Auction Rate Securities: "Take Prompt Action"

Kansas City, MOPeople who are still wondering if they may have been misled by financial advisers who urged them to buy auction rate securities can stop wondering. Recent news from Massachusetts confirms that at least some financial institutions knowingly gave false information to investors, leading them to believe that auction rate securities were safe investments. Investors are now being urged to file arbitration cases against those financial institutions, before it is too late.

Diane Nygaard, founder of the Nygaard Law Firm, has seen clients with a lot of money invested in auction rate securities. She is in the process of filing arbitration claims on behalf of these investors, and has already helped one investor regain all of her lost money. She says that news this week from Massachusetts helps to bolster investors' claims about auction rate securities.

According to Nygaard, the Massachusetts Securities Commissioner has filed a civil fraud case against UBS, a Swiss bank that has been first or second in auction rate securities sales for the past five years. The commissioner alleges that UBS sold auction rate securities to customers as being safe, liquid investments even though UBS knew that the investments were not safe and that the market for them was dying.

Furthermore, it is alleged that David Schulman, Global Head of Municipal Securities Group and Head of Fixed Income at UBS Securities, spearheaded UBS's marketing efforts to persuade financial advisers to sell auction rate securities to customers while he was selling the auction rate securities he personally owned. UBS was also trying to pull out of the auction market itself, referring to auction rate securities in October as "a huge albatross."

Nygaard says that people who invested in student loan-backed auction rate securities are among those that should file arbitration claims. "None of the student loan-backed auction rate securities have been redeemed by issuers and it doesn't look likely that they will be," Nygaard says. "Student loan authorities are not municipal bonds but were sold as municipal bonds. They are actually long-term bonds issued by private companies and quasi-public authorities. If they are issued by public authorities they are not quick to refinance because they do not have the money and there is no political reason to redeem them. For example, MOHELA (Missouri Higher Education Loan Authority) has been paying zero percent since February. Those securities cannot be resold. They have a small percentage of their par value."

According to Nygaard, student loan-backed securities are currently worth between one-third and one-half of what people paid for them, depending on the credit-worthiness of the issuer and the interest rate.

Some investors are already filing claims against UBS. "We have filed arbitrations for UBS customers seeking their losses and the consequential damages because their money was tied up," Nygaard says. "We are also seeking punitive damages from UBS. This complaint from Massachusetts gives us valuable evidence for the claim. It shows that the people responsible for this knew at the time about the risks of auction rate securities and acted on their own personal accounts. The game was fixed. They were front-running [which occurs when a financial entity knows about the risks of an investment but does not tell customers and then sells its investment while encouraging other investors to purchase it].

"There were indications that as early as October 2007, executives were concerned this was going to fail. So, I think that anybody that has an account at UBS should, if they have a substantial amount of money [$50,000 or more] tied up, file an arbitration."

"The reality, known to UBS, is that there were no auctions for these securities," Nygaard says. "They were propping up these 'auctions,' as were other dealers, so that they would get the auction management fees and the fees charged to retail brokers when they bought them."

Not all auction rate securities firms have abandoned their clients, according to Nygaard. In fact, HSBC has announced that it will redeem its clients' auction rate securities at par, so those clients will get all of their money back. Nygaard says that although HSBC was not a big player in the auction rate securities market, at least it is saying it will do the right thing.

Nygaard encourages people have more than $50,000 with UBS to file a securities claim as soon as possible. She notes that the longer people wait, the longer it will be until their claim is heard and by that time arbitrators may have become jaded by hearing the same facts over and over again.

"If they [investors] do not act and think that regulators will take care of it for them and then later learn that is not the case, there are then a lot of defenses that the defendants will use," Nygaard says. "They will say that the investor must have been okay with the situation. They will say, 'Liquidity must not have been an issue for you, you accepted the situation.' Those will be harder cases to win than if investors take prompt action."