TAG | failed Auction Rate Securities
Nuveen Investments Fined $3 Million by FINRA for Use of Misleading Marketing Materials Concerning Auction Rate Securities
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WASHINGTON — On May 23, 2011, the Financial Industry Regulatory Authority (FINRA) announced that it has fined Nuveen Investments, LLC, of Chicago, $3 million for creating misleading marketing materials used in sales of auction rate preferred securities (ARPS). The Nuveen Funds’ ARPS were a form of auction rate securities, which are long-term securities with interest rates or dividend yields that are reset periodically through an auction process. In contrast to other types of auction rate securities, the Nuveen ARPS were preferred shares issued by closed end mutual funds to raise money for the funds to use to invest.
It was reported on the FINRA website that by early 2008, over $15 billion of Nuveen Funds’ ARPS had been sold to retail customers by third-party broker-dealers. Nuveen did not sell the ARPS to customers, but in its role as distributor for Nuveen Funds, it created marketing brochures that were used by the broker-dealers who sold the ARPS to retail customers. The brochures were the primary sales and marketing material Nuveen created for the auction rate preferred securities. FINRA found that the brochures, also available on Nuveen’s website, failed to adequately disclose liquidity risks for ARPS. Nuveen neglected to include the risks that auctions for the ARPS could fail, investments could become illiquid and that customers might be unable to obtain access to funds invested in the ARPS for a period of time should the auctions fail. Instead, the brochures contained misleading statements which described the ARPS as safe and liquid investments. Also, FINRA found that Nuveen failed to maintain adequate supervisory procedures to ensure that the materials it used to market the auction rate preferred securities accurately described the features and risks of the securities.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Nuveen was aware of facts that raised significant red flags about the ability of investors to obtain liquidity for their Nuveen auction rate securities yet failed to revise their marketing brochures to disclose these risks. This failure deprived investors of important information.”
It was reported that Nuveen failed to revise disclosures in their brochures after a lead auction manager responsible for approximately $2.5 billion of the ARPS notified Nuveen in early January 2008 that it intended to stop managing Nuveen auctions. On January 22, 2008, the lead manager did not submit support bids in an auction for a series of Nuveen auction rate preferred stock and that auction failed. FINRA found that the auction failure and Nuveen’s inability to find a replacement for the lead manager raised serious questions for Nuveen about whether investors in Nuveen’s ARPS would be able to obtain liquidity for the securities in future auctions. Despite this, Nuveen failed to revise its marketing brochures to reflect these risks and, thus, the brochures were misleading. In February 2008, widespread auction failures occurred throughout the auction rate securities market, including auctions for Nuveen funds ARPS.
The Nuveen funds have redeemed approximately $14.2 billion of the $15.4 billion of the ARPS that were outstanding on February 12, 2008. As part of the settlement, Nuveen agreed to use its best efforts to effect redemptions of any remaining outstanding Nuveen funds ARPS. Nuveen neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
This information was obtained on FINRA’s website.
If you or a family member have become a victim of the alleged fraudulent schemes of Nuveen Investments, LLC, call a Securities Arbitration Lawyer for a free consultation on how you could potentially recover you losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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When the auction rate securities mess was first brought to light, there was an article in the St. Petersburg Times in 2009, reporting that while institutions like Bank of America are placating regulators and investors by buying back the hard-to-trade securities from customers, Raymond James chief executive Tom James told clients in a letter that the company doesn’t have access to financing to cover “anything near” the $1-billion outstanding owned by its clients.
Even if he could buy back the securities, James said, regulators would not give his company credit for the securities because they are illiquid. James also wrote that some large banks that have pledged to buy back securities “perhaps even with funds provided by the federal government for other purposes,” but have not yet repurchased everything.
The market for auction rate securities, which had been sold by nearly every large firm on Wall Street as a cash equivalent, seized up in February 2008, precipitating the stock market crash that September.
ARS or auction-rate securities, are long-term debt instrument designed to trade like short-term securities. They were issued by many municipalities and closed-end mutual funds, and often pitched to small investors as safe and easily redeemable. In early 2008, as the credit crunch intensified, the $300-billion auction-rate market froze, leaving investors unable to sell their holdings. When the market for the securities froze, Raymond James Financial’s clients held $1.9 billion in auction rate debt.
In a lengthy letter to clients in 2009, filed with the Securities and Exchange Commission, James alluded to other underwriters that allegedly knew that auctions were failing, had suppressed research reports or employed executives who liquidated their own positions while still selling to clients. “To the best of my knowledge, we didn’t participate in those types of acts,” James wrote.
Also in his letter, James said he couldn’t remember a significant number of failed auctions in auction-rate securities for almost 20 years. James said he understood clients could conduct business with whomever they wish. But he urged patience and understanding, noting that he personally still owns a large number of auction-rate securities.
In some of the more recently settled auction-rate cases, claimants allegethat their brokers recommended, and then invested their money in, an auction rate securities when they opened their account with Raymond James & Associates in or around January 2008.
The claimants also alleged that the broker’s “actions and conduct created the false impression that there were deep pools of liquidity in the auction market,” according to the arbitration award.
In one instance, the key to the investors’ $925,000 recent award, was the timing of the purchase which was reported in InvestmentNews.com. Thirty-five days after the couple made the purchase, their securities came up for auction for the first time. The auction failed, he said, and the clients never had the chance to go to auction.
If you feel you have a claim against Raymond James Financial, Inc., for selling you Auction Rate Securities (ARS) and would like to potentially recover your losses, contact a lawyer for a free consultation at Soreide Law Group, PLLC, at: www.stockmarketlawsuit.com or call (888) 760-6552.
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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