Auction Rate Securities Hearing in Washington: Wall Street’s Comeuppance?

by Jacob Zamansky on September 18th, 2008 at 11:10 am : Comments 000

Today, House Financial Services Committee Chairman Barney Frank, Chairman Spencer Bachus and Ranking Member Paul Kanjorski will hold a hearing to examine the continuing crisis in the markets for auction rate securities and auction rate bonds. The witness list will be comprised of regulators, investment-service providers, dealers and issuers of auction rate securities. Specifically, the hearing cover potential solutions to the auction rate securities market, which continue to be frozen. 

Originally only large institutional investors bought auction rate securities.  But following a 2005 SEC advisory clarifying the way corporations could account for auction rate securities forcing them to stop including them as cash on the balance sheet, Wall Street targeted retail investors. The pitch, as we all know, is that they were an alternative to money market funds.

According to most reports, over 160 arbitration claims related to auction rate securities have been filed since March 2008 including many by Zamansky & Associates.  Four enforcement actions arising from auction rate securities investigations have been lined up for hearing. Credit Suisse is the latest financial institution to settle an auction rate probe, agreeing to buy back the securities from individuals, charities and small businesses with accounts valued up to $10 million.

But despite the fact that several major banks have agreed to repurchase auction rate securities from the retail investors, investors still hold billions of dollars worth of auction rate securities.  Moreover, investors that are included in auction rate securities buybacks will not be compensated for their significant consequential damages unless they file securities arbitration claims to recover these damages.

I’m quite sure the committee understands the scope of this issue. But just in case, they should read a recent Legal Times article: “The auction rate securities debacle is the largest bond market failure in U.S. history. Although the buyback agreements represent real progress, any suggestion that auction rate securities holders no longer have enough at stake to merit their continued representation by counsel would be misguided.”

Chairman Frank has shown himself to be a results driven regulator.  He urged that issuers of auction rate securities be permitted to bid in auctions for their own securities, and demanded fast action on pending requests from mutual funds seeking clearance to issue new auction rate securities.  

Still, here are some questions I hope he will address at the hearing:

• Why did the SEC allow the auction rate securities market to continue business as usual after investigators found impropriety in 2006?

• What training did retail brokers have before they were told to sell auction rate securities to investors?

• Given that many Wall Street managers bought auction rate securities themselves, did any of them sell their auction rate securities knowing that the market was soon to collapse?  If so, how will they be punished?

• Wall Street sold many auction rate securities as hybrids in the private market under names such as auction pass through trusts, auction market preferred stock, among other now dubious names.  Purchases of these securities were not included in the buy back settlements.  How will Wall Street be held accountable for fraudulently marketing these?

• Will the brokerage house executives who oversaw the sale of auction rate securities be fined or punished?

• Exactly how much revenue did Wall Street generate through the auction rate securities market and did the fines that were levied along with the settlements equate to those revenues?

No doubt, today’s hearing on auction rate securities is necessary and warranted; let’s just hope it’s productive.

Filed under Auction Rate Securities, Investment Fraud, SEC, Wall Street
and Add new tag, Auction Rate Securities