Corporate & Securities Law

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