Bond exchange traded funds carry hidden risks. In a recent Wall Street Journal article, Sam Mamudi cautioned investors seeking safety in bond exchange traded funds to be aware of hidden risks that can magnify the losses and limit the gains in such investments. See “Bond ETF Buyers Must Stay on Guard for Hidden Risks,” March 1, 2010.
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Morgan Keegan has been aggressively fighting an array of regulatory actions and investor claims. As a result of these "hardball" defense tactics, Morgan Keegan's legal costs have doubled and are consuming a significant chunk of the firm's revenue as a result of investigations by securities regulators and legal actions by aggrieved investors, according to an Feb. 25 article in InvestmentNews by Bruce Kelly.
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The State Street Corporation’s recent settlement with the SEC provides a startling example of how large Wall Street firms abused their customers’ trust during the recent debacle in the financial markets. Simply stated, State Street hid important facts from most investors while secretly taking action to protect its own interests and those of a few select clients. Specifically, State Street told a few preferred investors in 2007 that one of its bond funds was almost entirely invested in subprime mortgage securities, allowing them to get out before the fund blew up. Simultaneously, other State Street customers were kept in the dark, costing them hundreds of millions of dollars.
Investors have been moving out of money-market funds into short-term bond funds, and while short-term bond funds are considered to be relatively safe, beware, says Tom Lauricella in his recent article in the Wall Street Journal, “Short-Term Bonds May Disappoint Investors This Year.”
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Wall Street banks like Goldman Sachs, Deutsche Bank, Morgan Stanley, as well as smaller firms like Tricadia Inc., and certain of favored hedge fund clients that were tipped off by the banks, reaped huge profits by shorting (betting against) “synthetic” collateralized debt obligations (CDOs) linked to residential mortgages, which the banks created and sold to other clients, according to Gretchen Morgenson and Louise Story in their recent New Times article, “Banks Bundled Bad Debt, Bet Against It and Won.”
In an encouraging sign to those who despair about investors receiving full justice in a compulsory arbitration process financed by the brokerage industry, a California FINRA panel last month (December 2009) awarded compensatory damages of $319,798 to a 96-year old investor as well as treble damages of $959,394 under the California Elder Abuse Act.
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"Signs and wonders" are pointing to a new bubble brewing in corporate debt and investors should be wary. According to a January 6 Bloomberg article by Bryan Keogh and Shannon D. Harrington (“Treasurers Embrace Pay-in-Kind Bonds as Ghost of Lehman Fading”), companies are (i) issuing bonds that pay interest in new debt rather than cash, (ii) using the proceeds to pay dividends to their owners rather than for operations or expansion, (iii) asking their lenders to change the terms of their existing debt agreements to permit this, and (iv) increasing the amounts of offerings if investors want more. Such risky offerings have not been seen since 2007, before Lehman Brothers declared bankruptcy and the credit markets froze.
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So many investors have lost money in investments mis-marketed under assurances the investment was “principal-protected,” or “capital guaranteed,” that the Financial Industry Regulatory Authority (FINRA) has found it necessary to issue a notice (Notice to Member 09-73) reminding brokerage firms of their sales practice duties when recommending investments such as so-called Principal Protected Notes. These securities are structured products that are typically comprised of a zero-coupon linked to the performance of some other asset. That asset might be, for example, a derivative product based on a stock index or a basket of securities as obscure as the Brazilian Real-U.S. Dollar exchange rate and the price of copper.
A Financial Industry Regulatory Authority (FINRA) arbitrator awarded damages to Mr. Weigel as a result of losses sustained in the Schwab YieldPlus Fund. The panel awarded the Mr. Weigel $19,400 in a claim submitted under FINRA’s special “simplified” procedure for claims of $25,000 or less (exclusive of interest and costs). Mr. Weigel’s actual trading loss in Schwab YieldPlus Fund was $22,279 while his net out of pocket loss was $15,359. In a simplified claim, a single arbitrator decides the case based on the paper submissions of the parties without an in-person hearing.
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Time is running out for Schwab YieldPlus investors to opt out of the class action. A properly completed Request for Exclusion must be received by the class action administrator no later than December 28, 2009. With the holidays, the time to do that is running very short.
If you were sold Main Street Natural Gas Bonds that were guaranteed by Lehman Brothers, you are likely to have a compelling claim to recover any losses that you sustained when Lehman Brothers went bankrupt. These bonds were sold to income oriented investors as relatively safe investments. However, the brokerage firms that sold them, in many cases, did not do their homework. If they had, they would have realized that these bonds were totally inappropriate for almost any investor.
