TAG | selling restricted ARS to customer not qualified
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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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Jefferies & Company, Inc., Fined by FINRA, $1.5 Million for Failing to Disclose Additional Compensation Paid and Conflicts in Sale of Auction Rate Securities
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WASHINGTON — The following article appeared on FINRA’s website on April 14, 2011. The Financial Industry Regulatory Authority (FINRA) announced that it has fined Jefferies & Company, Inc. $1.5 million for failing to disclose additional compensation received and conflicts in connection with the sale of auction rate securities (ARS). FINRA also ordered Jefferies to repay $425,000 in fees and commissions earned from the sale of ARS to the affected customers. FINRA also took action against the three brokers involved in the sale of these products, sanctioning two Jefferies brokers, Anthony Russo ($20,000 fine and five business-day suspension) and Robert D’Addario ($25,000 fine and 10 business-day suspension), and filing a complaint against a third, Richard Morrison, for their role in not disclosing the additional compensation and conflicts. Russo, D’Addario and Morrison comprised the firm’s Corporate Cash Management (CCM) group that provided investment advice and services, including purchasing and selling ARS, to 40 Jefferies institutional clients.
The FINRA article goes on to say that FINRA found in its settlement, and alleged in the Morrison complaint, that from Aug. 1, 2007, to March 31, 2008, Jefferies — through Russo, D’Addario and Morrison — failed to disclose material facts to a group of eight corporate customers for whom they exercised discretion to purchase and sell ARS. The brokers used their discretion to purchase for these customers new-issue ARS that paid them and the firm additional compensation. By exercising discretion, Jefferies and the brokers were obligated to disclose that they received this additional compensation, and that they could have purchased other comparable or similar ARS with higher yields. In 32 other transactions, they used their discretion to purchase ARS for the customers from other CCM group customers, but failed to disclose the conflict created because they acted as agent for both the buying and selling customer. They also failed to disclose the existence of comparable or similar ARS with higher yields.
We also learn that FINRA found that Jefferies committed several other violations in connection with its ARS business, including exercising discretion without written authority; failing to deliver official statements in connection with purchases of municipal new issue ARS; using misleading ARS advertising and marketing materials; selling restricted (Rule 144A) ARS to a customer that was not qualified to buy them; failing to implement an information barrier with a customer; deficiently completing order tickets for ARS trades; and, failing to establish and maintain an adequate supervisory system, including written supervisory procedures, relating to the operation of the CCM group and its preparation and use of advertising and sales material for ARS.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “In exercising discretion over customers’ accounts, Jefferies was obligated to ensure that its customers were aware of material facts about the transactions. Instead, Jefferies and its brokers failed to disclose the additional compensation they earned in selling new issue ARS to their customers, their role in effecting trades between client accounts, and the existence of comparable or similar ARS with higher yields.”
It was announced in the article on FINRA’s website that in reaching the settlement, FINRA took into account that in December 2008, Jefferies spent approximately $68 million in a partial voluntary buyback of ARS held in retail accounts. As part of the settlement announced today, which included findings relating to Jefferies’ ARS advertising and inadequate supervisory review of ARS advertising, Jefferies agreed to purchase ARS from additional retail accounts. Also, in July 2008, Jefferies began remitting all trailing commissions received for frozen ARS held in customer accounts directly to its customers on a go-forward basis, and as of October 2010, had remitted in excess of $868,000.
FINRA said that as part of the settlement, Jefferies also agreed to participate in a special FINRA-administered arbitration program to resolve eligible investor claims for consequential damages.
FINRA notes that in concluding this settlement, Jefferies, Russo and D’Addario neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. The Morrison complaint is not yet adjudicated. Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry; giving up gains associated with the violations; and payment of restitution. The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made, and does not represent a decision as to any of the allegations contained in the complaint. Because the complaint referenced above is unadjudicated, uninterested persons may wish to contact the respondents before drawing any conclusions regarding the allegations in the complaint.
If you feel you have been an alleged victim of Jefferies & Company, Inc., or it’s brokers, or you have found yourself in a similar situation, call a Securities Arbitration Lawyer for a free consultation on how to recover your 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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