Posted On: July 31, 2008

State Sues Merrill Lynch For Fraud In The Sale Of Auction-Rate Securities

Today, Massachusetts securities regulators charged Merrill Lynch with fraud in the sale of auction-rate securities. The State’s complaint asserts that the major Wall Street firm was pushing its brokers to sell auction-rate securities without making the proper disclosures to investors for months after the firm knew that the market for auction-rate securities was on the brink of collapse. The states of Massachusetts, New York and Texas had previously filed similar claims against UBS.

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Posted On: July 30, 2008

FINRA Announces Pilot Program To Evaluate All-Public Arbitration Panels

In response to growing public and political pressure, in a news release dated July 24, 2008, the Financial Industry Regulatory Authority (“FINRA”) announced that it has launched a “pilot program” that scraps the “industry” arbitrator. For “eligible” claims filed on or after October 6, 2008, claimants who elect to participate in the pilot program may choose an arbitration panel composed of three “public” arbitrators instead of two “public” and one “industry” arbitrator (the typical panel composition in a case filed by a customer). Generally speaking, a public arbitrator is one deemed not to be affiliated with the securities industry by FINRA rules governing securities arbitrations. An “industry” arbitrator is affiliated with the securities industry.

Six firms – Merrill Lynch, Citigroup Global Markets, UBS, Wachovia Securities, Morgan Stanley and Charles Schwab – have agreed to participate in the two-year pilot program. Schwab has agreed to “contribute” only 10 cases per year for participation in the program, and the other firms have agreed to contribute 40 cases per year. The firms cannot decide which cases will participate in the program. As noted, the pilot program only applies to “eligible” claims filed on or after October 6, 2008. FINRA’s announcement did not clearly define what is meant by “eligible.”

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Posted On: July 29, 2008

Blue Cross/Blue Shield Of Georgia Exposes Social Security Numbers And Other Personal Information

In an article in today's Atlanta Journal-Constitution, Andy Miller reported that Blue Cross and Blue Shield of Georgia (“Blue Cross”), Georgia’s largest health insurer, sent an estimated 202,000 “Explanation of Benefit” (“EOB”) and other letters to the wrong addresses last week, exposing patient names, social security numbers, medical conditions, treatment information, and other health and personal information to potential identity thieves. State insurance commissioner John Oxendine called the security breach “very, very serious” and ordered Blue Cross to notify affected policyholders in writing, according to the article. The breach, which may violate federal law, as well as Blue Cross’s obligations to its policyholders, occurred statewide and affected both employer and individual health benefit plans.

Page Perry, LLC is an Atlanta-based law firm with significant experience in consumer and class action litigation. Page Perry, LLC is presently co-lead counsel in a certified class action against Allianz Life Insurance Company of North America arising out of the marketing of annuity products. Page Perry, LLC attorneys have worked on numerous other class action cases with co-counsel from all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. For further information, please contact us.

Posted On: July 25, 2008

Investor Misrepresentation And Omission Claims Escalate

The subprime and credit crises have resulted in a surge of fraudulent misrepresentation and omission cases against Wall Street firms. A rising stock market concealed many such abuses because values were rising, making fraudulent misrepresentations and omissions hard to identify. Recently, however, many of these misrepresentations and omissions have become apparent. For example, many risk-averse investors with conservative objectives have recently discovered that they have sustained huge losses on investments that were misrepresented to them as being very safe and conservative.

Perhaps even more critical than what was affirmatively misrepresented to investors in these cases is what the firms and their brokers omitted to disclose to investors about these securities. The bedrock principle of the securities laws is the duty of complete and truthful disclosure. Once a broker undertakes to disclose any information about a security to an investor or potential investor, the disclosure must be complete and truthful in all material respects. This is an absolute requirement. It applies to every broker (whether discount or full service), every security, and every person who receives any information about a security (rich or poor, financially sophisticated or not, whether or not that person has an account with the broker). If a broker fails to provide complete and truthful disclosure, and the undisclosed information would have been important in deciding whether or not to invest, the investor has a legal right of action against the broker and the firm to recover resulting losses and damages.

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Posted On: July 22, 2008

The Latest Threat To Investors

Some economic pundits are blaming some of the latest market problems on the jettisoning of several Depression era protections for investors, such as the repeal of the Glass-Steagal Act, which used to separate commercial banks from investment broker/dealers and the repeal of the Uptick Rule on short sales that may be contributing to the wave of short-selling.

