Legal News

Should ?Downstream? Sellers Get an Invite to the ARS Buyback Party?

By Dan Slater

As the auction-rate securities party continues to wind down, and many of Wall Street’s biggest players have already come and gone, some smaller fish are sizing up their prospects for an invite.

As we’ve noted, in recent weeks UBS, Citi, J.P. Morgan Chase, Morgan Stanley, Merrill Lynch and Wachovia have agreed to buy back more than $40 billion of ARS from their clients, including individuals, charities and small-business investors.

But now, the WSJ’s Liz Rappaport and Shefali Anand report, there’s a feud brewing between those big fish and their smaller ARS-dealing brethren, such as Raymond James, Stifel Nicolaus, Oppenheimer and Fidelity. These smaller brokerages say they shouldn’t be on the hook to buy back the ARS they sold just because big investment banks are doing so. They also say they were merely sellers of ARS, which differentiate them from the investment banks that ran the auctions.

Brian Maddox, a spokesman for Oppenheimer, said the firm believes the recently announced settlements “should cover all investors,” even those who bought the securities elsewhere.

But a spokesman for New York AG Andrew Cuomo says the jury’s still out. “The culpability of downstream brokerages will depend on the facts uncovered in our investigation; what did they know about the liquidity risks of the auction-rate securities and when did they know it, and most importantly what representations, if any, did these brokerages make to their customers,” said the spokesman, adding that his office’s investigation is “far from over.”

Full post as published by Law Blog - WSJ.com on August 19, 2008 (boomark / email).