In May 2012, a statement of claim was filed with the Financial Industry Regulatory Authority by Saddlebag LLC. The claim alleges that the firm wrongfully invested the client’s assets in illiquid auction-rate securities (ARS). According to securities lawyers, many financial firms sold auction-rate securities as short-term instruments with a highly-liquid nature, much like money market funds.

However, in 2008, the credit crunch resulted in a failure of the ARS market and investors with a piece of the $330 billion market were stuck holding securities that they were unable to sell. Other firms, including Morgan Keegan, have been accused of misleading investors regarding the liquidity risk of auction-rate securities.

Auction-rate securities are tax-exempt, long-term and taxable bonds and their interest rates are connected to the short-term market. Through ARS, issuers can acquire lower short-term rates on long-term financing. Auction-rate securities were marketed as liquid cash alternatives and considered safe before the global credit crunch.

Firms and their registered representatives have an obligation to fully disclose all the risks of a given investment when making recommendations, and those recommendations must be suitable for the individual investor receiving the recommendation. According to Thompson Reuters, leading auction-rate securities underwriters included Bank of America, Citigroup, Goldman Sachs, UBS, Lehman Brothers, Morgan Stanley, JPMorgan, Merrill, RBC and Wachovia.

If illiquid investments were unsuitable for you given your age, investment objectives and risk tolerance and you suffered significant losses in the auction-rate securities market, you may have a valid securities arbitration claim. To find out more about your legal rights and options, contact a stock fraud lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or by e-mail at newcases@investorlawyers.net for a no-cost, confidential consultation.

In regards to suitability, FINRA Rule 2111 will replace NASD Rule 2310 on July 9, 2012. Factors determining an investment’s suitability for each investor will now include the customer’s age, tax status, financial situation and needs, liquidity needs, investment experience, investment objectives, risk tolerance, investment time horizon and other investments. A broker or adviser must consider these factors before making a recommendation after July 9.

According to securities fraud attorneys, because of an elderly investor’s age, asset allocations that are weighted in investments with a long time horizon or higher risk investments are often considered inappropriate. Potentially unsuitable investment products for elderly investors include:

• Auction rate securities (ARS)
• Hedge funds
• Equity-indexed annuities
• Return optimization securities
• Structured products
• Principal protected notes (PPN)
• Leveraged and inverse exchange-traded funds (ETF)
• Asset back securities
• Reverse convertibles and commodity futures-linked securities
• Unlisted real estate investment trusts (REIT)

If you are an elderly investor who has been improperly recommended one of the above investments, or have noticed any of the other red flags pertaining to your recent investments, you may have a valid securities arbitration claim. To find out more about your legal rights and options, contact a securities arbitration lawyer at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.

Morgan Keegan’s office based in Memphis, Tennessee, was accused of securities fraud and sued by the SEC in 2009. According to securities fraud attorneys, the SEC alleged that from late 2007 through the ARS market collapse in February 2008, Morgan Keegan brokers told customers the auction-rate securities “were as good as cash” in an effort to increase sales.

Stock fraud lawyers know that auction-rate securities are tax-exempt, long-term and taxable bonds and their interest rates are connected to the short-term market. Through ARS, issuers can acquire lower short-term rates on long-term financing. Auction-rate securities were marketed as liquid cash alternatives and considered safe before the global credit crunch severely affected the market. As a result, many investors were left with securities that couldn’t be sold.

Typically consisting of preferred shares and municipal- and student loan-backed bonds, the market for these investments collapsed after dealers refrained from taking part in auctions at which interest rates were regularly reset at intervals of every 7, 28 or 35 days. This information is notwithstanding the alleged omissions and misrepresentations.

The acquisition of Morgan Keegan was recently completed by Raymond James Financial Inc. from Regions Financial Corp. This case can be referenced as SEC v. Morgan Keegan & Co. Inc, 11-13992, U.S. Court of Appeals for the Eleventh Circuit. Now that the case has been reinstated, securities fraud attorneys are watching for further developments.

If you believe you have been the victim of auction-rate securities fraud, find out more about your legal rights and options by contacting a securities fraud attorney at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.

The FINRA investigation determined that SunTrust RH became aware of stresses in the ARS market in late summer 2007. These stresses increased the risk of auction failure. SunTrust Bank instructed SunTrust RH to reduce the usage of the bank’s capital and began examining their financial capabilities. These stresses continued to increase. The firm’s sales representatives were not adequately informed of the risks and were simultaneously encouraged to sell SunTrust RH-led ARS issues.

FINRA Executive VP and Chief of Enforcement, Brad Bennett, stated “SunTrust Robinson Humphrey and SunTrust Investment Services withheld information about the ARS market which prevented their sales representatives from making proper recommendations and their customers for making informed decisions about ARS. Because of that, the customers were left holding illiquid securities when the auctions failed.”

SunTrust RH did not cease supporting the ARS auctions until February 2008. SunTrust RH shared material non-public information on February 13, 2008, when it assured SunTrust Bank it would most likely be able to discard the illiquid ARS on the same day that they were refinanced in the event that the auction market froze. Additionally, advertising and marketing materials did not adequately disclose all of the ARS risks.

Without admitting or denying wrongdoing, SunTrust RH and SunTrust IS consented to the FINRA ruling and voluntarily repurchased a total of $643 million of ARS between the two firms, and will participate in a FINRA-administered arbitration program. This program is for eligible investors to resolve claims for damages related to the ARS.

The FINRA investigation was supervised by Enforcement Chief Counsel and Associate Vice President Jim Day, and was conducted by Michael Choi, Erin Lynch and James Ruppert.