Securities Lawyer Blog

Remember February of 2008? It was a cold winter for investors holding Auction Rate Securities (ARS) when the auctions went into a deep freeze and never thawed.

The Securities Lawyer Blog has previously posted on the many issues with ARS and related auction failures. Now ARS have resurfaced as the Financial Industry Regulatory Authority (FINRA) announced two more settlements with major firms.

FINRA says it has completed ARS settlements amounting to fines of almost $5 million with 14 firms and that those firms have returned over $2 billion to impacted investors. The two recent settlements are with HSBC Securities (USA), fined $1.5 million and US Bancorp Investments, Inc. fined $275,000.

In the HSBC matter, FINRA revealed that the firm had returned over 90 percent to ARS investors. However, there were additional investors who had for various reasons not received the repurchase of their ARS holdings. The settlement includes a repurchase offer to those customers who did not previously receive a repurchase of their holdings.

In the US Bancorp Investments matter, the firm had previously repurchased customer ARS holdings.

Reiterating the failure of these firms "to adequately disclose the risks associated with auction rate securities," James S. Shorris, FINRA Executive Vice President and Executive Director of Enforcement stated that ... "FINRA's first priority has been to ensure investor access to the money frozen in their ARS investments. We are pleased that these firms have completed or agreed to complete offers to buy back frozen ARS from their customers."

FINRA found that each of these firms had engaged in the sale of ARS with representations to their customers that these were safe and liquid. In HSBC's case, FINRA found that marketing materials were not fair and balanced.

These securities were recommended as safe and liquid even after the credit crisis began and failure of the auctions became a possibility. FINRA found that one broker suggested that the firm email a warning to customers that the auctions could fail. The suggested email to customers was not permitted by management and retail brokers continued to recommend ARS.

The situation with US Bancorp also involved marketing materials (provided by other securities firms) that did not adequately disclose ARS risks, were not balanced and did not disclose material differences between money market securities and ARS while comparing the yields of the two types of securities. Additional problems included failure of due diligence prior to including ARS on the firm's approved products list.

As part of the settlement, both firms have agreed to participate in the FINRA-administered arbitration program that allows resolution of claims of consequential damages for those customers that suffered such damages when their ARS funds were not available to them.

Apparently, there are more investigations on ARS ongoing and future FINRA settlements are likely.

Related Web Resources

For more information on the special arbitration program for ARS, go to FINRA.

Continue reading "The Big Freeze Still Thawing as ARS Settlements Continue" »

Late last year, the Securities Lawyer Blog posted on $600,000 in fines imposed by the Financial Industry Regulatory Authority (FINRA) on Scottrade, Inc. for what FINRA found to be an inadequate money-laundering program.

On April 1, 2010, FINRA announced that it has "fined Scottrade, Inc. $200,000 for violating pattern day trading margin rules and for extending credit to customers in violation of federal securities laws and banking regulations."

This time, FINRA found that the firm had permitted some margin account customers to trade even after their account values had fallen below the minimum equity required to continue. The problem centered around high volume traders whose minimum equity fell below the $25,000 required to continue trading. FINRA noted that the minimum is intended to limit risks that day-traders can present to both the market and to clearing firms as they leverage their positions throughout the day.

According to FINRA, the problem for Scottrade was that from February 2006 through October 2007, the firm failed to ensure that pattern day traders were restricted from trading when their account values fell below the required minimum. Rather, the firm provided those traders a written notice telling them to bring their account value to the $25,000 minimum prior to further trading.

Those pattern day traders who did not bring their account values up, were permitted to continue trading and received a second written warning from Scottrade. It was only after a failure to bring accounts up to the minimum that Scottrade restricted these traders from continuing to day trade. Over 11,000 day traders, trading nearly 172,000 day trades were allowed to continue trading in violation of the rules.

Pattern day traders are customers who day trade four or more times within five business days. These traders are required by FINRA rules to maintain at least $25,000 in their margin accounts.

Compounding this problem, Scottrade was also found by FINRA to have improperly extended credit to some cash account customers. These credit extensions were permitted to go beyond the time frame established under Federal Reserve Regulation T. Customers who did not have funds to cover stock purchases were sent a "sellout" letter when the funds were due. According to FINRA, this improperly permitted the customer to have additional days to pay for the transactions beyond the time frames allowed under Regulation T.

Related Web Resources

More information on margin accounts and Regulation T can be found on the SEC's website.

Continue reading "Not Another Fine Day for Scottrade -- $200,000 for Securities and Banking Issues." »