Now, a more recent law protecting investors is under attack. Jane Bryant Quinn, the well-known financial columnist, warned of the latest threat to investors in her column in the Sunday, July 20, 2008 Washington Post. The Sarbanes-Oxley Act (“SOX”) was passed in 2002 after the Enron and WorldCom frauds and other accounting abuses came to light. Before SOX, the accounting industry was supposed to be regulating itself for both audit quality and integrity. In practice, accountants were turning a blind eye to several serious accounting misdeeds in exchange for large fees for their consulting practices.

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Posted On: July 22, 2008

Wachovia's Woes Continue

Wachovia Corp.’s subprime and credit crisis woes appear to be increasing at a rapid rate. Yesterday, the U.S. bank reported a record quarterly loss of $8.9 billion. The loss reflects, among other things, Wachovia’s ill-advised acquisition of Golden West Financial Corp. in 2006. Bloomberg News has reported that the second quarter loss marks the first time, in at least 20 years, that Wachovia has experienced two consecutive quarterly losses. Wachovia’s stock has lost 65% of its value so far this year.

In response to these developments, Wachovia hopes to dispose of certain parts of its business. Last week, reports suggested that the bank might even be willing to part with Wachovia Securities. In addition, Wachovia hopes to pare expenses by $2 billion, has drastically cut its dividend and has announced plans to cut some 6,000 workers. The company also stated its intent not to fill approximately 4,400 positions that are currently open.

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Posted On: July 21, 2008

Should Investors Sell Their Illiquid Auction Rate Securities?

Many auction rate securities investors are asking whether they should sell their illiquid holdings or should wait in hopes of their auction rate securities being refinanced or redeemed. Unfortunately, there is no one answer that is right for every investor. This article attempts to discuss various factors that investors may wish to consider in making their own decision. Among other things, we discuss the status of the market, describe relevant considerations and discuss the advantages of selling and of waiting. We also provide investors with information on what they can do if they are interested in selling their auction rate securities.

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Posted On: July 20, 2008

Securities Arbitration Study Is Disappointing But Does Not Tell The Whole Story About Investor Recoveries

A recent study of securities arbitration raises some disturbing questions about industry-sponsored arbitration panels. A review of 14,000 NASD and NYSE securities arbitration awards for the period from 1995 through 2004 shows that individual investors are faring worse in cases decided by arbitration panels than they once did. This is particularly true when investors brought their claims against one of the larger brokerage firms. This study, among other complaints, has resulted in challenges to the fairness of securities arbitration, challenges to the inclusion of securities industry arbitrators on panels, and an array of similar issues.

Fortunately for investors, the study does reflect the overall success realized by investors who file securities arbitration claims. As is the case in court proceedings, many arbitration cases (including many of the strongest arbitration cases) are settled by the parties or in mediation. None of these cases or their results are considered in the study. The bottom line is that investors bringing arbitration claims, as a whole, recovered money many more times than the study would suggest.

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Posted On: July 19, 2008

Wall Street Firms Knew That Failure of the Auction Rate Securities Market Was Imminent

The Boston Globe has reported that, in addition to UBS Financial Services, other major Wall Street firms expected the failure of the auction-rate securities markets prior to the collapse in February of this year, yet failed to warn investors of the impending disaster. In the months leading up to the collapse, JP Morgan Securities, Inc., Lehman Brothers, Morgan Stanley, Bear Stearns Cos. and Merrill Lynch & Co. warned the Commonwealth of Massachusetts that the auction-rate markets were in trouble and that the state should consider refinancing some of its debt. Unfortunately, this information was not shared with smaller state entities or individual investors.

Previous reports had revealed that, as early as last summer, UBS, Citigroup and Bank of America, among others, had been advising issuers of student loan auction rate securities that their auctions were going to fail unless the issuers agreed to waive caps on the amount of interest they could pay. This information was also withheld from individual investors.

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Posted On: July 18, 2008

Check Out Your Broker

You are about to entrust a broker and a brokerage firm with a substantial amount of your money. Have you checked them out first?

There are three sources for you to check. First is the Financial Industry Regulatory Authority (FINRA); this is the organization that regulates brokerage firms and their employees. To see the information FINRA makes available on brokers and brokerage firms go to www.finra.org. Once on the website click FINRA BrokerCheck.

You should also check with your state regulator. Some state securities departments provide more information than does FINRA. The North American Securities Administrators Association (NASAA) has on its website, www.nasaa.org, a link for the appropriate regulator in each state. (NOTE: Brokers and brokerage firms are required to be licensed in the state in which they are doing business.)

