Last month, Michael Rivera and Erik Frias of the Fried Frank law firm argued in a Legal Times article (discussed here) that the steady stream of ARS settlements between banks and state regulators may effectively shut down pending and future private litigation on behalf of auction securities investors by making investors whole. The authors stated that ”the losses of individual investors who might be plaintiffs will now be fully compensated, leaving little to no damages to pursue in court” as investors will be compensated at the price at which they bought the securities.
Daniel Girard, a partner at Girard Gibbs in San Francisco, responds to this argument from a plaintiffs’ lawyer’s perspective in an article entitled “Billions to Answer For” in this week’s Legal Times. Addressing what role remains for private civil actions to play, Girard states that
billions in auction-rate securities sales are not included in the buybacks. Someone has to make sure these sales are accounted for. These include sales of auction-rate securities to institutional holders who are excluded from most of the buybacks, and sales of auction-rate securities by “downstream” sellers (regional banks and brokerage firms that remarketed the auction-rate securities but did not serve as underwriters or auction managers).
Girard adds that even those ARS holders who are included in the buybacks will not be made whole by the repurchase of their securities at par because
[a]side from having their money tied up for nine months or more when they were promised liquidity at periodic intervals of 28 days or less, many auction-rate securities holders received little or no interest on their bonds because of undisclosed interest rate “caps” concealed in the fine print of the prospectuses that were never delivered to any of the investors we’ve spoken with in the first place. These investors should be reimbursed for the interest they lost on their investments after the market failed.
Girard points out that he and his colleagues have spoken to several thousand auction-rate securities investors regarding the circumstances of their auction-rate purchases, and without exception these investors did not receive a prospectus at the time of sale. He states that to date, about 30 securities cases have been filed against 15 different sellers following the collapse of the $300 billion ARS market.