Oppenheimer Faces Auction Rate Securities LawsuitNov 20, 2008 | Parker Waichman LLP
The state of Massachusetts has filed an auction rate securities lawsuit against Oppenheimer & Co. According to Reuters, this is the first time a regulator has brought such a suit against a broker that resold the securities. The complaint, brought by Massachusetts Secretary of State William Galvin, charges Oppenheimer with deceiving customers in its sales of auction rate securities.
Auction rate securities are long-term corporate bonds, municipal bonds and preferred stock on which the interest rates are reset periodically based on bids submitted through securities firms. Generally, rates are reset every seven, 14, 28 or 35 days. Because they can be sold during weekly or monthly auctions, banks and brokerages often touted auction rate securities as short-term investments or cash equivalents. Unfortunately, because of the credit crises, the market for auction rate securities crashed earlier this year. Thousands of investors have been bewildered to find out that the investments they were sold as cash equivalents are now illiquid.
Various state and federal agencies have been investigating the auction rate securities crash, amid suspicions that investment banks misled their clients about both the liquidity of the vehicles and safety of the market. In the past several months, various institutions have reached agreements with regulators, including UBS AG, Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley, Merrill Lynch & Co., and Wachovia Corp. to buy back more than $60 billion of auction rate securities from their clients.
But those deals do not cover an additional $160 billion worth of auction rate securities bought through mutual fund firms or brokers that didn’t underwrite the debt. In September, Fidelity Investments reached an agreement to buy back $300 million worth of the securities to appease state regulators.
In a statement announcing the Oppenheimer lawsuit, Galvin said "Oppenheimer executives betrayed the trust of their clients by continuing to market these auction-rate securities as safe cash equivalents when they knew this was not the case." The statement said Oppenheimer customers in Massachusetts could not access $56 million of their money when the market froze up in February.
According to The Wall Street Journal, Galvin's office has obtained evidence which allegedly indicates that as Oppenheimer officials discussed problems in the auction rate securities market, several sold personal holdings between Feb. 1 and Feb. 12. The market collapsed between Feb. 12 and Feb. 14.
According to Galvin's statement, Oppenheimer kept its customers "in the dark, even as they, themselves, got out of that tottering market."
Galvin's lawsuit seeks to force Oppenheimer to repay customers who sold auction rate securities at a loss and to make whole those who can't sell, the Wall Street Journal said.