TAG | ARS loss
Comments off · Posted by Securities Lawyer in FINRA
WASHINGTON — In a February article in The Bond Buyer, Jonathan Hemmerdinger writes that a Financial Industry Regulatory Authority (FINRA) arbitration panel ordered Memphis-based Morgan Keegan & Co. to pay a Birmingham investor $1.95 million for misrepresenting that the Jefferson County, Ala., sewer bonds he purchased were safe, liquid and tax-free investments.
These bonds were actually auction-rate securities and the ARS market collapsed and froze during the financial crisis, leaving investors holding the securities they had purchased.
In an order from FINRA issued Feb. 17, the panel awarded the payment to William W. Featheringill, a Birmingham investor and venture capitalist. The amount of damages equals the amount of ARS Featheringill was left holding.
Mr. Featheringill complained to FINRA in 2010 that staff at AmSouth Investment Services Inc., which became a part of Morgan Keegan in 2007, misrepresented the risks associated with investing in auction-rate securities. Featheringill purchased $3.5 million worth of the sewer bonds in 2005 from AmSouth. That company was acquired by Morgan Keegan’s parent, Regions Financial Corp.
Morgan Keegan said that it is considering an appeal of the decision.
Hemmerdiner writes that Mr. Featheringill said he was unfamiliar with investing in bonds and purchased the securities on the advice of AmSouth staff, who assured him the bonds were safe and that he could get his money every 35 days if he wanted to. Featheringill later sold $1.5 million of the bonds. His holdings totaled $1.95 million in 2010 when he filed the complaint against Morgan Keegan.
The Bond Buyer article goes on to say that auction-rate securities are long-term bonds with interest rates that reset regularly at auctions. ARS are similar to short-term paper because investors can hold them for short periods. But if the auctions fail, as they did when the financial crisis was unfolding in 2008 and dealers stopped supporting the auctions, investors may be stuck holding them indefinitely.
“Unfortunately, the sewer bonds were, in risk and suitability terms, the exact opposite of what they were represented to be,” said Featheringill’s complaint. “This type of investment — auction rate securities — had and still has huge risk of illiquidity and price depreciation.”
Rediker said staffers at Morgan Keegan were aware of problems with ARS in 2007, but failed to notify investors.
“They knew in the fall of 2007 that there was severe risk of failure,” he said.
“The principal amount at issue in this case may seem relatively small, but the securities principles involved were large. They go to governing the fundamental relationship between broker-dealers and their clients,” said Joseph S. Fichera, chief executive officer of Saber Partners LLC, who served as an expert witness for Featheringill. “While each case is fact-specific, the sheer number and variety of ARS cases, even four years after the market dislocation, suggests there were fundamental problems in this market.”
Although the FINRA panel gave Featheringill all of the damages that he asked for, it took no action on the his demand for $5.85 million in punitive damages.
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SunTrust Robinson Humphrey, SunTrust Investment Services Fined a Total of $5 Million by FINRA for Auction Rate Securities Violations
Comments off · Posted by Securities Lawyer in FINRA
WASHINGTON — In an article from FINRA’s website, The Financial Industry Regulatory Authority (FINRA) announced that it has fined SunTrust Robinson Humphrey, Inc. (SunTrust RH) and SunTrust Investment Services, Inc. (SunTrust IS) for violations related to the sale of auction rate securities (ARS). SunTrust RH, which underwrote the ARS, was fined $4.6 million for failing to adequately disclose the increased risk that auctions could fail, sharing material non-public information, using sales material that did not adequately disclose the risks associated with ARS, and having inadequate supervisory procedures and training concerning the sales and marketing of ARS. SunTrust IS was fined $400,000 for having deficient ARS sales material, procedures and training.
The FINRA article stated that FINRA found beginning in late summer 2007, SunTrust RH became aware of stresses in the ARS market that raised the risk that auctions might fail. At the same time, SunTrust RH was told by its parent, SunTrust Bank, to reduce its use of the bank’s capital and began to examine whether it had the financial capability in the event of a major market disruption to support all ARS in which it acted as the sole or lead broker-dealer. As these stresses increased, the firm failed to adequately disclose the increased risk to its sales representatives while encouraging them to sell SunTrust RH-led ARS issues in order to reduce the firm’s inventory. As a result, certain SunTrust RH sales representatives continued to sell these ARS as safe and liquid. In February 2008, SunTrust RH stopped supporting ARS auctions, knowing that those auctions would fail and the ARS would become illiquid.
Both SunTrust RH and SunTrust IS used advertising and marketing materials that were not fair and balanced, and did not provide a sound basis for evaluating all the facts about purchasing ARS. Specifically, the materials did not contain adequate disclosure of all the risks of ARS, including adequately disclosing the risk that ARS auctions could fail, rendering the investments illiquid for substantial periods of time. Both firms failed to maintain adequate supervisory procedures and training concerning their sales and marketing of ARS.
The FINRA article adds that FINRA found on Feb. 13, 2008, SunTrust RH shared material non-public information regarding the potential refinancing of certain ARS issues with SunTrust Bank, which was contemplating investing in ARS. This information was material because SunTrust Bank was assured that if the auction market froze, it would likely be able to dispose of the illiquid ARS on the date the ARS was refinanced.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “SunTrust Robinson Humphrey and SunTrust Investment Services withheld information about the ARS market which prevented their sales representatives from making proper recommendations and their customers from making informed decisions about ARS. Because of that, the customers were left holding illiquid securities when the auctions failed.”
FINRA goes on to say that this action concludes the agreements in principle with FINRA that were previously announced in Sept. 2008 and withdrawn in May 2009. SunTrust RH and SunTrust IS voluntarily repurchased approximately $381 million and $262 million of ARS, respectively, from their customers after FINRA began its investigation. In addition, as part of the settlements, the firms will participate in a special FINRA-administered arbitration program for eligible investors to resolve investor claims for consequential damages.
In concluding these settlements, the firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. This information was obtained from FINRA’s website.
Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you feel you have become a victim of SunTrust Robinson Humphrey, SunTrust Investment Services Inc., relating to the sale of auction rate securities (ARS), please call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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