Some industry experts think the auction rates securities settlements have the potential to cost Wall Street brokerage firms more in penalties than (1) the $5 billion in sanctions for mutual fund abuses in 2003, and (2) the $1.4 Billion for biased analyst research, also in 2003.
So why are Wall Street firms so quick to settle this time?
Securities Attorney Jake Zamansky says they want to avoid the release of highly embarrassing emails -- proving these investments were touted as a cash alternative by people who knew they were risky.
And while I have no doubt deception did occur, I also wonder if investors in these securities bear some responsibility -- for not doing appropriate due diligence.
I call your attention the SEC’s settlement with 15 Broker-Dealer firms back in 2006.
To refresh your memory, 15 broker-dealer firms, including all the major players, agreed to “provide certain disclosures of its material and current auction practices and procedures,” as pertains to auction rate securities (agreement #4)
So, if I am to understand correctly -- marketing materials were supposed to alert investors to the possibility that (1) ARS auctions could fail, and (2) dealers were not obligated to prop up the market. I wonder if investors didn’t read their prospectuses closely enough -- putting too much trust in their brokers or investment advisors.
To be clear -- I am not defending the investment banks for touting the investments as safe. All I’m saying is that investors -- particularly sophisticated ones -- may bear some of the responsibilities for their losses in the securities.
Who out there agrees/disagrees with me?
Comments
Say you bought a car from someone like a broker, who is a fiduciary, who knew it was a clunker. The seller sold the car as "like-new," but buried in the glove box was paperwork that the car had its frame bent in an accident - is that your fault for not inspecting the car?
Brokers were selling these ARS to clients as "like-cash." According to some of those e-mails the firms don't want on the front pages, they knew the auction market was freezing up and the risk was real that auctions would fail if they didn't step in. I don't think the blame here falls on the investor.