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Posted On: July 17, 2008

States Raid Wachovia Securities Regarding Auction Rate Securities Abuses

A team of state regulators raided Wachovia Securities’ St. Louis headquarters today as part of a broad investigation into sales of auction rate securities to investors. The investigation is apparently focusing on Wachovia Securities’ sales practices in selling auction rate securities as well as Wachovia Securities’ internal activities regarding the auction rate securities market. The raid was apparently necessitated by Wachovia Securities’ refusal to comply with requests for information issued by the state of Missouri.

In addition, Missouri has reportedly served subpoenas on more than twelve Wachovia Securities’ executives and employees as part of the investigation.

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Posted On: July 17, 2008

Has Washington's Bailout Of Wall Street Banks Compromised The SEC's Ability To Regulate And Protect The U.S. Capital Markets?

Washington’s recent decision to permit the Federal Reserve to advance loans to Wall Street banks may have the unintended effect of undermining the SEC’s ability to regulate and protect the investment markets. Simply stated, different agencies of the U.S. government now have an inherent conflict among themselves. On the one hand, the SEC, which is the U.S. agency charged with regulating and protecting the investment markets, has a duty and obligation to take appropriate action to protect those markets, enforce violations of the rules of those markets, and, where appropriate, to take action that would have adverse financial consequences for Wall Street investment banks. On the other hand, the U.S. government is now among the largest creditors, if not the largest creditor, of the very investment banks that the SEC is obligated to regulate. Clearly the question must be posed as to whether the SEC will be willing and able to take appropriate action in situations where its very actions could have a negative impact on the financial wherewithal of the Wall Street banks which, in turn, would adversely impact the U.S. government’s ability to collect on obligations that are owed to it by the Wall Street banks.

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Posted On: July 17, 2008

SEC Finds "Serious Shortcomings" At Credit-Ratings Agencies

Lack of staffing, conflicts of interest and poor business practices are among the reasons the SEC has found caused the three largest credit-rating agencies (Moody’s, S&P and Fitch) to award high credit ratings to questionable structured finance securities. Due to an unprecedented increase in mortgage-backed and structured finance securities between 2002-2007, the big three fought to keep up with volume while maximizing their own market share. In this environment, all three ended up compromising their standards and integrity.

The ratings agencies did not hire enough people when their workload began increasing in 2002. As a result, the SEC concluded that they did not have enough staff, and “sometimes cut corners.” The firms also did not document their processes or decisions in awarding “AAA” ratings (the highest rating) for questionable securities. In certain situations, there was no evidence that any surveillance work was done by the agency.

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Posted On: July 16, 2008

Investor Suitability Claims on the Rise

The subprime and credit crises affecting the economy have revealed an array of suitability abuses by Wall Street investment firms. While a rising stock market hides many abuses by brokerage firms, suitability abuses are more easily identifiable when times are tough. For example, many risk-averse investors with conservative objectives have recently discovered that they have sustained huge losses on unsuitable investments recommended to them as being very safe. Auction rate securities, short-term bond funds, AAA rated debt securities, and mortgage heavy mutual funds provide recent examples of suitability abuses.

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Posted On: July 16, 2008

Washington's Bailout Of Financial Firms May Put The United States' AAA Credit Rating At Risk

According to recent reports, Washington’s decisions to open the government’s vault to support Wall Street banks, Freddie Mac, and Fannie Mae, among others, could have the collateral effect of costing the United States government its AAA credit rating. During the last several months, Washington has permitted the Federal Reserve to provide billions of dollars in government funds to an array of financial institutions in order to provide them with needed liquidity. Specifically, Washington has committed to provide financial support to numerous Wall Street banks, Freddie Mac and Fannie Mae. Many of these loans by the government have been secured by complex financial instruments of questionable value. Stated another way, much of the questionable debt associated with the ongoing subprime and credit crisis could become the government’s risk at substantial cost to American taxpayers.

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Posted On: July 15, 2008

UBS Plans to Repurchase $3.5 Billion of Auction Rate Preferred Shares

Today UBS announced plans to repurchase up to $3.5 billion of auction rate preferred shares issued by tax-exempt closed-end funds. This repurchase will permit some investors to convert their illiquid auction rate preferred shares into cash. These shares have been illiquid since February of this year when UBS and other brokerage firms withdrew their support of the auction rate markets.

UBS was recently sued by the Commonwealth of Massachusetts for urging its sales force to sell auction rate securities as safe, cash equivalents or money market-type investments while UBS insiders were simultaneously dumping their auction rate investments and UBS was planning an exit strategy from the auction rate securities markets. UBS is also alleged to have continue to sell student loan auction rate securities to its customers after it had determined that these securities were a flawed product.

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Posted On: July 15, 2008