April 15, 2010
Institutional Investor Wins Multi-Million Dollar Award Over Purchase of Student Loan Auction Rate Securities (“ARS”) During Financial Crisis
Saber Partners Led Expert Advisors for Investor on ARS
(New York, New York – April, 2010) In the first arbitration decided against Banc of America Securities arising out of the sale of auction rate securities to institutional investors, an independent panel of arbitrators from the Financial Industry Regulatory Authority (“FINRA”) found the investment bank liable for its actions in the sale to an institutional investor of these securities during the financial crisis. The panel ordered a multi-million dollar award to a corporate investor who bought student loan auction rate securities from the firm, and for which auctions began to fail in February 2008. (See FINRA Dispute Resolution Arbitration No. 08-04948)
The FINRA arbitration panel awarded The Westervelt Company, a privately-owned paper company in Tuscaloosa, Alabama, $5.5 million in compensatory damages plus interest on the award at 12%. It also required Banc of America to pay Westervelt over $500,000 in attorney fees, as well as the full cost and fees of the arbitration proceeding. Westervelt may keep the securities and receive full payment as they mature or sell them.
After a string of victories by broker-dealers in arbitrations (see, e.g., FINRA Arbitration Nos. 08-03486, 08-03355 and 08-03386) in which institutional and other “sophisticated” investors were awarded nothing – and in which some even had to pay for the cost of the proceeding against the broker, while others may have simply accepted their losses without compensation – this case may mark a turning point and is an important signal to the market.
“Litigation is ugly, expensive and should be avoided if at all possible. However, this award is significant and shows that, when all the facts are properly presented, primary broker-dealers who did not follow the industry’s rules are accountable to institutional investors as well as to individuals,” said Joseph S. Fichera, Chief Executive of Saber Partners, LLC. “FINRA’s rules are known as the ‘Standards of Commercial Honor and Principles of Trade,’ which means our industry has a high standard to meet to maintain the confidence and trust of market participants, particularly during periods of market stress,” he added.
Saber Partners and Mr. Fichera served as a consultant and lead expert witness for Westervelt on student loan auction rate securities and the market for auction rate securities.
Mr. Fichera explained “Student loan auction rate securities are complex securities, and the issues involving their marketing and sale to appropriate investors are equally complex. It is unfortunate that litigation is required to resolve these issues. However, while each case has its own fact pattern, this case sets an important precedent. It sends a strong signal to the market, and to institutional investors who purchased auction rate securities in particular, that they can recover damages through the arbitration process.”