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Home > Cases > Auction Rate Securities > Wall Street Needs to Do the Right Thing For Investors

Wall Street Needs to Do the Right Thing For Investors

Doing right by others can be a long and difficult process, which is exactly what more investors are learning about Wall Street every day. In the May issue of Smart Money magazine, James Stewart devotes his column, Commonsense, to his personal experiences with auction-rate securities.

In Stewart's case, the securities were auction-rate preferred shares (ARPS), which are shares in a closed-end mutual fund that owns select types of AAA-rated bonds.

Like thousands of investors, Stewart was sold on the idea of auction securities by a broker who presented the securities as a money market-type fund and safe alternative to cash. As Stewart points out, the purpose of a money market fund is it gives investors ready access to their cash. Of course, when the auction-rate market became frozen, investors discovered that access had all but vanished.

For investors who bought into auction-rate securities on the advice of their brokers, the reality of the situation is more than disheartening. Many have lost their entire savings for retirement and funds for the children's college education.

Wall Street, for its part, has been painstakingly slow to rectify the auction-rate situation for investors.

“ARPS investors tell me that they've heard no explanation from their brokers,” Stewart writes. “Their statements still carry the shares at face value, as though nothing happened.”

Indeed, when Stewart - who also is a shareholder in Goldman Sachs - placed a telephone call to the firm, wanting to know what it was doing to resolve the auction-rate issue for clients, the response amounted to “not much.”

Not all firms have responded in such a cavalier manner. Nuveen Securities has announced plans to redeem more than $15 billion ARPS for investors.

Other smaller investment firms began to steer clients away from ARPS long before the market soured.

For the most part, however, Wall Street remains virtually silent on how it plans to resolve the auction-rate crisis to the satisfaction of investors. Stewart's suggestion is a commonsense one: Firms like Goldman Sachs, Merrill Lynch and others need to be taken to task by the Treasury Secretary for walking away from the very auctions they alone created.

“If these firms took billions in faltering SIVs and CDOs onto their balance sheets, why not this Triple A-rate paper?,” asks Stewart.

In addition, the government may very well need to intervene, with a promise to step in if bonds default, Stewart contends.

What's truly imperative in resolving the auction-rate crisis rests with the investment firms themselves. It is critical that they step up to the plate and make it right with clients who were sold auction securities under the guise that they were safe, low-risk investments.

And they need to do this sooner, rather than later. Every day that passes is a day in which customer loyalty and confidence becomes a bit more jaded, a little more eroded. Left untouched and unattended to, regaining customer loyalty can be an arduous, if not impossible, task to achieve.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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