Broker Insists Auction-Rate Securities are Still Safe

Los Angeles, CANatalie handed her life savings over to a UBS Financial Services broker with explicit instructions to invest in certificates of deposit (CD). Instead, they were put into auction-rate securities and despite the collapse of that market, the broker still insists Natalie's investment is not at risk.

"My relationship with my broker started in April 2007 when I originally put money into a balanced index portfolio," says Natalie, "but that market became so volatile I pulled out at the end of October/beginning of November. I didn't like the options my broker suggested so later that month I instructed her to just put them into CDs so I would be safe until I decided what to do with my money. She said she had some that were around 5 percent.

Our conversation took place over the phone [so there's no paper trail of my request].

I didn't realize that my money wasn't in CDs until I got my March statement from UBS. They had marked down securities on their March statements so mine was showing a loss. I was shocked--what CD shows a loss?

The monthly statements are difficult to understand so I faxed it to a friend who's a trader in New York and in reading it, he told me I was in auction-rate securities. The little line of abbreviations on the statement seemed to be performing like a CD, where the principle stayed the same and interest came every month, which is what I asked her for, so why would I even think to double check. I had no idea they meant something else. She never told me she put me in this product instead of CDs, and when the ARS market went illiquid in February I never got a call from her.

I had to figure out the rest for myself.

I was pretty distraught. I called the broker and asked why I wasn't in CDs. She just said auction-rate securities are better than certificates of deposit and that's been her line ever since. Even when I sat down with her and her manager for two hours she was still insisting they were safer and better. Since then, I've been in touch with others at that branch and then finally, their legal department. I don't count on them doing anything for me but I do have to register a complaint with them.

I have been talking to lawyers but there doesn't seem to be too many options out there for me and even though this was an unauthorized trade, I still have to pay for the court to prove it. The onus seems to be on me--it's very distressing. I'm trying to figure it out through all the steps I've taken and the people I've spoken to, and unless I sue her and make her prove it was not an unauthorized transaction, I'm not going to get any satisfaction.

UBS doesn't seem to be taking the claims seriously so I have to go through the steps with the legal department and see what they have to offer me but so far that's just been a margin loan, which means I borrow against my own illiquid security, while the value of the securities are going down and I'm responsible for the rest of my loan."

Searching out information and solutions to recovering her savings has Natalie on the Internet day and night. The solutions she has identified so far include accepting the 100 per cent margin loan UBS will be offering from the month of May, despite the risk that devaluing securities still leave her accountable for the loan. She has also toyed with the idea of selling her ARS on a secondary market, which entails a 10-20 percent hit that might cost her at least $50,000.

"My broker wants me to wait six months for Nuveen Investments to redeem them," says Natalie. But Nuveen has announced it is redeeming only four funds and mine isn't one of them yet. They say it might take 3-5 months; another lawyer I talked is guessing at a couple of years--or maybe never. Auction-rate securities don't ever mature."

Finding and settling on a lawyer has raised several challenges. "Some have suggested filing a class action suit but if class action involves broker misrepresentation I have that but I also have a slightly different case because this happened in an unauthorized transaction. The best I can do with my case is arbitration because I signed an arbitration clause as most people do when opening a brokerage account.

"I would like to go to arbitration even though I have heard my case isn't unique and lots of people put their money into ARS without knowing, but I feel like I'm not part of that class who it was misrepresented to because my lawyer didn't sell me this product at all, she just went behind my back and got it.

In arbitration, if I were to sue, I'd have to sue for damages but I can't sue for punitive damages, as I understand it, so as of now I don't have official damages yet. It's a horrible Catch-22 situation--until the securities are valued at zero I can't claim damages. I'm learning a whole lot. Nothing like this ever happened to me when I was taking care of my own money."

The UBS broker continues to justify a lack of transparency. "It's truly amazing the double-talk," says Natalie. "She said, 'well, you asked for 100 per cent principal protection and for liquidity' -- well, they're not and never were. We sat in her office with her manager telling me this product had been safe for 20 years, and this is how they were represented to them, but I've read and educated myself on ARS and I don't think any broker can say they were mislead. If they did a little scratching, and I'm sure they did but are just playing dumb, they would have found as I have, that there was considerable risk."

Thousands of investors had only the word of their brokers to assure the suitability of their investments to match their needs, all the more since no prospectus of detailed information accompanies auction-rate securities. If you are no longer able to access your investments that are frozen in auction-rate securities, you should seek the advice of a lawyer.