Auction Rate Securities: Were They Sold As 'Highly Liquid'?

Posted by John Carney, Mar 27, 2008, 9:41am

Auction rate securities, including the auction rate preferred securities that remain frozen and often pay low interest rates capped at low levels, were sold to retail customers (including some investors close to DealBreaker staffers) by retail brokers. A key question in the lawsuits that have been filed against Merrill Lynch and Morgan Stanley, among others, is what the retail brokers told customers about the the securities they sold.

At least at one firm, we know that asset managers were told that they were to regard the securities as "cash equivalents" because the auctions had not failed for decades. Indeed, it seems that some brokers were given a "script" that urged the so sell these as "cash equivalent" or akin to "money market funds" or "highly liquid" securities.

We know this because brokers and others in wealth management groups have told us. But we'd like to see training materials that spell this out. It will be an important indicator about whether the firms themselves were selling the auction rate securities based on misleading marketing or whether, as some firms are already whispering, it was just a few overeager rogue brokers who oversold the auction rate securities. If the retail brokers were provided with misleading sales materials, they should not be blamed.

Merrill Lynch, for instance, seems to admit the auction rate securities were sold as equivalent to money market type securities in some of its documents. "Auction rate securities have generally been issued as either bonds or preferred stock and are designed to serve as 'money market-type instruments,'" Merrill says in a document describing auction rate securities on its website.

Send any information or sales materials you have to tips@dealbreaker.com. Your anonymity will be protected.

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Posted in: Auction Failure, Auction Rate Securities

Comments

Posted by guest, Mar 27, 2008 9:44AM

Everyone is talking about CCC. why the obsession with ARS

Posted by John Carney, Mar 27, 2008 9:52AM

We'll get back to CCC later today. If you missed it, here's our initial coverage.

http://dealbreaker.com/2008/03/clear_channel_and_pe_firms_sue.php

We have an advantage over newspapers and television of smarter readers and no newsprint/airtime costs or limitations. This means we can continue to focus on continuing problems (like the ARS market) even after the mainstream media has moved on. They might focus on the story of the day but this effectively whitewashes problems simply because they are not novel even though they continue. We are institutionally committed to not allowing that kind of whitewash to succeed. So there you go.

Posted by guest, Mar 27, 2008 10:14AM

John Carney - cannot agree with you more. Media needs to follow a story through to conclusion, and not move from topic to topic like a child with attention deficit disorder. Main stream media is doing a pathetic job with the ARS issue.
ARS is a story with a huge human cost and a lot of intrigue. I suspect many ARS-holders do not even know that their money is inaccessible. And as for intrigue – this is yet another instance of organized misinformation fed by the Wall Street to their clients. The ARS that are still not succeeding have such low reset rates that it is impossible that the people who wrote the prospectuses didn’t know that there is a realistic chance of the auctions failing. That information was material, but was kept hidden from the customers.

Posted by zzz1357, Mar 27, 2008 10:17AM

Way to stand up for yourself, Carney. Keep the ARS news coming.

Posted by Serge Birbrair, Mar 27, 2008 10:31AM

The problem with illiquid ARS is huge and more and more it takes toll on the lives of people just like you and me. Some folks entrusted their life savings into thos "safe, secure and liquid" papers.

Here who they are and their stories:
http://ARSvictim.com

Posted by Anonymous, Mar 27, 2008 10:35AM

People are always pissed of when things don't work out. That doesn't mean they were ripped off.
The disclosures were made.

http://www.ml.com/media/70501.pdf

http://www.morgankeegan.com/MK/Investing/IProducts/FixedIncome/auction.htm

How often do people buy plain vanilla money market investments and consider them risk free? Let a few break the buck and watch the lawsuits come in.

Posted by Serge Birbrair, Mar 27, 2008 11:11AM

Disclosures were made!?

1) Webpage doesn't constitute disclosure.

2) Was this page shown to ALL victims who bought ARS from those companies?

3) This "disclosure" didn't exist untill 2006, while those securities were sold for the last 23 years.

