Legal News

Auction-Rate Securities ? the Latest Legal Rage?

By Jamie Heller

Call it the Wall Street phrase of the week: auction-rate securities. These instruments, used by municipalities, schools, closed-end mutual funds and others to raise money, have been on the out since February, when many banks stopped bidding on them.

Today, Citi in its earnings report said it took $1.5 billion in write downs on auction-rate securities.

The WSJ reported that NYAG Andrew Cuomo (pictured) is turning his office’s attention to auction-rate securities. His office subpoenaed 18 institutions this week, including Wall Street powerhouses UBS, Citi, Merrill and more.

The NLJ reported this week that at least 14 lawsuits, as well as additional arbitrations, have been filed by investors.

And the Journal’s Robert Frank a couple of months ago wrote this page-one story about a family that sold a business for more than $1 billion and gave the money to Lehman, which put a chunk into auction-rate securities. The family lost access to more than $250 million, and filed a claim.

You know what comes next – the law-firm task force. Today, a Dewey & LeBoeuf press release announced that the firm has has an “Auction-Rate Securities Task Force” with an “integrated team” of “experienced lawyers” providing a “full-service approach” to the issues. Readers of this blog have heard of these task forces before, with regard to stock-options backdating, subprime and global warming.

This one seems particularly narrow – concerning one type of financial instrument. Then again, this was a $330 billion market before it virtually collapsed in February when, according to the WSJ, demand dried up and Wall Street firms stopped providing support for the market they’d given in the past. Buyers had thought the instruments were liquid but they proved not.

We caught up with Lawrence Hill, a senior litigation partner at Dewey & LeBoeuf who helped put together the task force.

Giving a sense of the range of issues the firm anticipates, he said the task force includes attorneys with experience in regulatory investigations, internal investigations and white-collar defense, as well as lawyers who worked on subprime or stock-options backdating matters.

“The idea is to have a team in place that is best suited to handle a particular type of disputed issue and pools our talent and resources that we have in those areas,” said Hill, “so we can service our clients in real time.”

LB’ers: Where do auction-rate securities woes fall on the scandal scale? Wall Street types, please enlighten us.

Full post as published by Law Blog - WSJ.com on April 18, 2008 (boomark / email).