auction rate securities and lawsuits by institutional investors

Despite recent news that several Wall Street brokerage firms have agreed to settle claims with the regulators and buy back billions of dollars worth of auction rate securities from their customers, institutional investors may not be included in these settlements and are left searching for relief.

A close reading of the settlements announced by Citigroup, UBS , Wachovia , JPMorgan Chase (JPM:JPMorgan Chase & Co
Merrill Lynch (MER:Merrill Lynch & Co., Inc
and Morgan Stanley regarding auction rate securities reveals that there are no requirements that these brokerage firms repurchase auction rate securities from their institutional clients. Brokerage firms most likely are taking a hard-line position against institutional investors because they believe: 1) that auction rate securities were suitable for all institutional investors, 2) that institutional investors do not need immediate liquidity, and 3) that institutional investors knew all of the risks associated with purchasing auction rate securities before they bought them. However, this is not the case for many institutional investors

Wall Street's treatment of its institutional clients is inherently unfair. Institutional investors have the same rights that retail customers have, and they should be reimbursed for their auction rate securities as well." In April of 2008, FINRA issued Regulatory Notice 08-21 which discusses the redemption of auction rate securities. In the Notice, FINRA reminded member firms that when redeeming auction rate securities among their customers, "they must adopt procedures that are reasonably designed to treat customers fairly and impartially, and must put their customers' interests ahead of their own." Additionally, NASD Rule 2110 requires firms to observe high standards of commercial honor and just and equitable principles of trade when conducting business with their customers. In that regard, Wall Street brokerage firms should not show partiality to their retail customers, while denying the rights of their institutional customers.

I am in the same position as those below but frankly not sure what is best path at this point. Amount is 35,000 USD.


Large Wall Street firms have announced plans to buy back billions of auction-rate securities from aggrieved investors. Yet hundreds of thousands of individuals who bought these same products from midsize and online brokerage firms are still in the lurch.

• Investors who bought auction-rate securities from midsize and online brokerages still don't know if they will ever get their money back.
• The firms say they didn't underwrite these securities, so they shouldn't be liable to buy them back.
• Regulators say they will keep trying to find a resolution for aggrieved investors. Among them is Michael Davis, of Fort Lauderdale, Fla. He invested $400,000 in auction-rate securities after a representative from online brokerage TD Ameritrade Inc. called him in 2003, suggesting he move his money from a money-market account to safe but slightly higher-yielding "seven-day paper."

Mr. Davis's problem is that he didn't buy his auction-rate securities from any of the big Wall Street underwriters of the market. Under regulatory pressure, UBS AG, Citigroup Inc., Merrill Lynch & Co. and other companies that both sold and underwrote these securities have agreed to buy back around $70 billion of them. However, their agreements don't include buying back securities underwritten by them but sold by smaller brokers.

These smaller brokers, who were primarily "resellers," haven't yet announced any plans to buy back the securities they sold. They include Oppenheimer & Co., Fidelity Investments, Stifel, Nicolaus & Co., Northern Trust Corp. and H&R Block Financial Advisors Inc., a unit of tax firm H&R Block Inc.

Regulators are already making noises about persuading the resellers to settle with investors. Last week, Massachusetts Secretary of State William F. Galvin urged Fidelity to buy back all the auction-rate securities it sold. Michigan Attorney General Mike Cox says he hopes to work with Detroit-based bank Comerica Inc. to find a way to "make investors whole, short of litigation." A Comerica spokesman says the firm doesn't discuss communications with regulators. Fidelity's representatives say that a vast majority of its customers are self-directed investors who make their own investing decisions, and that the firm didn't actively market auction-rate securities.