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Phil Trupp

Phil Trupp

Posted: October 15, 2010 05:41 PM

It's been nearly three years since virtually every bank, brokerage and securities fund pulled off one of the slickest deceptions in Wall Street's scam-ridden history: the $336 billion auction-rate securities (ARS) scandal -- Wall Street's financial roach motel: Investors check in but many still can't check out.

Three hundred and thirty-six billion dollars is enough to fund 20 percent of the entire federal government. And aside from blowing a hole in a struggling economy, the ARS rip-off has caused human misery on an unimaginable scale.

Auction-rate securities are "debt obligations" -- bonds that promise to pay back an investment with a little higher interest than would be available in ordinary money market funds. The bonds were issued mostly by municipal and corporate entities in need of cheap funding.

Unlike ordinary bonds with fixed interest rates, ARS rates reset every 7, 28, or 35 days. Wall Street controlled these "Dutch auctions" and charged hundreds of millions of dollars in fees. The "issuers" -- charities, hospitals, corporations and cultural icons like the Museum of Modern Art -- received long-term financing at short term rates. Investors received a little higher yield on their cash than plain vanilla money market funds. The banks sold as completely safe, liquid, and Triple-A rated.

But when the credit crunch of 2008 killed off Bear Sterns and Lehman Brothers, the banks pulled off a scripted, simultaneous shutdown of the market, leaving investors holding the bag. A cone of silence descended and information was near impossible to get.

The irony is that the bonds aren't worthless; investors just can't cash them in, unless they wait 30 to 40 years, at which time the issuers are obligated to buy them back. Since many investors are seniors, most will never see a dime.

I was one of those investors. My life turned upside down. But I was determined to find out what was behind the scripted market failure and get my money back. Working with others via the Internet, we discovered the following:

* Though ARS was sold as a money market in the classic sense, it is actually a bond fund propped up by the banks.

* There had been market breakdowns in the past, but these were covered-up.

* Prospectuses were not publicly available; investors couldn't even find them online.

* While the ARS funds were listed on accounts as "cash" or "cash equivalents," the major accounting organizations had ruled ARS could not be defined that way. The banks paid no attention.

* When the market showed cracks in 2004 and 2006, the banks began shoveling ARS into the accounts of ordinary investors and corporations.

* We found legions of brokers who actually had no understanding of ARS. "We did what we were told," was the mantra.

* We uncovered misery on a Third World scale: lost homes; savings of a lifetime obliterated; victims dying of illnesses for lack of funds; students forced to drop out because student loan organizations were shuttered; hospitals and charities crippled or ruined; corporations laid off workers or went out of business; municipalities fired first responders; construction projects withered.

Two-and-a-half years have passed since the market collapse. During this time, our team has forced action by state and federal regulators. The House Financial Services Committee held hearings. I asked Barney Frank, chairman of the committee, why no remedial action was taken. "We didn't have time," he replied. Washington was overwhelmed by the Wall Street meltdown.

In the meantime, we have had much success recouping frozen ARS. Through political pressure we've managed to redeem $200 billion. Yet $130 billion remains under challenge, despite the precedent of settlements by state attorneys general against firms such as Merrill Lynch, Bank of America, Goldman Sachs, UBS, Wachovia, and Wells Fargo.

Still, there are holdouts. Raymond James, for example, complains that redemption of ARS amounts to "extortion." Among the worst holdouts is Oppenheimer & Co., which sold approximately $1 billion in ARS. The company settled with New York Attorney General Andrew Cuomo, but has not redeemed the full amount. Mr. Cuomo was to conduct six-month reviews of the company's finances, but has yet to force a full buy back. Oppenheimer continues to plead poverty.

I repeatedly called Daniel Sangeap, New York assistant attorney general for investor protection. Mr. Sangeap never returned my calls. Financial insiders say Oppenheimer "thinks it's dodged a bullet." Why hasn't Mr. Cuomo pressed his case? Mr. Sangeap isn't talking.

It's long past time to end this farce once and for all. Our economy is hurting, people are suffering. An injection of $130 billion will buy jobs, security, and end a great deal of misery.