Investor Sues Nuveen, Merrill, Citigroup and Deutsche Bank over Auction Rate Securities
A retired securities lawyer and his wife have filed suit in the U. S. District Court for the Middle District of North Carolina over losses they sustained as a result of investing in preferred stock auction rate securities issued by Nuveen Investments. Auction rate securities are debt instruments -- in this case preferred stock-- for which interest is regularly reset through a Dutch auction. Auction rate securities were once routinely marketed as safe, cash equivalents that were highly liquid, but the broker-dealers who sold them failed to disclose that liquidity was entirely dependent upon the success of the auction process, which was being artificially supported by the undisclosed participation of brokers bidding in auctions where they had an interest. The North Carolina suit alleges fraud and securities law violations at all levels, including claims against the issuers, the underwriters, and the broker-dealers who sold the securities and managed the auction process.
Auctions were once held every 7 to 35 days by the brokerage firms that dealt in auction rate securities, but because of the credit crisis and its effect upon the financial markets, auctions ground to a halt in February 2008 because they were no longer viable investments and broker-dealers who had previously propped up the market by bidding in their own auctions were no longer inclined to invest in them. The result has been that holders of auction rate securities have been unable to cash out even at a loss, and investors who were led to believe that they were purchasing a cash equivalent have learned that they essentially have no liquidity at all.
In addition to the credit crisis, a number of other factors contributed to the decline and ultimate failure of the auction rate securities market. In early 2007, the National Accounting Standards Board (NASB) announced that auction rate securities should be treated as short-term investments rather than cash equivalents that could be treated as available cash on balance sheets. When auction rate securities holdings could no longer be reported as cash in the bank, corporate and institutional investments in auction rate securities dropped from $264 billion at the end of 2006 to just $98 billion by the end of 2007. Meanwhile the minimum investment limits for many auction rate securities, which had previously been $250,000, were dropped to $25,000 to allow more individual investors to enter the market. Just as smaller investors entered the market, the risks of auction rate securities increased substantially, but those risks were not disclosed to investors. Auctions began to fail in the late summer and fall of 2007, when there were more auction failures than had occurred in the past 20 years combined. Fitch and other ratings agencies issued warnings about the auction rate market, and some issues of auction rate securities were downgraded. Eventually the brokerage houses stopped supporting the auctions until the market completely collapsed. Investors were left holding over $300 billion in illiquid securities.
Since the market collapse, there have been several regulatory settlements with broker-dealers that have allowed many investors to redeem their auction rate securities at par, but many of those investors have made claims for consequential damages caused by the loss of liquidity—for example, lost business opportunities that they were unable to take advantage of. Many more investors have still not achieved liquidity, however, because the broker-dealers who sold them their auction rate securities were not party to the regulatory settlements or because the investors were not eligible under the terms of the settlements, which primarily benefited individual “retail” investors. Some investors who have been unable to redeem their securities have been able to sell them, at a steep discount, in a limited secondary market, forcing them to take substantial losses. Others have continued holding the securities, which have long-term maturities but are locked into paying short-term interest rates—in some cases less than one percent for periods of more than thirty years.
According to attorney Craig T. Jones, who represents several auction rate securities investors who were not party to regulatory settlements, “private lawsuits like the one in North Carolina are just beginning to be filed in large numbers. Our firm recently filed an $8 million claim for a Georgia nonprofit, and we are pursuing arbitration claims for a number of individual and corporate investors whose holdings did not meet the criteria of the SEC and FINRA consumer settlements.” Jones’ law firm, Page Perry LLC, is a securities boutique law firm that represents investors in lawsuits and arbitrations all over the country. “The first step that an investor must take,” says Jones, “is to determine what the options are. Many of our clients simply want to know whether to hold or sell the securities, and what their legal options are if they sell at a loss. Either way, we can help you.”
Though not involved in the North Carolina case, the law firm of Page Perry, LLC is handling a number of auction rate securities cases for investors who lost liquidity due to the collapse of the auction market. Based in Atlanta, Page Perry has a national practice through strategic alliances with other securities law firms.
