FinancialCounsel

SNSFE Warns That Class Actions May Not Be The Best Recourse For Purchasers Of Auction Rate Securities

News of auction-rate securities class actions being filed has concerned many securities lawyers that investors may be choosing the wrong path to pursue recovery.  While sometimes some class actions are sensible for some investors, oftentimes they are not. 

SNSFE attorneys are investigating auction-rate matters for investors at various firms and are willing to continue to do so when faced with the prospect of a class action notice. 

Investors ought to beware that the brokerage firms named in the suits alleging class action status include, Citigroup, E*Trade Financial, Merrill Lynch, Morgan Stanley, Deutsche Bank, Raymond James Financial, SunTrust Banks, TD Ameritrade, UBS and Wachovia.  Investors should feel free to share their documentation with SNSFE attorneys to determine which course of action is best.

Schwab's YieldPlus Ultra-Short Bond Funds Continue To Suffer Along With Fidelity And State Street Global Advisors Bond Funds And Are Unlikely To Rebound

Schwab YieldPlus Fund Select Shares and Schwab YieldPlus Fund Investor Shares now are subject to an investor arbitration claim filed at FINRA. 

Regarding the ultra-short bond fund Shwab YieldPlus, Morningstar states that the fund's sizeable loss in recent months is certainly shocking as ultra short-term fixed income securities are generally perceived to be safe investments with minimal interest-rate and credit risks.  The fund first showed signs of distress last summer when subprime mortgage woes caused market liquidity to dry up.  Lead manager Kimon Daifotis has taken on slightly more credit risk than his category peers and kept the portfolio heavily invested in corporate and nonagency mortgage bonds, with a small exposure to subprime-backed bonds.  These securities took a sizeable hit, and the fund proceeded to lose 3.6% in the latter half of 2007.  That was enough to send investors heading for the exits, and it appears that management was forced to sell bonds at depressed prices to meet redemptions.  Because many of the fund's losses are already locked in, the chance of a rebound is slim, according to Morningstar.

Other short-term funds have suffered similar misfortunes.  A few similar funds, such as Fidelity Ultra-Short Bond Fund and SSgA Yield Plus from State Street Global Advisors have been hurt in recent months as well, yet weren't as popular as the Schwab fund.

Schwab Reportedly Offering To Settle Loss Claims Of YieldPlus Fund Investors

Charles Schwab's YieldPlus mutual funds are in the news again.  This time, it is reported by attorneys that Schwab has called clients who have filed arbitration actions as well as others associated with a class action lawsuit against the company regarding YieldPlus.

According to the attorneys, the purpose of the calls is to suggest to customers that they settle with Schwab over YieldPlus losses.  That fund plummeted in recent months. 

Attorneys say that the settlements are anywhere from five to 12 cents on the dollar of losses.  Whether or not this is true, investors need to carefully consider any settlement options before moving forward with a settlement.

Attorneys at SNSFE continue to investigate claims of YieldPlus investors.

Edward D. Jones Broker Awarded Damages For Emotional Distress Arising From Employment

An arbitration panel has held Edward D. Jones accountable for emotional distress inflicted upon one of its registered representatives and has awarded that former rep over $141,000 plus legal expenses.  Edward D. Jones, which is widely regarded as one of the best companies to work for, allegedly inflicted emotional distress on a former registered representative and then insisted that she seek psychological help, according to a recent arbitration award.

Ms. Sommer, who worked for St. Louis-based Edward Jones between 2000 and 2005, was awarded damages of $141,000 -- $100,000 of which was intended to compensate her for "emotional distress," according to the award, which was handed down in March.

The award is a reasoned award and part of the award states, "Without any reasonable grounds for doing so, apart from some sporadic instances in which Sommer's communications had a sarcastic tone or used crass language, coupled with the fact that Sommer did not readily take 'no' for an answer and occasionally involved higher-ups in such situations, Jones ordered Sommer to mental health counseling -- in effect an order to involuntarily undergo 'surgery' or be terminated," the arbitrators' decision stated.

Coupled with the threat of immediate termination if Ms. Sommer displayed "inappropriate, unprofessional or insubordinate behavior," the panel said it found that no reasonable person could be expected to continue working under such conditions.  "Sommer had no choice but to resign," according to the decision.

