Risk & Compliance

Oppenheimer Sued by Mass. over ARS

It's the latest firm to be targeted by state or federal regulators. Three of the firm's managers are named, as well.
Stephen TaubNovember 18, 2008

A Massachusetts state administrative complaint made Oppenheimer & Co. the latest financial services firm to be accused of violating securities laws in its sale of auction rate securities.

Massachusetts Secretary of State William Galvin said in the complaint that Oppenheimer “improperly conducted its auction rate securities business,” and charged the firm with separate counts of “fraud and dishonest and unethical conduct.” Regulators are calling on Oppenheimer to rescind sales of ARS at par and make full restitution to investors who have already sold these instruments below par.

The state regulators also seek to censure the firm, revoke Oppenheimer Chairman and CEO Albert Lowenthal’s Massachusetts registration as a broker-dealer agent of Oppenheimer, and fine Oppenheimer; Albert Lowenthal; Robert Lowenthal, senior managing director of the taxable fixed income trading department; and Greg White, managing director of the auction rate department at Oppenheimer.

A spokesman for Oppenheimer issued a statement on behalf of the company and its executives, saying that Oppenheimer “denies that the allegations made by Massachusetts Securities Division have any basis in fact or law,” and that the company “intends to vigorously defend itself.” Said the statement: “Oppenheimer sold auction rate securities in the same manner as the entire brokerage industry — as a cash management tool similar to a money market fund. Oppenheimer and its executives, like dozens of other ‘downstream’ brokerages nationwide, had no knowledge of the conduct of the major institutions which caused the entire auction rate securities market to collapse. While there were sales by executives of auction rate securities, there were also executive purchases during this period and these same executives continue to hold millions of dollars of auction rate securities (a fact oddly omitted from the complaint). Oppenheimer continues to work with regulators and financing sources to try to find a means for its clients to find liquidity from their auction rate holdings.”

The complaint alleges that Oppenheimer “significantly misrepresented” not only the nature of ARS, but also the overall stability and health of the ARS market when marketing the product to clients. It also claims that key Oppenheimer executives and ARS Department personnel sold their own ARS as they learned that the market was in danger of imploding, and they “failed to disclose this information to investors.”

Massachusetts regulators charge that in late January and early February of 2008, while clients were told and believed they held cash-like investments, Oppenheimer senior executives and ARS personnel unloaded nearly $3 million of their personal holdings of ARS in February “in an effort to avoid the catastrophic effects of a market failure that they saw coming.” Regulators allege that Oppenheimer’s misrepresentations regarding the nature and safety of the ARS market, and its failure to inform clients of heightened concerns prior to the market implosion, resulted in clients being stranded with illiquid ARS.

Oppenheimer is just the latest among a growing list of financial services firms that have settled similar charges with various state and federal regulators.

Among the companies already settling similar charges by various state and federal regulators are City National Securities, BNY Mellon Capital Markets, and Harris Investor Services. They have agreed to repay a total of more than $60 million, according to The Financial Industry Regulatory Authority. Other financial institutions previously agreeing to settlements with state regulators include Credit Suisse Securities (USA) LLC, Citigroup, UBS, JP Morgan, Morgan Stanley, Wachovia, Merrill Lynch, Goldman Sachs, and Deutsche Bank. In addition, Fidelity Investments became the first so-called downstream retail broker to settle and agree to buy back ARS from its customers.

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