You don't beleive me?
http://web.archive.org/web/*/http:/www.ml.com/media/70501.pdf
check for yourself

I was buying thise instruments since 2001 and I never seen or was even told about failed auctions, MAX rates hair above LIBOR and fines paid by all those companies to SEC 2 years ago
(which probably is the #1 reason why those disclosures were made but not publisized to customers)

Do you have any more arguments that this is all our fault for believing our FA's?

Shoot, I'll gladly point you where you went wrong.

http://ARSvictim.com

Posted by guest, Mar 27, 2008 11:13AM

Kudos to JC for sticking to his guns!!

These follow-up stories to ARS, Bear, etc. are what make DB shine!

With that in mind, what about the Jon Benet Ramsey case??

Posted by guest, Mar 27, 2008 11:22AM

It's hard to ask all the right questions before we invest. Asking questions like how long will this thing go on paying and what can stop it often have no real answers at the time. But when the shit hits the fan (and it seldom does) all is clear and dirty.

Posted by guest, Mar 27, 2008 11:33AM

ya, they were absolutely sold as cash, although always with the non-disclosed confusion and eye roll of "what the f-ck are these things, anyway??"

carney, you are spot on w/ this, and no, it wasn't done to f-ck people. not malicious, just the usual incompetence -the idea that they never failed in the past was the selling point.

speaking of black swans, good taleb article in bloomberg -and just long enough so that most wall streeters will continue NOT reading him.

cheers,
guy formerly known as "retail guy"

Posted by guest, Mar 27, 2008 11:36AM

Some of us did ask the right questions. Before we got in last August, I asked my broker "Given the current turmoil in the credit markets, do you see any increased risk in this type of investment (liquidity, etc?)".

His reply: "what is currently occurring in the market has no bearing on the securities we would utilize for you. The principal for these securities does not fluctuate and are meant to provide yield. As well, liquidity will not be an issue. The market for these securities is very mature and billions worth of these securities are traded daily."

Posted by Anonymous, Mar 27, 2008 11:38AM

Serge,

No putting it on the web doesn't constitute disclosure, nor does it mean that if it's not at the same web address on the WayBack machine it didn't exist.

I imagine they told you and you ignored it. Just like the disclosures on every Money Market prospectus that everyone gets and completely ignores.

Posted by guest, Mar 27, 2008 12:11PM

In reality, the salesmen selling these things didn't understand them, let alone the customers.

Posted by Serge Birbrair, Mar 27, 2008 12:36PM

Anonymous @ 11:38AM
1) have you noticed that ALL disclosures from ALL participants are dated 2006 and not earlier?
SEC fined broker-dealers in 2006. You think this is coinsidence?

2) MA Security Division opened investigation today:
http://ARSclassAction.com

Would they investigate into the matter if the case had no merits whatsoever?

3) They are the first, but as the day long, they are not the last State Security Division to jump on it.

guest @ 12:11PM
This is my exact sentiment. I do NOT blame my UBS FA, but I DOI blame his superiors who put him up to it.

Posted by Serge Birbrair, Mar 27, 2008 12:38PM

P.S. it took my FA 3! days to obtain prospectus...and UBS was the one who underwrote it! He had no clue what he put me into.

Posted by guest, Mar 27, 2008 1:07PM


Last October, my Merrill Lynch representative e-mailed me the following:

"You best vehicle for short term yield is still the 7 and 28 day bonds / AMPS

Yields are around 5.5 to 6.1% - still backed by assets, still AAA rated and considered quite safe."

Posted by guest, Mar 27, 2008 1:08PM

Serge,
You are right on the mark. My FA at UBS never did provide us with a perspectus and I finally had to get one from the office manager who informed me that we were asking questions of our FA that he could not answer. He wanted us to only direct any further communications directly to him or their PR department.
He also wanted us to know that the Par value might change in the future. This was a change from dozens of e-mails that this was only a question of short term liquidity. Up the food chain fraud is definitly a big factor here.

Posted by Serge Birbrair, Mar 27, 2008 1:33PM

Guys,
I'll gladly publish your losses, arbitration locale, contact info at
http://ARSvictim.com
Lots of folks find themselves in the similar situations and in the same locales and might share lawyer expenses in the future.

I'll glaldy publish e-mail from your FA as well, lawyers going after Merrill Lynch will be glad to use it.