Source:  InvestmentNews

Securities Regulator Issues Tips to Protect Financial Information

FINRA (the Financial Industry Regulatory Authority) has published, “Keeping Your Account Secure: Tips for Protecting Your Financial Information."

According to FINRA, identity theft has advanced well beyond “dumpster diving” to recover discarded account statements or other records that have not been shredded, though this old-fashioned method still is a threat.  In addition, some identity thieves “use keystroke-logging software to capture usernames and passwords, disseminating these programs through instant messages, emails, or freeware.”  Likewise, “others ‘phish’ for sensitive information by sending phony emails that purport to come from a legitimate financial institution but which ask for information your firm would never request through email – such as confirmation of an account number, password, credit card number, or Social Security number.”

The FINRA publication discusses a dozen steps that investors can take to secure their brokerage accounts as well as other personal financial information.  Let’s examine those steps.

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SNSFE Announces Intention to Maintain Library of Auction-Rate Securities Materials As SEC And State Securities Regulators Continue to Investigate Possible Investor Abuse

Auction-rate securities continue to be in the news.  Recently, the Securities and Exchange Commission announced that it was seeking information on auction-rate debt sales.  According to Lori Richards, head of the SEC's Office of Compliance Inspections and Examinations, "We are looking at representations made to investors when they purchased auction-rate securities."

According to the news release, the SEC's inspections office sent letters to the biggest sellers of auction-rate debt this month seeking the names of customers who had purchased the notes and the identities of the brokers who had sold them.

In related news, the North American Securities Administrators Association today said that regulators in Florida, Georgia, Massachusetts, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington were coordinating their probes of the $330 billion market.  Importantly, the President of the North American Securities Administrators Association Karen Tyler stated, "Our focus is to determine what conduct took place at the point of sale -- what was potentially misrepresented and omitted -- and our goal is securing for investors access to their cash as requested."  She said if the product was represented to be a cash equivalent going in, it must be treated as a cash equivalent going out. 

Last week, New York Attorney General Andrew Cuomo was reported to have subpoenaed 18 banks and brokerages about their involvement in the securities.  Those banks included UBS, Merrill Lynch, Goldman Sachs, Citigroup, Raymond James Financial, First Albany, Wachovia Corp., Morgan Keegan, Piper Jaffray, AG Edwards, Deusche Bank, TD Ameritrade, Lehman Brothers Holdings, RBC Dain Rauscher, Bank of America, JPMorgan Chase, Morgan Stanley and E*Trade Financial. 

TD Ameritrade is now facing a lawsuit over auction-rate securities, though investors ought to beware that that is a class-action lawsuit and they should consider whether or not they will receive anything more than nominal sums in settlement or in any legal action.

On the heals of all these investigations, SNSFE is announcing that it is gathering a library of documents that will pertain to auction-rate securities brochures, descriptions and other materials. 

Of note, the Bond Market Association in 2006 published Best Practices for Broker-Dealers of Auction-Rate Securities.  Section 4.7.1 states:

An initial offering of Auction Rate Securities is effected by means of a prospectus or offering statement.  Most subsequent auctions of such securities are secondary market transactions that do not involve a requirement to deliver a prospectus or official statement.  Broker-Dealers, however, often use marketing materials and other disclosure documents to identify the issuer and inform investors of the salient features of the program, including the Auction Procedures.  Such disclosure document should reflect current auction practices.  Broker-Dealers should consider using website postings, educational brochures and/or disclosure in confirmations to help Holders and Prospective Holders understand the market for Auction Rate Securities.

Most investors have reported they did NOT understand the market for auction-rate securities or the risk involved. 

SNSFE should be contacted in the event the investors have materials they would like to share in the library that SNSFE is putting together, as well as to discuss bringing claims to liquidate such investments.

SNSFE Investigating Citigroup's ASTA And MAT Hedge Funds As Brokers And Their Clients Considering Bolting From Citigroup

According to a recent BusinessWeek article, Citigroup, its clients and its brokers, are in the midst of several hedge fund flameouts and Citigroup is scrambling to hold on to both investors and brokers who are considering bolting from the firm.

As if Citigroup didn't have enough of a mess from its parade of writedowns, the bank must now deal with the fallout from blowups at a series of hedge funds.  Some of its high-net-worth clients, whose losses in the funds approach $2 billion, are threatening to move their money to rivals.  That's prompting some of Citi's top brokers to consider leaving the bank as well.

