Corporations Begin Holding Wall Street Accountable for the Auction-Rate Securities Debacle
A growing number of corporations around the country are beginning to assert claims against Wall Street investment firms over Wall Street’s misleading and deceptive marketing of complex structured finance products such as auction-rate securities and collateralized debt obligations. Most recently, American Eagle Outfitters has filed claims accusing Citigroup of fraud in connection with the sale of some $258 million of auction-rate securities. Among the allegations made by American Eagle are that Citigroup misrepresented the auction-rate securities as safe and liquid and that Citigroup omitted to disclose various material facts such as the lack of demand for the auction products and the necessity of support by Citigroup.
The American Eagle case involves circumstances that many companies and institutions find themselves confronting. Large corporate and institutional investors have been “left out in the cold” by regulators' recent auction-rate securities settlements with Wall Street brokerage firms. While many small investors have recouped all of their losses in auction-rate securities as part of settlements between Wall Street firms and regulators, hundreds of corporations and institutions have been left holding the bag. Thus, despite the fact that most corporate and institutional investors were misled about auction-rate securities in the same way as other investors, they must fend for themselves even if it requires bringing legal claims to protect their interests.
J. Boyd Page, senior partner at Page Perry LLC in Atlanta, observed that, “I think that corporations and institutions have compelling claims based on the mismarketing of auction-rate securities. The underlying abuses in these cases are horrendous. Given the size of the losses and the egregious conduct of Wall Street, it seems incumbent for corporations and institutions to protect the interest of shareholders.”
The banks and regulators argue that companies and institutions were excluded from the settlements because their officers were financially sophisticated and should have known better. The message from regulators and Wall Street to these companies is: “Drop Dead.”
This distinction is simply not justified – sophisticated people can’t bring their sophistication to bear when they are lied to. Not only were corporations and institutions lied to about auction-rate securities being safe, liquid cash equivalents, they were not told various material facts that were essential to a reasonable understanding of the product. For example, they were never told that most auctions would fail unless the brokerage firms intervened to support the auctions. Similarly, they were not informed about the deteriorating conditions in the auction-rate securities markets.
The fallacy in the rationale adopted by the Wall Street firms and the regulators was clearly underscored last August in a letter written by an organization, the Regional Bond Dealers Association, that represents certain brokerage firms that sold auction –rate securities but did not underwrite them. In its letter, the Regional Bond Dealers Association claimed that many of the brokerage firms distributing auction-rate securities were themselves victimized by the fraud perpetrated by the major underwriters of auction-rate securities. Specifically, the Regional Bond Dealers Association claimed that the major underwriters of auction-rate securities withheld material information about auctions and the auction process from them. If financial professionals working in brokerage firms were defrauded by their peers, it is easy to understand how corporations and institutions were also defrauded.
Pluris Valuation Advisors, LLC, has reported that U. S. companies held nearly $165 billion of ARS in June 2007, $100 billion in December 2007, and $39 billion at the end of July 2008. Google Inc., Bed Bath & Beyond Inc., and Starbucks Corp., among other companies, purchased auction-rate securities because they were led to believe such securities were cash equivalents and were not advised of material facts regarding auction-rate securities, the auction-rate securities markets and the auction process.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. 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. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in auction-rate securities cases. For further information, please contact us.
