Amegy Bank and Amegy Investments, Inc., a registered broker-dealer, commenced an arbitration proceeding against Merrill Lynch to recover $140 million paid for auction rate securities sold to it by Merrill, according to a February 10, 2009 article by Mary Alice Robbins in LAW.COM. Amegy alleges that Merrill knew but failed to disclose that there was no reliable market for auction-rate securities, that Merrill was propping up auctions that would otherwise fail, and that Merrill intended to stop propping them up very soon but didn’t tell anyone that. When Merrill withdrew its support, the auctions failed, leaving Amegy and its clients (who had purchased auction-rate securities from Amegy) with frozen investments.
According the article, the Amegy statement of claim alleges, among other things:
- That the manager in charge of Merrill’s auction desk wrote in August 2007: “Markets are shutting down bit by bit. We have 5 failed auctions so far, with three more likely today.”
- That Merrill regarded its inventory of auction-rate securities as problematic, that its policy was to limit its auction-rate securities inventory to no more than $1 billion, and on December 4, 2007, Merrill’s head of credit and trading wrote in an e-mail: “Trading ? we need to reduce balance sheet into year end. The desk is over it’s [sic] target by and we need to get it down.”
- That Merrill never told Amegy that it had surpassed its internal auction-rate securities limit and was prepared to reduce it by encouraging its sales force to sell more auction-rate securities to the public by aggressively marketing them as a safe, liquid investments, and by ending its support of the auctions and allowing them to fail.
This is one of the first claims filed by a “downstream” or “distributing” broker-dealer against a firm that underwrote the auction-rate securities and conducted the auctions.
Recently, many corporate and institutional clients have also filed claims against brokerage firms that sold the auction-rate securities based on the brokerage firms’ failures to disclose important information. As pointed out by this blog in “Corporations Begin Holding Wall Street Accountable for the Auction-Rate Securities Debacle,” posted on February 7, 2009,
The fallacy in the rationale adopted by the Wall Street firms and the regulators was clearly underscored last August in a letter written by an organization, the Regional Bond Dealers Association, that represents certain brokerage firms that sold auction ? rate securities but did not underwrite them. In its letter, the Regional Bond Dealers Association claimed that many of the brokerage firms distributing auction-rate securities were themselves victimized by the fraud perpetrated by the major underwriters of auction-rate securities. Specifically, the Regional Bond Dealers Association claimed that the major underwriters of auction-rate securities withheld material information about auctions and the auction process from them. If financial professionals working in brokerage firms were defrauded by their peers, it is easy to understand how corporations and institutions were also defrauded.
Thus, while Merrill argues that Amegy and other similarly situated broker-dealers are “seasoned investment professionals” who should have understood the risks, Amegy points out that it understood everything that was disclosed to it, but that its claim is about what Merrill omitted to disclose. Even seasoned investment professionals can only bring their experience to bear on information that is disclosed to them, and a brokerage firm is required to disclose all material facts about the securities it sells to all its customers, including its broker-dealer clients.
J. Boyd Page, senior partner at Page Perry in Atlanta, observed that, “I think that ‘downstream’ broker-dealers like Amegy Investments, as well as other corporations and institutions, have compelling claims against the underwriting firms based on the failures of the underwriting firms to disclose material information about auction-rate securities and the auction-rate securities market. Some of the underlying abuses in these cases are horrendous. Given the size of the losses and the egregious conduct of Wall Street, it seems incumbent for corporations and institutions to protect the interests of shareholders.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in auction-rate securities cases. For further information, please contact us.