Citigroup is in damage-control mode, scrambling to stave off the exodus.  The bank recently pumped $661 million into six troubled hedge funds and devised a restructuring plan that would allow investors potentially to recoup some of their money.  The company is also arranging weekly conference calls with its sales force to keep them in check. 

The latest drama stems from six hedge funds - sold under the brand names ASTA and MAT - that used huge piles of leverage to buy municipal bonds.  The funds borrowed approximately $8 for every $1 raised.  When the muni market went haywire in February, the funds tanked.  Even after Citi's emergency cash infusion this year, they are down 60% to 80%.  The funds' rapid demise came on the heels of a plunge at the $1 billion Falcon Strategies, another group of highly leveraged funds run by Citigroup.  Late last year, the Falcon funds dropped more than 30% after making a bunch of bad bets on the mortgage market - declines that have continued into this year.

The problem started earlier this year when the municipal bond market got spooked by woes at the big insurers.  Prices on bonds, in turn, tumbled.  The volatility wreaked havoc on the funds, which sold short-term debt and used the proceeds to buy higher-yielding, longer-term municipal bonds - an arbitrage strategy that profited on the spread between the different yields.  The funds owned some of the hardest-hit muni bonds, those guaranteed by Financial Guaranty Insurance Co.; when the insurer lost its AAA rating, the prices on FGIC-backed muni bonds dropped precipitously.

The portfolios might not have been decimated if it weren't for all the leverage.  At their peak, the funds controlled some $15 billion worth of municipal bonds although they owned only $1.9 billion in investors' money.  But the mayhem in the munis triggered a round of margin calls, which forced the managers to sell assets to come up with cash to pay the funds' lenders.  Internal bank documents reviewed by BusinessWeek show that the largest of the municipal bond funds had lost almost all of its value by the end of February.  A spokesman for Citi, Alexander Samuelson, admits that the funds suffered from "unprecedented volatility."

It's not clear that Citi's recent moves will appease the two constituencies, brokers and investors, who have claimed that the municipal bond funds were pitched as low-risk.  One broker referred to them as a "failed product."  Another asserted that the restructuring plan will probably be a nonstarter with investors.

Already, at least one broker with a number of clients in the hedge funds has jumped ship to Morgan Stanley.  Sources familiar with the situation say other brokers have hired lawyers to negotiate separation agreements from Citi or to represent them if the bank tries to block them from defecting to another firm.  Some brokers are referring frustrated clients to lawyers and SNSFE stands ready to assist.

Please beware that sources indicate that Citi is trying to sweep the mess under the mat by requiring investors to agree that they won't sue the bank as part of the restructuring plan.

SNSFE continues to assist investors and investigate in hedge fund cases such as these.  Please contact us with any questions or comments.

Regulators Increase Investigations Of Auction Rate Securities As Individual Investors Might Have Been Suckered Into Buying So That Heavyweights Could Bail Out

Regulator inquiries are intensifying over auction-rate securities.  This week Goldman Sachs disclosed that it has received requests for information from various governmental agencies and self-regulatory organizations relating to auction products and the recent failure of such auctions. 

The SEC and FINRA are looking into the market.  In particular, investigators want to learn what promises brokers made to investors who purchased auction-rate products.  Likewise, Bear Stearns has disclosed that it received a Wells Notice from the SEC warning that civil charges may be coming "in connection with the bidding for various financial instruments associated with municipal securities."  That Notice comes in connection with a probe by the SEC and the Justice Department regarding the conduct of Wall Street firms that packaged and sold municipal derivatives (securities based on underlying assets such as city bonds) beginning in 1990. 

As well, FINRA has issued a regulatory Notice that now brokerage firms will have to report specifically customer complaints regarding auction-rate securities.  This complaint reporting category goes into effect immediately. 

But most troubling is the fact that even though some Wall Street heavyweights and major corporations have been stung, many of them also appear to have bailed out of the market well ahead of individuals.  At the end of 2006, institutional investors held about 80 percent of all auction-rate securities, according to Treasury Strategies, a consulting firm in Chicago, yet at the end of last year that portion had fallen to just 30 percent.  "A number of corporations understood there was a rising threat to their securities; there had been failures and warnings," according to the chief executive of Treasury Strategies. 

