How The Brokerages Misled Customers On Auction Rate Securities

By John Carney


A key question in the liability of brokerages in the failure of the auctions for auction rate securities is what customers were told about the risks of the products they bought. The brokerages now claim they properly warned customers about the products, and that they never considered them cash or cash equivalent. Most individual brokers we’ve spoken to off the record say that this is very inaccurate, and every retail customer we’ve spoken to (including some who are friends and family of DealBreaker editors) say they bought these securities with the understanding that they were “highly liquid” or “cash equivalents.”
So what did the brokerages tell retail customers? There were lots of disclosure documents that say a variety of confusing things but almost none of them reveal the risk of systemic and perhaps permanent auction failures for the auction rate preferred securities that pay low interest rates even after auction failure. And, as the screen shot of a ARPS customer online account above reveals, the brokerages did, in fact, take actions that encouraged customers to regard the ARPS as cash. This account comes from a Merrill Lynch customer account. (Click on image for a bigger version.)

Comments (18)

  1. 1
    Posted by guest | March 31, 2008 at 10:15 AM

    Retail customers, there’s your problem right there.

  2. 2
    Posted by guest | March 31, 2008 at 10:22 AM

    But then my homework was never quite like this:
    http://www.nbc11.com/slideshow/news/15713516/detail.html
    Two of ‘em I think the kids were studying extra hard. The other one the kids must have been behind or blind. Pity for them.

  3. 3
    Posted by Anal_yst | March 31, 2008 at 10:31 AM

    @ 10:22
    Hot for teacher!
    Seriously, how come sh!t like this never happened when i was in school?
    Also, Carney, as I pointed out the Brokers are totally f’d here. The fine print may say “ars are not cash and [we]do not guarantee liquidity”, but when they are sold as cash, show up on the statement as cash, etc…they might as well “be” cash. The streets will flow…

  4. 4
    Posted by diablo | March 31, 2008 at 10:31 AM

    Ha! Nothing more satisfying than frozen cash. Of course the prospectus would describe the risks, but I doubt many retail customers even got those documents.

  5. 5
    Posted by guest | March 31, 2008 at 10:36 AM

    @10:15 – way to sound like an obnoxious douche.

  6. 6
    Posted by guest | March 31, 2008 at 10:42 AM

    @ Anal_yst^WWaldo :
    http://www.youtube.com/watch?v=b5t5GukrWOU
    –Calgary Schmooze

  7. 7
    Posted by Lowly Assistant | March 31, 2008 at 10:52 AM

    @Schmooze,
    I forgot how amazing that video is! Danke schön!

  8. 8
    Posted by american bandersnatch | March 31, 2008 at 11:11 AM

    That was when MTV was worth watching. Rock videos with half-naked hot chicks – talking about a winning formula

  9. 9
    Posted by guest | March 31, 2008 at 11:33 AM

    Where is the YouTube vid of the guy hawking GS stock? Today he’s correct!!

  10. 10
    Posted by guest | March 31, 2008 at 11:44 AM

    After catching part of the movie on TV this weekend and from observing this website, I have come to the conclusion that Carney is the modern-day Fletch.
    http://www.youtube.com/watch?v=eDH52Z1l1QI
    –CS

  11. 11
    Posted by guest | March 31, 2008 at 12:14 PM

    I was watching Boiler Room this past weekend (it’s likely playing on one of those crappy independent/WB channels in your locale as well) and in one of the scenes the guys at JT Marlin start talking about Bear Stearns and JP Morgan. How dated is that movie gonna be when BSC no longer exists? Perhaps somebody could post the clip for us all to be amused at?

  12. 12
    Posted by guest | March 31, 2008 at 12:15 PM

    Pretty good case for the fact that disclosure based regulation is a complete failure. Need to substantively regulate the securities industry like we do banks.

  13. 13
    Posted by Investorcluzo | March 31, 2008 at 12:17 PM

    talk about a walk down memory lane! damn, I’m getting old. as for the blonde teacher, she must have real baggage if she can’t get a guy her age to bed her (random banker, where were you?)…too bad I didn’t go to school in tampa.
    as for the poor souls holding the arps bag, I’m sure the class action suits are currently being papered up by a few ambulance chasers.

  14. 14
    Posted by guest | March 31, 2008 at 12:17 PM

    Has it occurred to anyone to subpoena the phone records of these shit shops? Not yet, huh?

  15. 15
    Posted by guest | March 31, 2008 at 12:17 PM

    Go back to your P@ssy Beer and STFU:
    http://www.youtube.com/watch?v=VaCWNgf3Urg
    Best vid I could find other than THE SPEECH (for the interns who haven’t been fired yet and have no idea how business *really* works, i.e. liberal arts folks).
    http://www.youtube.com/watch?v=-NRlulKvYNs

  16. 16
    Posted by guest | March 31, 2008 at 12:39 PM

    as a former piker retail who managed to swing over to the buy side, i know at least two major brokers that pushed this stuff like cash, and let people margin against it up to 90% (margin against cash, what a concept)
    but the best bit here is that whenever i would call the desk for info about whether or not a “tax exempt” issue was tax exempt, the guys could NEVER answer that question; they had no clue what these things were

  17. 17
    Posted by Investorcluzo | March 31, 2008 at 12:48 PM

    wait a minute, weren’t the “plain english” guide (http://www.sec.gov/pdf/handbook.pdf) and sarbox designed to prevent this sort of thing from happening? just askin’…
    c’mon people. you can try to regulate, but where there’s a dollar to be made, people will find a way.

  18. 18
    Posted by guest | March 31, 2008 at 1:55 PM

    This reminds me of the protesters at BSC last week.

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