In Focus

April 28, 2008

iscontent among investors in auction rate securities appears to be matched by equal discontent among the financial advisers who sold those investors the auction rate securities (ARS)!

As one adviser told me, many financial advisers have been duped alongside their clients. In many cases, both investor and adviser were not told that auction rate securities were not risk-free and were not liquid. Still more disconcerting, many advisers didn't know that firms had conflicts of interest, as they cleared out their inventory, or arranged sales of auction rate securities for their favored institutional clients, leaving retail clients holding the bag! What else is new!

Now we learn that one especially troubled type of auction rate securities - those issued by student loan authorities - issued waivers that would make the auction-rate securities easier to sell. That is, easier to sell by institutions unloading their positions and by firm trading desks scrambling to clear out their inventory! And worse, retail investors who bought after the waiver now suffer not only from illiquidity but also from reset interest rates of as little as 0%. Face it; these auction rate securities have little or no prospect of redemption.

My prediction? When financial advisers come to us saying that they were duped too, I know we just are seeing the tip of an iceberg. Nothing less than the spectacular Prudential limited partnership scandal, or more recently, the brokerage firm analyst research conflict of interest scandal, approaches what the ARS scandal will reveal. There should be no shame on the part of financial advisers in working with their clients to refer them to securities lawyers who will seek the legal remedies to which they are entitled! In fact, it is the right thing to do in order to teach firms yet another lesson: the customer must come first!

— James J. Eccleston
FinancialCounsel.com