Auction Rate Settlements Are Bad News for Plaintiffs Firms
Recent settlements in which brokerage firms are buying back auction-rate securities may put a damper on lawsuits filed on behalf of investors.
The Am Law Daily recently dubbed New York Attorney General Andrew Cuomo its litigator of the week for the settlements he has reached with financial institutions such as Wachovia, Merrill Lynch & Co., Goldman Sachs Group and Deutsche Bank.
Under reported settlements, auction rate securities held by small and retail investors will be repurchased for the price paid, according to two experts writing in Legal Times. Investors who sold below this par value will also be compensated, and those who can prove other losses can seek more money under a special arbitration procedure. The settlements also contemplate refunds for larger institutional investors, but at a lower priority.
The settlements will leave individual investors fully compensated, leaving little damages to pursue in court, the story says. Even without the settlements, plaintiffs lawyers could have difficulty getting class action certification because individual issues predominate—including whether brokers misled investors about the safety of the instruments.
“It is a truly unusual circumstance that businesses pay billions of dollars to settle fraud investigations by regulators with little available opportunity for the plaintiffs bar to profit,” say the writers, Michael Rivera and Erik Frias of Fried, Frank, Harris, Shriver & Jacobson. “Yet government and industry have worked cooperatively to craft a solution to the auction-rate securities problem in such a way that private litigation will be largely unnecessary and unavailable.”