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Investors and their accountants should scrutinize investment portfolios to see whether they contain Main Street Natural Gas Bonds that were guaranteed by Lehman Brothers Holdings, Inc. These bonds were not only guaranteed by Lehman Brothers, they were issued to finance the cost of acquiring a thirty-year supply of natural gas from Lehman Brothers Commodities Services Inc., a wholly-owned subsidiary of Lehman Brothers, as the designated Gas Supplier. Thus, the viability of these Lehman-backed bonds was directly dependent upon the viability of Lehman Brothers. In September 2008, Lehman Brothers filed for bankruptcy, and Lehman-guaranteed Main Street Natural Gas Bonds plummeted in value, but there were numerous red flags and storm warnings well before then.
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A federal court recently certified a class action against Charles Schwab & Company, Inc. brought on behalf of investors in the Schwab YieldPlus Fund. The certification means that the lawsuit can proceed as a class action; no settlement has been reached. Most importantly for YieldPlus investors with significant losses, the deadline to be excluded from this class action is December 28, 2009.
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Dow Corning Corp. has filed a federal lawsuit against BB&T bank for misrepresenting the risk and liquidity of auction rate securities, leaving Dow Corning with $667 million in securities that it cannot sell. Auction rate securities (ARS) are debt instruments for which interest or dividends are 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 Dow Corning suit, filed in federal court in New Jersey, alleges that the bank and its brokerage subsidiary either misstated or failed to disclose material facts about the safety and liquidity of the investment, even as BB&T knew that the market was collapsing.
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Investors in Charles Schwab’s YieldPlus Fund need to be aware of their options in light of the recent certification of a class action brought by YieldPlus investors against Schwab. Most importantly, YieldPlus investors who are class members need to request exclusion from the class if they wish to maintain individual claims against Charles Schwab (even if those claims are already filed). Requests for exclusion must be properly filed and received by the claims administrator no later than Monday, December 28, 2009.
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Roche International has sued Credit Suisse for over $270 million in losses that the drug company incurred after the bank’s brokers invested $545 million of its money in auction rate securities. Roche’s Credit Suisse relationship managers were Julian Tzolov and Eric Butler, who are now serving federal prison sentences for securities fraud in connection with auction rate securities. In its lawsuit, Roche alleges that it was among Tzolov and Butler’s victims, accusing them of investing the company’s money in risky auction rate securities while claiming it was invested in highly liquid, government-backed student loan securities.
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A federal judge in Atlanta recently dismissed a class action lawsuit brought against SunTrust for fraud in the sale of auction rate securities. The case was not dismissed on the merits of investors’ claims against SunTrust, but based on technical legal requirements about what it takes to plead a claim. Those requirements are strict in securities fraud cases that get filed in federal court, especially class actions, but they do not apply to cases that get filed in arbitration.
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The threatened SEC enforcement action against The Charles Schwab Corp. relating to sales of its YieldPlus Fund increases the likelihood that Schwab will need to settle a class action and FINRA arbitrations involving the YieldPlus Fund, according to industry analysts, as reported by Bruce Kelly on October 18 in InvestmentNews. On October 14, Schwab disclosed that it had received a Wells notice from the staff of the U.S. Securities and Exchange Commission that the staff intends to recommend the filing of a civil enforcement action against Schwab Investments, Charles Schwab Investment Management, Charles Schwab & Co., Inc. and the president of the funds for possible violations of the securities laws with respect to the Schwab YieldPlus Fund and the Schwab Total Bond Market Fund.
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Congress is finally working on legislation to regulate the $592 Trillion market for over-the-counter-derivatives, according to a recent article in USA Today by Paul Wiseman and Pallavi Gogoi. Derivatives include futures contracts to take delivery of an underlying asset, such as oil, at an agreed price on a certain date. These contracts are used by dealers in the underlying assets to manage the risk of price variations. They are also used by speculators to place bets on the direction of the price. Speculators provide the liquidity needed to have a market in which some derivatives are bought and sold.
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Citigroup Global Market, Inc. has filed a motion to dismiss an action against it by KV Pharmaceuticals Co. arising out of sales of auction rate securities, according to an August 25 article in Law360 by Christine Caufield entitled "Citigroup Argues KV Pharma Knew ARS Risks." The case is pending in the United States District Court for the Eastern District of Missouri. Citigroup appears to following the playbook of other Wall Street firms, arguing that KV was a "sophisticated investor" that knew the risks of ARS, that KV failed to identify any material misrepresentations by Citigroup, failed to allege it relied on any Citigroup statements in deciding to invest, failed to establish any actual loss, and failed to file suit before the statute of limitations ran out.
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