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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.”

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.

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