decline, reducing
the yield earned by the common shareholders.
Does the distress
of some closed-ends make them a good buy? Not yet, says Cecilia Gondor, an
analyst at Thomas J. Herzfeld Advisors in Miami, specialists in closed-ends.
Right now, their market price is averaging about 6 percent to 7 percent less
than the net asset value of the securities they hold. She likes to buy when
the price falls to 15 percent to 20 percent below net asset value.
waiting for dividend cuts, if they happen,'' she says. She may not have to
Carter filed a complaint against UBS with the SEC:
am filing this complaint against UBS on behalf of:
Anthony and Marva DeFalco
1. Brokerage - UBS,
Financial Advisor - Steve Carter,
UBS Financial Services, Inc.
1801 13th St. Suite 100, Boulder, CO 80302
2. In September of 2007, Anthony and Marva DeFalco asked Steve Carter to place
the bulk of their money (almost 2 million dollars) in a safe AAA credited
and insured investment. They also specified that they needed to have access
to the funds for operating costs for their business and to pay taxes. They
were assured by Steve Carter that these funds would be available with 7 days
3. A written prospectus from Eaton Vance was received in October of 2007.
4. The monthly statement from UBS characterizes the ARS funds as "Cash
Alternatives" with a subsection titled as "Money Market Instruments."
The actual fund listed under this is the "Eaton Vance Senior FTG RT TR
SR AM 7-DAY AUCT PFD 4.220%.
The UBS website also characterized ARS investments as "(c)ash alternatives"
and "highly liquid, short-term investments" that gave investors
"the ability to quickly convert investments into cash when you need it."
However, four days after a lawsuit was filed, UBS removed the ARS-related
representations from its website
5. Steve Carter was never given any authorization to place the DeFalco's money
in anything but AAA insured funds that were liquid within 7 days.
Neither UBS, nor Steve Carter notified the DeFalcos that their money was invested
in ARS until UBS sent out a letter received March 15, 2008.
Neither UBS nor Steve Carter ever contacted the DeFalcos to give them notice
that the auctions were failing or that their funds had been frozen. The DeFalcos
received notice that the funds were frozen on March 17th when they attempted
to contact Steve Carter to withdraw some of the money to purchase investment
6. The fraudulent misrepresentation on the part of UBS and Steve Carter has
caused considerable financial and emotional hardship. The DeFalcos have already
had to forgo a business opportunity and if the funds are not released by April
15th, the DeFalcos may be unable to pay Federal income taxes.
UBS knew, but failed to disclose to investors, material facts about ARS and
mislead investors into believing that these investments were cash alternatives
rather than complex, long-term financial instruments with 30 year maturity
dates or longer. UBS failed to disclose that the ARS were only liquid at the
time of investment because UBS and other institutions were artificially supporting
and manipulating the auction market to maintain the appearance of liquidity
and stability and that the ARS would become illiquid as soon as UBS and other
institutions stopped manipulating the auction market.
We appreciate any help that the SEC can provide. Please feel free to contact
me if you need any additional information.
Brandee DeFalco-Galvin, Esq.
Gabelli Convertible and Income Securities Fund Inc. to Redeem Auction Rate Preferred
Stock. From a web site called finanzen.net:
The Board of
Directors of The Gabelli Convertible and Income Securities Fund Inc. (NYSE:GCV)
has authorized the filing of a shelf registration of up to $100 million in
preferred stock or debt securities. The registration process typically takes
approximately one to two months. Upon its completion the Fund will have additional
flexibility to take steps toward resolving the illiquidity that has occurred
for holders of the Funds auction rate preferred stock.
The Board of Directors has agreed in principle to the redemption of the Funds
auction rate preferred stock once the shelf registration is declared effective.
The Fund currently has approximately $50 million of preferred stock outstanding,
$25 million of which is auction rate preferred stock. This press release does
not constitute an offer of any securities for sale.
The Gabelli Convertible and Income Securities Fund Inc. is a diversified,
closed-end management investment company with $144 million in total assets
whose primary investment objective is to seek a high level of total return
through a combination of current income and capital appreciation. The Fund
is managed by Gabelli Funds, LLC, a subsidiary of GAMCO Investors, Inc. (NYSE:GBL),
which is a publicly traded NYSE listed company.
prank took 207 people to pull off. They gathered at Grand Central
Station in New York to pull off a 'frozen in place' act. The onlooking travelers
who weren't part of the act were mystified as to what was going on. Check out
we came about
A little girl asked her mother, "How did the human race appear?"
The mother answered,
"God made Adam and Eve and they had children and so was all mankind made."
Two days later
the girl asked her father the same question.
The father answered,
"Many years ago there were monkeys from which the human race evolved."
The confused girl
returned to her mother and said, "Mom, how is it possible that you told
me the human race was created by God, and Papa said they developed from monkeys?"
The mother answered,
"Well, dear, it'll is very simple. I told you about my side of the family
and your father told you about his."
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.
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