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Harry Newton's In Search of The Perfect Investment Technology Investor. Auction Rate Securities. Auction Rate Preferreds.

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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.

The 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."

Damages are key to what settling a class action suit will ultimately cost. See below.

I ask myself what would I do if I were a broker or banker who sold this stuff to my unsuspecting clients?

I'd 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 that’s 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.

5. Massive 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.

ASTAR Air Cargo Alleges Merrill Lynch Fraud; Files Complaint Regarding Auction Rate Securities

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.

'Merrill Lynch 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.

For the rest of this story, click here or click here. Or Google "ASTAR Air Cargo alleges Merrill Lynch Fraud."

Another touchy-feely statement, that says nothing: (This one from last Friday.)

Cohen & Steers Seeking Alternatives to Auction Market Preferreds

NEW YORK, March 14, 2008—Cohen & 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.”

Cohen & 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.

Steers said 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 (, where it has posted an AMPS report and updates AMPS rates weekly.

How class action suits work. When you Google "Auction Rate Preferreds," the first ad that comes up is from a law firm called Girard 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:

The federal 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.

Most private 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:

* Defendants made a misrepresentation or omission of material fact;

* Defendants 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.

Girard Gibbs 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?

A securities 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?

Girard Gibbs 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 factors.

8. What is contingency fee litigation?

In contingency 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?

The damages 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 are unrestricted.

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.

Yesterday 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, my hosting service. Tip: If it's not up, keep checking. Computers aren't reliable.

Visa 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.

Don't 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.

Tennis 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.

Watch carefully.
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.

The professor 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 students.

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.

When everyone 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 is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.

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