Stifel Nicolaus falsely represented auction rate securities as liquid, short-term investments to Colorado investors without discussing the risks. These representations gave investors a false sense of security that the investments would always be liquid when auction rate securities, in fact, faced significant, inherent liquidity risks.

A copy of the Notice of Charges is available in pdf format here.

Auction rate securities, which are also referred to as auction rate preferred shares, ARS, ARPS, and MARS, to name a few, have been at the epicenter of regulatory investigations across the country. Auction rate securities are long-term (or perpetual) investments that traded in periodic “auctions.” They are designed to allow companies, mutual funds, municipalities, and other organizations to borrow money for a long-term period while paying short-term rates of interest, which were reset during the periodic auctions. It was in these auctions that investors who held the securities could also sell their holdings if they needed to have access to cash. Because these auctions occurred on a relatively frequent basis (i.e., weekly, bi-weekly, or monthly), investors had the ability to sell their positions and obtain cash in a relatively short period of time.

For years, Wall Street firms sold auction rate securities as short-term, cash equivalent investments that paid marginally higher rates of interest as compared to other short-term investments. What these firms did not tell their customers was that the liquidity of the auction rate securities markets was entirely dependent on the ability and willingness of these same firms to participate in the auctions — in other words, these firms had to be willing and able to purchase the securities that were not purchased by the other auction market participants. In most cases, these firms were purchasing more securities than the other market participants. The firms (and their representatives) did not disclose these critical facts, but rather, only disclosed that the interest rates paid on the securities was reset at the auctions. In addition, these firms generally failed to inform investors that they would not be able to access their invested capital if the auctions froze.

In 2007, these Wall Street firms came under massive liquidity problems. As a result, these firms made a decision to cease participation in the auction rate markets, leaving investors across the country with illiquid investments that typically paid short-term rates of interest. In some cases, the auction rate securities paid no interest for months at a time. Therefore, investors were left holding a bag of illiquid long-term securities that paid little, if any interest.

Several class actions have been filed across the country on behalf of auction rate securities investors. In addition, numerous securities arbitration claims have been filed by investors. Some of these cases, as well as action by state regulators, has resulted in redemption of some investors’ auction rate securities. However, many investors remain stuck with these illiquid investments.

If you own auction rate securities that have not been redeemed, you may want to contact an attorney to discuss your rights. The Kueser Law Firm is a boutique legal practice that focuses its practice on protecting the rights of investors and recovering investment losses for companies and individuals. You may contact us by completing the form to the right, or by visiting our website.

This post is also available on our Investment Fraud Blawg, Securities Fraud Blawg, and Stockbroker Fraud Blawg.

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Two recent news items should come as welcome news to consumers. Regulatory and private action has led to the suspension of consumer credit collection arbitration by two groups who administer arbitration claims across the country. Given the anti-consumer nature of arbitration, these actions should help level the playing field for consumers in debt-related disputes.

National Arbitration Forum to stop administering consumer debt arbitration claims

In another pro-consumer effort, Minnesota Attorney General Lori Swanson recently reached a settlement with the National Arbitration Forum (“NAF”) related to pre-dispute arbitration clauses in credit card agreements. Under the settlement, NAF agreed to stop administering arbitration disputes between credit card companies and consumers. NAF also agreed to stop administering arbitration disputes involving consumer loans, health care, and consumer leases.

As stated in The New York Times, Ms. Swanson’s “lawsuit accused the firm of violating state consumer fraud, deceptive trade practices and false advertising laws by hiding financial ties to collection agencies and credit card companies.” Ms. Swanson was quotes in the article as stating “To consumers, the company said it was impartial, but behind the scenes, it worked alongside credit card companies to get them to put unfair arbitration clauses in the fine print of their contracts and to appoint the Forum as the arbitrator.”

The American Arbitration Association imposes a moratorium on consumer debt collection arbitration

In somewhat related news, on July 27, 2009, the American Arbitration Association (AAA) announced that it has self-imposed an immediate moratorium on consumer debt collection arbitration cases. The AAA’s evaluation of a recently concluded program in this area found that there were “weaknesses in the consumer debt collection arbitration process.” As a result of this moratorium, the AAA will no longer administer the following types of arbitration cases:

• Consumer debt collections programs or bulk filings
• Individual case filings in which:
• • The company is the filing party and,
  • The consumer has not agreed to arbitrate at the time of the dispute and,
  • • The case involves a credit card bill or,
    • The case involves a telecom bill or,
    • The case involves a consumer finance matter.

Nevertheless, the AAA has stated that it “will continue to administer all demands for arbitration filed by consumers against businesses and all other types of consumer arbitrations.”

More information on the AAA’s position on consumer debt collection arbitrations can be found here.

In a recent announcement, New York Attorney General Mario Cuomo stated that his office has issued subpoenas to fourteen loan modification companies and filed suit against another company.

During a news conference on June 9, it was reported that Mr. Cuomo referred to the entire loan modification industry as a scam. Mr. Cuomo has taken aggressive action against several industries in recent months, including the financial services industry.

Consumers often fall victim to businesses that use deceptive and misleading marketing strategies. These businesses use false promises or fake “offers” to entice consumers to purchase their product and/or service. Unfortunately, the government cannot protect everyone and consumers sometimes need to take action on their own behalf.

The Kueser Law Firm represents consumer fraud victims. If you would like to contact the firm for a free consultation, please call 816.374.5865 or visit our website, www.jmkesquire.com, for more information.

The Consumer Fraud Blawg will contain information and commentary related to, you guessed it . . . consumer fraud.  I am currently developing this blog, as well as the Investment Fraud Blawg, the Stockbroker Fraud Blawg, the Securities Arbitration Blawg, and the Securities Fraud Blawg.  Please bear with me while I finish a few administrative matters.  I expect to have these blawgs officially up and running within the next few days.