Oppenheimer Loses First Auction Rate Securities Case

12/15/2010 01:27 pm ET | Updated May 25, 2011

After beating back several class-action cases involving auction-rate securities, an arbitration panel has ordered Oppenheimer & Co. to repurchase $650,000 from a Connecticut couple. The move is a win for New York attorney Todd Higgins who has several more actions pending against the recalcitrant firm.

"The company may rethink it's tactics after this," Higgins suggested. "The class-actions failed because of the 'scienter' provision, which rules out nuances and makes the plaintiff actually prove 'intentional fraud'," Higgins, a managing partner in Crosby & Higgins, explained.

The ruling against Oppenheimer was ordered by a Financial Industry Regulatory Authority (FINRA) panel comprised of one industry representative and two non-industry attorneys.

"Oppenheimer has to learn that they will come before similar panels, and that they will be held liable," Higgins said. "Sooner or later they (Oppenheimer) are going to have to think about avoiding punitive damages. These cases aren't going away."

Oppenheimer is one of the largest sellers of auction-rate securities (ARS). At one time, the company sold nearly $1 billion in ARS before the Wall Street banks and broker- dealers pulled a scripted shutdown of the market on February 13, 2008.

The ARS scandal, at its height, totaled $336 billion dollars -- 20 percent of what it takes to run the entire federal government for a year. Settlements by state attorneys general have reduced the numbers of deceptively sold auction paper by $200 billion. The ARS market was sold to individuals and institutions as completely liquid, Triple-A rated, and safe as Treasury bonds. Clients were unaware that the market was being artificially propped up by industry auctions which gave ARS a phony appearance of liquidity.

Earlier this year, Oppenheimer signed a settlement with New York Attorney General Andrew Cuomo. But the pay back schedule was staggered in increments because the company cried poverty. It still has nearly $600 million in ARS claims outstanding and many claims against it.

The irony of the poverty plea came as Oppenheimer made expensive new hires, expanded operations in the U.S., and Asia, and ran a series of expensive television ads seeking new business.

Higgins said the buy back of securities from Jordan Moffett and Margot Tremble, formerly of Los Angeles, was originally set at $700,000 in damages, plus interest. The case was originally filed March 23, 2009.

Moffett and Tremble alleged a breach fiduciary duty, fraud, negligence and breach of contract in Oppenheimer's sale of ARS preferred securities. In addition to the $650,000, the panel ordered the company to pay $18,441 in expert witness fees, plus reimbursement of the FINRA filing fee.

"ARS is a defective product," Higgins said. "The whole market was, and is, artificial. This was never a free-flowing market."

Approximately $130 billion is ARS remains under challenge. Among the firms still refusing to repurchase auction paper, which are long-term bonds running 20-30 years, and others having no end-date: the so-called "perpetual bonds," are Pimco, Charles Schwab, E*Trade, and Raymond James, among others.

"Investors weren't ever given proper information about these bonds," Higgins continued. "Brokers were intervening in the market, propping it up, and investors didn't know what was happening. The market was being manipulated."

Higgins is convinced that if the ARS sellers had been transparent -- "they (investors) were never given prospectuses" -- people never would have bought in. As for Oppenheimer, he said the company handed out an "egregious sets of facts. It doesn't get any worse. My experience with the company is that there is no tool they won't use against clients."

He predicted the complaints against Oppenheimer won't stop. He also speculated that if the company remains intransigent, "it will wind up costing them more than if they just did a straight, honest buy back" of the bonds.