As big holders of those securities accelerated their selling late last year, Wall Street firms overseeing the auctions would have come under greater pressure to find buyers to make the auctions succeed.  It is unclear whether they turned to individual clients to fill this void, but that would have seemed sensible.  Auction-rate securities have morphed from a product sold mainly to corporations to one marketed heavily to individual investors, especially when minimum investments were dropped to $25,000.00.  The top underwriters in the municipal part of the market were Citigroup, UBS, Merrill Lynch and Morgan Stanley. 

Importantly, investors were not provided with the prospectus to outline the risk of these securities because they are viewed as secondary market offerings.  Likewise,  it is now clear that auction securities became a  managed bidding system, and not a true investor auction.  That's according to the chief executive of Saber Partners, a financial advisory firm. "The investor never knew how many investors there were, how often the brokerage firms were stepping in to make the system work, nor that the broker's support could stop all of a sudden...If we had transparency in the system, investors could have judged the ability to sell in the individual auctions and bid accordingly."

Interesting as well is how the firms make money with auctions.  According to recent press, the firms earn money at least twice.  First, when the notes or shares are underwitten, they receive 1.5 percent of the amount of money raised, in the form of a fee.  Then they receive a quarter percentage point (0.25) annually for conducting the auctions and that's a total of $825 million this year, based on the size of the market.  Most amazing is the fact that the firms receive these auction fees even when the auctions fail, so the firms have no incentive to help revive this market.

Investors ought to beware and SNSFE is continuing to investigate claims of auction-rate securities unsuitability on behalf of investors.

Sources:  New York Times; The Wall Street Journal; FINRA; Reuters

New Handbook Outlines Prudent Practices For Fiduciary Advisers

The Financial Planning Association (FPA) has published a handbook containing practice guidelines for "Fiduciary Advisers" as that term is defined in the Pension Protection Act of 2006.  The FPA states that the handbook "represents a standard of excellence for fiduciary advisers."  As such, it is a must-read for anyone providing investment advice to pension plan participants or beneficiaries with respect to plan assets for fees or other compensation, including those fiduciary advisers employed by trust departments, insurance companies, brokerage firms, registered investment advisers and any agents or affiliates. 

The handbook defines "prudent, or best, practices", and it is organized under a four-step investment management process.  The four steps are:  (1) Organize; (2) Formalize; (3) Implement; and (4) Monitor.  Each practice falls within one of those four steps.  For each practice, there are "criteria" that define the scope or detail of each practice.  Sometimes, a "suggested procedure" is provided to demonstrate how a particular practice should be implemented.

Let's examine the more important practices, criteria and suggested procedures under the four-step investment management process.

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ARS Woes Continue As Companies Join In Lawsuits To Recover Damages And Liquidate Securities

Auction-rate securities continue to be in the news.  To date, most of the suits against broker-dealers that sold ARS have been brought by individual investors.  But two companies, Miami-based Astar Air Cargo and Dallas-based MetroPCS Comunications, have each filed claims against Merrill Lynch. 

Last month, Astar, a privately held cargo airline, filed a Financial Industry Regulatory Authority arbitration claim against Merrill.  The firm said it has $9.125 million in frozen auction-rate preferred securities and is seeking compensatory damages of that amount.  Astar is also seeking $27.375 million in punitive damages. 

In the claim, Astar said it instructed Merrill to invest its cash reserves in products that would provide "complete safety of principal and complete liquidity."  Merrill put the money in ARS.  MetroPCS, the largest pay-as-you-go mobile phone service provider in the U.S., filed suit against Merrill in a Texas state court, charging that the company had invested $134 million in 10 ARS backed by CDOs.

Individual investors have filed ARS lawsuits against brokers including Morgan Stanley, UBS, TD Ameritrade and Wachovia.  However, those actions have been class actions and SNSFE attorneys would advise individual investors, especially those with large claims, to seek independent counsel before committing to a class action where the recovery may not be as great as individual actions.

On a related note, it appears that Goldman Sachs knew about the problems with auction-rate securities as early as 1992.  In 1992, a group of investors had bought auction-rate securities but they failed four times in a row at the auction and they ultimately became illiquid.  The investors filed an arbitation claim with the New York Stock Exchange which awarded the group $2.8 million and it awarded them recission. 

SNSFE continues to investigate ARS cases for their suitability or lack there-of.

