Oppenheimer Settles Lawsuit Over Auction Rate Securities with New York AG

Oppenheimer & Co. has reached a settlement with New York Attorney General Andrew Cuomo to return $31 million in losses to investors who lost money on auction-rate securities.

The settlement of the Oppenheimer lawsuit, reached on Tuesday, will require Oppenheimer to buy back auction-rate securities from more than 1,246 investment accounts.

Cuomo sued the company on behalf of investors, saying that the company promoted the auction-rate securities market as a conservative, low-risk, short-term investment that was an easy-to-sell alternative to cash. However, the auction-rate securities market froze in February 2008, preventing investors from accessing their capital and resulting in large losses.

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The $31 million settlement will not pay back all of the money lost by investors. The total value of the frozen auction-rate securities held by customers of the brokerage firm exceeds the company’s ability to pay it back. Accounts that are less than $1 million, including those held by individuals, charities and small businesses, will be eligible for $25,000 reimbursement payments.

Auction-rate securities are bonds that are bid on by investors and sold to those who will accept the lowest interest rate during auctions regularly held to determine the bonds’ rates. When banks withdrew their support for auction-rate securities, investors were unable to sell the bonds, freezing their assets.

Cuomo, the Securities Exchange Commission, and others have been pressuring brokerages to reimburse investors for the face value of losses they suffered as a result of investments in the ARS market.

The Oppenheimer settlement is the latest in a string of auction-rate securities victories Cuomo has reached with various firms, including Morgan Stanley, UBS, Merrill Lynch, and Goldman Sachs. He has settled with 13 different firms in all, and there are still pending lawsuits against a number of brokerages. Including this week’s settlement with Oppenheimer, firms have agreed to pay back nearly $100 million in losses to auction-rate securities investors.

Cuomo still has some major outstanding lawsuits, including a claim against Charles Schwab over $787.9 million lost by Schwab customers when the market froze. The Charles Schwab lawsuit, filed in August, brought to light recorded Schwab conversations of Schwab representatives promoting auction-rate securities as infallible cash equivalent investments. Cuomo has also said that the ignorance defense does not work for Schwab, as the company should have responsibly known the risks and should have trained its brokers accordingly.


  • johnnyFebruary 27, 2010 at 8:35 pm

    So Cuomo gets $25k "liquidity" for accounts up to $1 million? When every other settlement has been for 100% of the money tied up in ARS? How exactly is this a good settlement? If you get back 2.5% of your $1 million?

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