Corporate & Securities Law

Concerns about investor abuse in auction-rate securities continues.  New York Attorney General Mr. Cuomo is joined now by at least a dozen different authorities at the state and national level investigating aspects of the $330 billion auction-rate securities market. 

The Securities and Exchange Commission has been working closely with the Financial Industry Regulatory Authority.  Regulators say probes are still continuing but some appear to be narrowing their search.  One focus is on disclosures made to issuers.  But the area that may be more fertile is how the securities were sold to investors and whether they were informed of the risk that the market could become illiquid, say some regulators.

One enforcement official says:  "As the market started to show signs of stress... did [firms] start changing who they sold to?  Did they start taking themselves and preferred sellers out of the market?  Did they start overplaying or underplaying the cash-like aspect of the securities?  What did they know and when did they know it?"

That person adds that firms or broker-dealers who intentionally placed customers into products they knew "would not act as they had before" given the market dislocation would be in breach of the rules.

Professor Coffee, law professor at Columbia University, says, "It was anomalous that the market suddenly dried up.  The question is, was there any collusion that led to people suddenly moving out of the market?  What would be most suspicious is if you see any kind of discussions between banks."

On another note, the Restricted Securities Trading Network began listing auction-rates last month on its electronic trading network.  Transactions were slow to begin, but now average between seven and ten per day, according to its CEO.  That said, to date, municipal auction-rate securities are seeing discounts of up to 10 percent.  Auction-rate preferred securities are between 10 percent and 20 percent discounts, and student loan auction-rates are discounted 25 percent and up.

With respect to student loan auction-rate securities, several student loan authorities say broker-dealers including UBS, Citigroup and Bank of America requested late last year that these authorities issue waivers that would make the auction-rate securities easier to sell.  A broker-dealer is the firm responsible for recruiting buyers for the securities at the auctions.

The behind-the-scenes moves show broker-dealers were struggling to keep auctions afloat as some more sophisticated investors such as corporate treasurers, spooked by problems in the credit markets, became reluctant to buy.  The moves, according to the Wall Street Journal, raise questions about what Wall Street firms told their brokerage clients about risks emerging in the auction-rate security market.  While alerting investors to warning signs could have accelerated the market's ultimate failure, firms' lack of action suggests Wall Street may have grappled with conflicted loyalties leading up to the collapse, according to the Wall Street Journal.

SNSFE continues to investigate and assist investors in this area of possible, if not probable, investor abuse.

Sources: Wall Street Journal; CFO.com; Financial Times