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Articles Posted in Auction Rate Securities (ARS)

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Investors who suffered significant losses as a result of their auction-rate securities investment with Jeffries Group LLC may be able to obtain a recovery via FINRA securities arbitration. Jeffries Group is a subsidiary of Leucadia National Corp., another full-service brokerage firm. Recently, Jeffries was ordered to pay an investor $7 million regarding an auction-rate securities dispute.

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.

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According to securities fraud attorneys, elderly and retired individuals are frequently the targets of securities fraud. While this is not likely to change, elderly investors can be aware of red flags that could indicate fraud has occurred. Some of these red flags include recommendations for investments that are typically unsuitable for elderly investors, unsolicited investment offers, unrealistically high return promises, promises of little or no risk, request for up-front payments, high pressure tactics, direct mail offerings and Internet offerings.

Investment Fraud Red Flags for Elderly Investors

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:

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Recently, it has been reported that the SEC lawsuit against Morgan Keegan & Co. has been reinstated by the U.S. Court of Appeals in Atlanta. According to stock fraud lawyers, Morgan Keegan allegedly mislead investors regarding its auction-rate securities liquidity risk. According to the federal appeals court, a trial judge previously incorrectly sided with Morgan Keegan that the verbal comments made by brokers to four Morgan Keegan customers were not “material” omissions or misrepresentations that would, under U.S. Securities law, make the company liable.

News: Lawsuit Against Morgan Keegan Regarding Auction Rate Securities Reinstated

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.

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Securities arbitration ended with a Financial Industry Regulatory Authority (FINRA) announcement on July 26 that SunTrust Robinson Humphrey Inc. and SunTrust Investment Services Inc. will pay a total of $5 million for “violations related to the sale of auction rate securities (ARS).” $400,000 of the $5 million fine will be paid by SunTrust IS for failure to provide adequate ARS procedures, sales material and training. The remaining $4.6 million will be paid by SunTrust RH, the underwriter of the ARS, for sharing material non-public information, using inadequate sales material, having inadequate procedures and training for the sales of ARS, and failure to adequately disclose increased ARS risk of failure.

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.”

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