Posted by guest, Mar 27, 2008 3:33PM

I am a Goldman client and I will tell you that not only did they market these as cash equivalents, but my monthly statements (and their website) actually listed them as "Cash Equivalents".

Posted by guest, Mar 27, 2008 3:34PM

It took my Merril FA 3 weeks to get me a prospectus. When I tried to call the issuer for one, they wouldn't give it to me.

Posted by Serge Birbrair, Mar 27, 2008 3:53PM

...and if you do NOTHING now - you won't get anything.
The fastest way for us to get our money back is to contact Securities and Exchange comission in Washington DC.

Here is the first official response and the results of the follow up phone call:

http://arsclassaction.com/SEC-Letters.html

Phone number and e-mail to reach SEC on this matter are listed on the website.

Don't sit on your tohases, people, sitting it out won't do you any good, if Government won't step in the game.

Posted by guest, Mar 27, 2008 4:06PM

Hahaha when is contacting a government agency the fastest way to get any response?

Posted by guest, Mar 27, 2008 4:45PM

Some clown compared this to money markets breaking a buck.

So if money markets broke a buck , maybe you lose 2-3-4 %. Maybe.

In the case of ARPS, 100% of your money is now unavailable to you , and the vultures in the supposed secondary market are offering 70-75% of the actual intrinsic value.

No comparison.

Posted by Serge Birbrair, Mar 27, 2008 5:06PM

guest @4:06PM

Elliot Spitzer WAS Government....I wish he could keep his pecker in his pants, now he is useless.

Posted by guest, Mar 27, 2008 5:18PM

My UBS FA told me it was the best place to park proceeds froma real estate sale while looking for a new one. Said it gave slightly higher return than money market since it's weekly liquidity vs daily, but still a very low return because it's safe and basically a cash equivalent. And that's how it shows up on my statement.

Also, it doesn't work like a fund where you research it and select the one you want ahead of time. I have 5 in 25K increments that I bought last Aug and received prospectuses for only 2 of them afterwards. I found out they were illiquid when I called my FA on Monday to tell him I made an offer on a place and the closing date. He offered me a loan at 50% of the value with the securities as collateral.

Posted by Serge Birbrair, Mar 27, 2008 7:12PM

Do we have Merrill Lynch brokers here?
I'd like to BUY something,
click
http://arsCLASSaction.com
for details, confidentiality guaranteed.

Posted by Serge Birbrair, Mar 27, 2008 7:16PM

guest @ 5:18PM
Posting your story in the blogs won't get you your money back.
Contacting SEC has much better chance for you to see your money.

Here is the letter from SEC and some phone call details:
http://arsclassaction.com/SEC-Letters.html

If you wish, I can also post your story at
http://ARSvictim.com so others in your situation could contact you direct.

Posted by guest, Mar 27, 2008 7:23PM

obama wants to double the capital gains tax rate.

this is good for hedge funds, no?

Posted by guest, Mar 28, 2008 10:34AM

Municipal issuers were led down the same path by the underwriting investment banks and are arguably suffering equally or more as the ars with low max rates have damaged their ability to sell new debt by alienating investors and high max rates are resetting at 9-11% for underlying AA 7 day TE paper. Municipalites were pushed into the ars market by bankers lies about the depth of the ars market and the appeal of not paying loc fees for VRDO debt. A

Posted by guest, Mar 28, 2008 2:30PM

Does anyone have any comment on the fact that Merril Lynch sent out account statements to their retail customers listing the ARPS at their face value, for ten months, even though they knew about the FASB problem which their corporate clients were facing since the spring of 2007? Note that some companies, such as Apollo Group, were busily unloading ARPS during 2007 and early 2008, while the rest of us were getting statements showing the ARPS at full value. After the whole thing broke, Merril has now sent out supplemental statements saying, guess what, the ARPS might not be worth their face value. It will be very interesting to learn, in the end, who Merrill was selling the ARPS to after the FASB change. It seems like those people have slam dunk cases. I'm wondering about those of us who were simply lulled into inaction by these misleading account statements.

Posted by Serge Birbrair, Mar 31, 2008 7:12AM

Here is where some bankers might be in violation of the SEC court ruling:
http://arsclassaction.com/SEC.html

I NEVER got the disclosure SEC prescribes as a must.

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