As if dealing with clients stuck with auction rate securities isn't challenging enough, brokers are dismayed that firms are reporting some ARS-related customer complaints on the brokers' public disciplinary records.
As if dealing with clients stuck with auction rate securities isn't challenging enough, brokers are dismayed that firms are reporting some ARS-related customer complaints on the brokers' public disciplinary records.
In February, the brokerage industry stopped bidding in auctions for the securities, causing liquidity to dry up. ARS issuers have begun to redeem some of the securities, but investors are still holding the bulk of the original outstanding $300 billion of ARS.
In many cases, brokers and lawyers said, clients who have complained to firms about lack of access to their money don't blame their brokers for the ARS debacle.
Lawyers say that it isn't clear client complaints to a firm about ARS have to be reported. But in many cases, brokers have been hit and some are upset about it.
"Wachovia threw me under the bus," said a broker at Wachovia Securities LLC of St. Louis, whose pristine record was tarred with an ARS complaint. The broker, who asked not to be identified, said that the client didn't blame him.
That type of disgust may become more widespread if, as a result of investigations by regulators, it becomes apparent firms knew the market was in trouble but nevertheless pushed unwanted ARS inventory onto retail investors and brokers.
Any type of customer complaint on a disciplinary record, even if unproved, can make it difficult for a representative to attract new clients.
Firms, on the other hand, realize that ARS complaints are a firm problem, not a broker problem, said recruiter Bill Willis, founder of Willis Consulting Inc. in Palos Verdes Estates, Calif. "Those [complaints] will be overlooked for now" when brokers change firms, he said.
The records are available publicly through the central registration depository, also known as the BrokerCheck system. The database is run by the Financial Industry Regulatory Authority Inc. of New York and Washington.
Brokers might be upset about getting the blame, but in some cases customer complaints were "proper complaints against the broker," said Leonard Steiner, a plaintiff's lawyer at Steiner & Libo PC of Beverly Hills, Calif. In some instances, ARS were "clearly misrepresented by the individual broker as being better than cash in the bank," he said.
Late last month, Massachusetts filed an ARS misconduct case against UBS Financial Services Inc. of New York. Last week, New York state filed a similar case against UBS and is reportedly targeting other firms as well.
In the Massachusetts case against UBS, seven brokers are mentioned. Five of those reps have ARS complaints filed on their records, dating from February.
In those regulatory filings on the reps' records, all of which use identical wording, UBS blamed the ARS problem on "unprecedented market events."
A UBS spokeswoman didn't respond to a request for comment about the firm's reporting policy.
Lawyers report many more brokers have had their records tarred. But whether an ARS complaint is reported seems to be somewhat hit or miss.
Seth Lipner, a partner at Deutsch & Lipner of Garden City, N.Y., is working on a number of ARS cases including one against UBS that has been reported on the broker's record.
But in another case he is handling, on behalf of a legacy A.G. Edwards & Sons Inc. client whose broker is now part of Wachovia, the case wasn't reported.
The Wachovia customer noted in his arbitration claim that the broker wasn't at fault. A.G. Edwards is based in St. Louis.
Mr. Steiner also has two cases involving UBS reps. "In one, the broker is not culpable, but it was re-ported" on the rep's record, he said. In the other case, the broker was more culpable, Mr. Steiner said, but the complaint wasn't reported.
100 PHONE CALLS
More customer complaints could be coming.
"We've fielded nearly 100 calls and e-mails in the last four days" from investors complaining about ARS, said Laura Egerdal, a Jefferson City, Mo.-based spokeswoman for the Missouri Secretary of State's Office. She was referring to the days after the July 17 announcement that regulators from Missouri and other states had showed up at Wachovia's office in St. Louis to gather evidence of possible violations related to the sale of ARS.
At that point, Missouri had already received "hundreds" of calls from investors, and more than 70 formal complaints had been filed with the state regarding ARS, according to a statement from Missouri regulators.
Finra has received about 110 ARS-related arbitration claims, said spokesman Brendan Intindola, and one Finra official said last month that the regulator had received 200 ARS complaints.
Plaintiff's attorneys say that they are still getting calls as well. And many of these clients have taken it upon themselves to write complaint letters to their brokerage firms.
Under reporting rules, any written consumer complaint alleging a sales practice violation must be reported, unless the claim is clearly for less than $5,000. Firms must make reasonable efforts to determine whether a complaint is reportable.
"With auction rates, a really good case could be made that there is no sales practice [violation] because what most [clients] are saying is that the product was faulty," said Bill Singer, a shareholder in the law firm of Stark & Stark in New York. "This is essentially a product liability case."
With an ARS complaint that alleges a sales practice violation, "it's hard to know if it's the broker's violation" or the firm's, said Jonathan Kord Lagemann, a plaintiff's attorney at Lagemann Law Offices in Chatham, N.Y.
ARS created the same reporting problem that the brokerage industry faced with limited partnerships, said Marc Dobin of Marc S. Dobin PA in Jupiter, Fla., who was an in-house lawyer with the former Prudential Securities Inc. of Newark, N.J., a huge seller of those faulty products. "I think each of the firms is going to have to develop a process of determining whether [a complaint is about] a product failure or the sales process," he said.
Some legal observers expect that customers will eventually get their money back and won't need to pursue formal cases. These unresolved complaints cycle off the BrokerCheck database after two years.
E-mail Dan Jamieson at djamieson@investmentnews.com.
