South Florida Arbitration & Litigation Lawyer Blog
FINRA Auction Rate Securities Arbitration Attorney, Russell L. Forkey, Esq.
September, 2011:
Fidelity Brokerage Services LLC (CRD #7784, Smithfield, Rhode Island) submitted a Letter of Acceptance, Waiver and Consent in which the firm was censured, fined $375,000, and agreed to make an offer to repurchase illiquid auction rate securities (ARS) from certain customers who purchased ARS via the firm’s website between February 13, 2008, and March 4, 2008. For those customers who accept the firm’s offer, it will repurchase the illiquid ARS those customers held within 35 days of the acceptance of the firm’s offer. No later than 30 days following the last of the payments, the firm shall certify to FINRA that it made the required payments and provide supporting documents to FINRA upon request.
The firm agrees to arbitrate claims for consequential damages filed by the relevant class (individual investors who purchased eligible ARS from the firm at any time between May 31, 2006, and February 28, 2008, into accounts maintained at the firm) relating to eligible ARS through a special arbitration program (SAP) in accordance with rules set forth by FINRA. No later than 90 days after the date of FINRA’s acceptance of this AWC, the firm shall notify investors in the relevant class that they are eligible to participate in the SAP. This process is voluntary on the part of qualifying investors and does not preclude investors who elect not to participate in the SAP from pursuing other remedies. Arbitration under the SAP shall be conducted by a single public arbitrator, unless the claim for consequential damages is $1,000,000 or greater, in which case a panel of three public arbitrators may be appointed if both parties agree. Any investors who choose to pursue such claims through the SAP shall bear the burden of proving that they suffered consequential damages and that such damages were caused by investors’ inability to access funds consisting of investors’ ARS purchases through the firm. The firm shall be able to defend itself against such claims provided, however, solely for the purposes of the SAP, the firm shall not contest liability related to the sale of ARS and shall not be able to use as part of its defense an investor’s decision not to sell ARS holdings prior to receiving a buyback offer from the firm nor the investor’s decision not to borrow money from the firm if such loan facility was made available to ARS holders. In determining the appropriate sanctions, FINRA took into account that the firm took significant steps to minimize the impact to customers of the illiquidity of the ARS market.
Without admitting or denying the findings, the firm consented to the described sanctions and to the entry of findings that its website depicted ARS as liquid and omitted material facts about ARS, including risks that investments in ARS could become illiquid. The findings stated that the firm stated on its website that while a failed auction could occur, it did not disclose any risk relating to the potential consequences of a failed auction, and the website did not contain disclosure that broker-dealers placed supporting bids to ensure that auctions would not fail or that the broker-dealers who did this were under no obligation to continue that practice. The findings also stated that the firm provided information to its representatives, including an online reference and fixed income sales training manual, that inaccurately described ARS and omitted material information about risks, including liquidity risks; the online reference also stated that ARS were putable and callable on scheduled reset dates which was false. The findings also included that the online reference and the training manual omitted material information about the risks of failed auctions for ARS that could render ARS illiquid.
FINRA found that the firm did not revise its website disclosure about ARS until after numerous ARS auctions failed. FINRA also found that the firm failed to establish and maintain procedures reasonably designed to ensure it marketed ARS in compliance with federal securities laws and applicable FINRA and/or MSRB rules. In addition, FINRA determined that the firm inadequately reviewed and supervised the drafting of materials on its website, which contained a discussion about ARS that was misleading and omitted material information. Moreover, FINRA found that the firm failed to establish and maintain procedures reasonably designed to ensure that the written materials it distributed to its registered representatives to educate them regarding the marketing and sale of ARS complied with the appropriate disclosure standards in NASD Rules 2210, 2211 and MSRB Rule G-21. Furthermore, FINRA found that the firm did not act as an issuer, underwriter or sponsor. The findings also stated that the firm did offer to purchase ARS from any customer who had purchased still-illiquid ARS at any time through the firm prior to February 13, 2008; the firm completed the ARS buyback program on or about January 21, 2009, purchasing approximately $280 million in ARS from customers. The findings also included that no firm customer had sold ARS below par prior to the firm’s purchase of ARS as part of the ARS buyback program. (FINRA Case #2008013056101).