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Diane Nygaard: Battling for Investors in Auction Rate Securities

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Kansas City, MONygaard Law Firm represents investors and consumers who have suffered large losses from fraud, most specifically in securities and annuity fraud, pension plan mismanagement, and financial planning. Based in their Kansas City office, Diane Nygaard started her practice in 1986 and, with her two associate attorneys, has collected tens of millions of dollars for investors in the last 20 years. Their newest challenge is Auction Rate Securities.

LawyersandSettlement (LAS): What kinds of cases are you involved with at the moment?
Diane NygaardDiane Nygaard (DN): We are the appointed Class Counsel in the Kinder Morgan takeover litigation, Co-lead Counsel in a big insurance fraud that certified against Allianz; we're also working on a class action case involving Sprint, settled with Utilities and on an H&R Block case. And we also work with local investors in securities fraud due to broker or trust company misconduct.

LAS: And now you're getting involved in the Auction Rate Securities matter?
DN: Yes, we had a retired physician and other people come to us who put hundreds of thousands into Auction Rate Securities (ARS) and thought they were safe and secure only to find, to their alarm, that they can't get their money from their very safe liquid money market funds. It's a terrible shock.

LAS: How did they find out?
DN: I know one of them started seeing things in the newspaper and called her broker to make sure she wasn't in any of these and he told her, 'yes that's what you're in'. She didn't know what she had.

Another read an interview with James Stewart, the editor of Smart Money magazine where he was talking about his own problems with ARS and she wondered if she had the same thing happen. So that's how people typically find out. They don't really understand what they have.

LAS: What was the selling point on the ARS?
DN: Investors were told the ARS were paid a little more than a money market but that they would be just as safe and secure.

LAS: What is the difference between the two funds?
DN: Unlike a money market, which you can liquidate at any time, the ARS can be liquidated only if there was an auction--if someone was willing to buy them. Every week there was an auction and there would be bidders for them. This is typically a very liquid market. They're basically a long term note but being sold as if they were a money market with a long term of return.

LAS: What companies buy ARS?
DN: A lot of banks. They were initially issued by mutual funds companies and municipalities as well; a city or state would be issuing these secured notes, some just to borrow money.

Some are taxable, some tax-free.

LAS: So these investors have come to you with the realization that they have lost money.
DN: They can't get their money so the worry is will they ever get their money and they're being told by brokerage firms that they themselves don't know. With the state of the credit crisis in the country, it's hard to know whether other investors with an iron-clad stomach are buying them up at much less than their face value and will worry about who they will sell them to later.

LAS: Are those notes worthless then?
DN: Some brokerage firms are doing various things on the statements. Some are showing the face value on the statement, they're not showing a lot; some of them are showing 5-10% loss of face value. It depends on which brokerage firms sold these. For example, UBS statements show value of average worth 5-15% less than face value.

The reason so many people are concerned is that they have parked their tax-paying money in these (and taxes are due next week). That's why some of the brokers, like Merrill Lynch, I believe, are making loans to some of their clients so they can pay their taxes.

LAS: Any solutions for anyone else?
DN: We are suggesting that people file individual cases so that they are able to recover the loss from their brokerage firm in a securities arbitration--individual cases that have a lot of money in them. There's an estimate made, in an article, that some may be worth 10-30% and will never trade at par value again. Eaton Vance issued a lot of these and has already returned money to investors.

LAS: What else can your law firm do at this point?
DN: What we're doing is where there's not a lot of money involved we would be working on a class line basis, representing classes of people, but what we're really attempting to do is to recover losses on an individual basis.

It's a $330 billion auction rate market. The problem is that the global credit crunch is making it hard to resell these funds.

LAS: This story just broke in March. How many people have approached your law firm so far?
DN: About a dozen. A lot of people are just now getting their monthly statement too and therefore are just seeing the problem; we're expecting a lot of calls.

LAS: Which is your preferred process?
DN: It depends on the losses. If large amounts have been lost, say over $200,000 we recommend doing it an individual basis rather than a class action. It takes more than 20 to make a class action suit, not that many.

LAS: What should investors do when they try to cash out and find their funds worthless?
DN: They should contact an attorney.

LAS: What else is essential for investors who are holding ARS to consider?
DN: They should realize that time is of the essence. It's important for investors to start a claims on file; they're processed in order of receipt.

Arbitration can take less than a year. The brokerage firms have an obligation to return the money. If they don't, arbitration can force them. They didn't provide disclosed information. ARS were supposed to be safe money market funds, and the typical investor, who is very conservative, bought them because they don't pay high interest and therefore not a great risk.

This is a new problem--a direct result of the credit market and non-disclosure of risk. All this started in the subprime credit market and is getting worse.

Diane Nygaard is a graduate of Drake University and Harvard Law School. She is a member of several legal associations including Public Investors Arbitration Bar Association and is arbitrator for the New York Stock Exchange. Diane shares her expertise extensively as a speaker and writer and has been quoted by The New York Times, Wall Street Journal and Newsweek on investor rights and remedies.

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