Sources:  FinancialWeek, Dow Jones Newswires

SEC Charges Five Former San Diego Officials With Securities Fraud For Inadequate Municipal Securities Disclosures

The SEC has filed securities fraud charges against five former San Diego city officials who played key roles in the city's inadequate municipal securities disclosures in 2002 and 2003.  The SEC charged the former officials for failing to disclose to the investing public buying the city's municipal bonds that there were funding problems with its pension and retiree health care obligations and those liabilities had placed the city in serious financial jeopardy.

"Municipal officials responsible for municipal bond disclosure play a key gatekeeper role in protecting investors," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.  "It is therefore imperative that they honor the public's trust by ensuring that investors are provided with accurate, material information about the issuer's fiscal health."

According to the SEC's complaint, the five former officials knew that the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs.  They were aware that the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut.

Excerpted from SEC Press Release 

Bond Funds, Especially Those Invested In Mortgage-Backed Securities, Continue To Suffer Significant Losses

If gyrating stock mutual funds haven't been enough to make investors queasy, many bond funds have swooned, too.  A fifth of all investment grade U.S. taxable bond funds tracked by Morningstar are in the red.  Bonds are supposed to be the pillars of stability during times of tumult in the market.  And indeed, the broad Lehman Brothers U.S. Aggregate bond index - which tracks taxable bonds, including Treasury notes, corporates and some mortgage securities - is up about 2.3% since the start of this year through April 4. 

A few bond funds that placed big bets on mortgage securities have posted shockingly big drops.  The Regions Morgan Keegan Select Intermediate Bond fund is down 44% since the start of the year and 72% over the past year.  State Street Global Advisors Yield Plus and Schwab YieldPlus have fallen 18% and 23%, respectively, since the start of the year.  And even the relatively successful funds that invest in inflation-protected Treasury securities - which are up as much as 6% so far this year - face new risks.  If interest rates rise, the price of Treasury bonds will tumble - likely quite sharply in the short-term. 

Charles Schwab's largest bond fund has lost more than 80% of its assets over the past 10 months as investors have fled the mortgage-backed securities in which it invested heavily.  As of February 29, more than half of its assets were in mortgage-backed securities.

Source:  The Wall Street Journal and InvestmentNews

Auction Rate Securities Present A "Hotel California" Nightmare For Investors

Investors have discovered Wall Street’s version of the Hotel California: they have “checked in” to an investment that they cannot leave.  Since mid-February, a significant number of auctions (70% according to Thestreet.com) in “auction rate securities” have failed, leaving the $330 billion market in disarray. 

At least one state securities regulator has commenced an investigation, and FINRA (the Financial Industry Regulatory Authority) has issued guidance for investors (“Auction Rate Securities: What Happens When Auctions Fail”).  Additionally, UBS and Goldman Sachs are among the financial services firms which have decided to markdown the value of these securities on client statements, with most markdowns between 3% and 5% but some as high as 20%.  Moreover, one secondary market provider has reported transactions completed recently with 30% discounts!

Let’s examine the problem and explore the recourse that investors may have.

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SNSFE Investigating Morgan Stanley (Multi-Financial and NEXT Financial) Brokers John Mullins and Kathleen Mullins of New Jersey

Attorneys at SNSFE are investigating a broker who misappropriated almost $400,000 from a 97-year-old widow and her charitable foundation.  According to FINRA, the Financial Industry Regulatory Authority, it has charged registered representative John Edward Mullins, of Margate, NJ, with misappropriating almost $400,000 from a 97-year-old nursing home resident who was a Mullins' client for more than 20 years, as well as from her charitable foundation.  The customer has recently passed away.  Broker Kathleen Maria Mullins, John Mullins' wife, was also charged with wrongdoing. 

In addition to misappropriation, FINRA charged John Mullins with attempting to misappropriate funds from his employer relating to improper expense submissions, accepting an unauthorized $100,000 loan from the client, and making misstatements on his firm's annual compliance questionnaires and Form U4 in an apparent effort to conceal his officer and trustee status with the charitable foundation.  Kathleen Mullins was charged with accepting a loan from the customer and making misstatements on her Form U4 and annual compliance questionnaires.  In addition, both were charged with failure to adhere to high standards of commercial honor and just and equitable principles of trade.

The couple worked at Morgan Stanley from 2002 through 2006 then went to Multi-Financial Securities Corporation and on to NEXT Financial Group, terminating association with that firm in February of 2008.  Those with information about the Mullins pair should contact attorneys at SNSFE about these customers or any other customers who have been abused.

Source:  FINRA.org