Corporate Investor Wins $400 Million on Auction-Rate Securities Claim
A FINRA arbitration panel entered a $400 million award against Credit Suisse based on claims that it improperly sold auction rate-securities to a large corporation, STMicroelectronics. The award also requires that Credit Suisse pay over $6.5 million in attorney’s fees. This is the first in what is likely to be a long line of significant awards against brokerage firms that engaged in improper sales of auction-rate securities to corporations.
Attorney J. Boyd Page of Page Perry LLC in Atlanta applauded the decision saying, "It's good to see arbitration panels recognizing that many corporate and institutional investors were victimized by abusive conduct in the auction-rate securities debacle. These investments were sold as safe parking places for cash and important facts were withheld from investors. It would be a travesty of justice to deny recovery under such circumstances."
Auction-rate securities are long-term bonds paying short-term interest rates that reset at periodic auctions. These securities were routinely sold by brokerage firms as safe, liquid “cash equivalents.” In February of 2008, the auction-rate securities market collapsed when the brokerage firms ceased supporting the auctions and the auctions failed. As a result, the securities that were sold in the marketplace as cash equivalents became completely illiquid long-term obligations.
Many corporate and institutional investors have been devastated by the purchase of auction-rate securities. While many small investors have recouped all of their losses in auction-rate securities as part of regulatory settlements, hundreds of corporations and institutions have been left holding the toxic securities. The STMicroelectronics case confirms that many institutional investors were misled about auction-rate securities in the same way that individual investors were.
This decision further illustrates a trend in which an increasing number of corporate and institutional investors (so-called “sophisticated” investors) are standing up for their shareholders and bringing claims, with considerable success, saying we were lied to. Brokerage firms and investment banks typically argue that institutional and corporate investors do not deserve to be compensated because they were financially sophisticated and should have known better. It’s the “you never should have trusted us” defense. However, this defense is simply not justified, because even sophisticated people can’t bring their sophistication to bear when they are lied to.
The fallacy in the rationale adopted by the Wall Street firms and the regulators is further underscored by a letter written last August by the Regional Bond Dealers Association, which 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.
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.
