Generally speaking, unhappy investors seeking recourse for their broker’s alleged bad actions aren’t noteworthy unless the dollars at issue are large.
A New Jersey family, the Mahers, had sold their business Maher Terminals LLC, the largest container operator at the Port of New York and New Jersey. UBS and Lehman were each given a portion of the proceeds to manage (in Lehman’s case, $600 million). Both firms were instructed to put the funds in liquid instruments, preferably ones that were tax advantaged like muni bonds, for two months while the family examined long-term investment options. Things went awry when Lehman put $286 million in term auction notes which now cannot be sold. The total amount of the family’s claim comes to $1.14 billion by virtue of the family seeking Lehman to buy the position, plus punitive damages, costs and interest.
This seems to be a pretty clear cut case, but recall that arbitration is notoriously industry-friendly, to the point where some senators have called on the SEC to make arbitration voluntary rather than mandatory.
Lehman Brothers Holdings Inc. faces a $1.14 billion claim from members of a New Jersey family, who say the firm mishandled their fortune by steering $286 million into investments that have become hard to sell.
Brian and Basil Maher, two brothers who sold their family’s marine container company last year, say Lehman ignored their requests to place the proceeds in short-term, liquid assets, according to an arbitration complaint filed yesterday with the Financial Industry Regulatory Authority.
Instead, the Maher brothers say, Lehman put the money into so-called auction-rate securities that have been hit by the contraction in credit markets. The arbitration claim may be the largest filed against a U.S. brokerage since a surge in defaults on subprime mortgages last year prompted investors to shun high- yield debt.
“If Lehman had directions to do X and then they did Y, they could be liable,” said Tamar Frankel, a law professor at Boston University who has written about investment industry regulation…
“Fundamental to this was an agreement with two objectives, to preserve the capital and provide liquidity,” said family spokesman Anthony Cicatiello. After Lehman employees showed the Mahers a sample portfolio that met those criteria, “they didn’t do what was in line with that.”
Should the Mahers prevail, arbitrators may not award the full amount they’re seeking, according to Frankel, the Boston University professor.
“It depends on what they think the market practices are,” she said. “They may hit hard, or not at all.”….
Auction-rate securities are typically bonds whose interest rates are reset by periodic bidding, usually every seven, 28 or 35 days. The auctions can fail if there aren’t enough bids, leaving investors stuck with their holdings. In such cases, many bonds automatically compensate investors by paying higher interest rates.
Investors surprised by the illiquidity of auction-rate securities often blame their brokers, said Donald Langevoort, a securities law professor at Georgetown University in Washington.
“My suspicion is that most investors are not even aware of auction-type securities,” Langevoort said.
Lehman was the 10th-largest senior underwriter of municipal auction-rate securities in 2006, with $970.4 million of the instruments, according to Thomson Financial data in the 2007 Bond Buyer Yearbook. It doesn’t rank corporate auctions.
The U.S. Securities and Exchange Commission sanctioned 15 firms, including Lehman, in 2006 for allegedly giving some clients information on rival bids for the securities. Lehman paid a $1.5 million fine in that sweep, without admitting or denying wrongdoing. It also paid $850,000 in 1995 to settle SEC claims that it manipulated auctions by improperly bidding for its own account….
The Mahers’ complaint accuses Lehman and its employees of lapses including negligence, deception, breach of contract, making unsuitable investments and supervisory failures.
“Because of respondents’ gross misconduct, claimants cannot use those funds and also are missing the valuable opportunity to invest those funds as they see fit,” the claim says. There is “no indication that liquidity will return to these securities.”