Investors, advisers enraged by stall in ARS relief efforts

Although thousands of investors trapped in auction rate securities sold by Merrill Lynch, UBS AG, Wachovia Corp. and other big banks and brokers are finally getting relief through regulatory-mandated repurchases by the firms, others who bought the securities through brokers untouched by the settlements are still stewing.

So are some independent advisers.

“Our clients are calling every day, saying, ‘The UBSes of the world are buying these back, so why can’t you do it for me?’” said Steven Greenwald, president of Telemus Capital Partners LLC in Southfield, Mich., which oversees more than $3 billion in assets. “It’s a tough question to answer.”

Mr. Greenwald said that he has repeatedly sought help from Oppenheimer & Co. Inc., the New York-based broker through which he bought the securities, and has repeatedly been told that it was his problem.

He also said that he has been rebuffed by National Financial Services LLC, the custodian and clearing broker for Telemus’ assets. NFS is a subsidiary of Boston-based Fidelity Investments.

Oppenheimer general counsel Dennis McNamara and Oppenheimer chief executive Albert Lowenthal did not respond to calls seeking comment.

Mr. Lowenthal, whose company is among a dozen named in proposed class actions, told investors and brokers earlier this year that they would likely find relief by selling their securities into an embryonic secondary market or by waiting for closed-end funds that issued many of the securities to redeem them.

A wide range of firms besides Oppenheimer have not made settlements, including The Charles Schwab Corp. of San Francisco, E*Trade Financial Corp. of New York and TD Ameritrade Holding Corp. of Omaha, Neb.

The only market that has developed for trading such securities to date is largely institutional, however, and redemptions by funds are taking place piecemeal.

Fidelity in September reached a settlement to repurchase auction rate securities at par value from retail customers who bought them before the market froze Feb. 13. But a spokesman for the company said the offer does not extend to customers who bought the securities through other firms or advisers.

Some brokers this year proposed making low-interest loans to cash-hungry investors who couldn’t redeem the securities. But those plans were made moot by multimillion-dollar settlements reached with New York State Attorney General Andrew Cuomo, Massachusetts Secretary of the Commonwealth William Galvin and other state and federal regulators.

Under the proposed settlements, about 20 financial institutions agreed to repurchase auction rate securities at par value and to reimburse those investors who sold them at a loss after the market locked up in February.

Some investors said that their brokers actively suggested moving cash in $25,000-minimum increments from money market accounts or other conservative instruments to such securities because they were similarly liquid but carried slightly higher interest rates.

And many individual brokers said that they weren’t aware that the auctions carried the risk of failing until firms such as The Goldman Sachs Group Inc., Merrill Lynch & Co. Inc., Morgan Stanley and Citigroup Inc. — all of New York — stopped submitting bids in February as their mortgage-battered balance sheets continued to bleed.

While many investors are willing to wait, those counting on cash to meet immediate needs remain concerned. What galls some advisers is that they have found little support even from their custodians to help these clients.

J. Thomas Bradley, president of TD Ameritrade’s Jersey City, N.J.-based institutional business for advisers, expressed a common defense when he said that his firm’s brokerage affiliates have no obligations to ARS investors because the brokers didn’t underwrite the securities, manage the auctions, act as market makers or actively market the products. Less than one-half of 1% of TD Ameritrade clients’ assets were held in the securities as of early August, he said.

Nevertheless, the custodian has set up an essentially interest-free-loan program for clients who need cash, with rates keyed to the interest rates they receive on their locked-up securities. When auctions fail, rates for auction rate preferred securities are reset and keyed off a predetermined index, while directly issued auction rate securities are reset at penalty rates.

Mr. Bradley said that the loan facility hasn’t been widely used, a testament to the fact that independent advisers tend to offer long-term investment plans to clients who generally have alternative sources of liquidity.

One investor in Nashville, Tenn., however, said that a TD Ameritrade broker actively solicited purchases of auction rate preferred securities issued by Chicago-based Nuveen Investments Inc.

“TD [Ameritrade] now claim that they were a middleman and did not support the ARS market in any way,” said the investor, who re-quested anonymity. “But they used confidential, proprietary and personal account information about my family to specifically target us.”

A spokeswoman for Schwab Institutional also denied any responsibility for bailing out ARS investors because the firm never actively marketed the instruments or supported the auctions. Schwab isn’t buying back the securities but is providing “some liquidity options, such as margin loans, for certain auction rate issues,” she said, without elaborating.

In its role as custodian, Schwab thinks that the regulatory settlements should require “dealers and auction leaders” who abdicated the market to offer to repurchase the securities at their original cost from clients who transferred the securities into a Schwab account or who purchased them directly, she said. She declined to comment on whether the firm has actively tried to influence such settlements.

A spokesman at Pershing Advisor Solutions LLC, a Bank of New York Co. Inc. custodian for independent advisers in Jersey City, N.J., declined to comment.

E-mail Jed Horowitz at [email protected].

Related Topics: Merrill Lynch, UBS AG, Wachovia