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Firms Fight Banks Over Frozen Notes
By Liz Rappaport Hundreds of businesses are fighting to recover billions of dollars tied up in frozen auction-rate securities, a year after Wall Street firms agreed to $60 billion in settlements over the collapsed market for the investments.Some 400 companies that sank their free cash into the investments -- from retailer Abercrombie & Fitch Co. to tiny Nanophase Technologies Corp. -- hold more than $20 billion of auction-rate securities that can't be sold or are sharply reduced in value. That is forcing the holders to restrain their spending, thus creating yet another drag on the economy as it struggles to recover.Buyers say banks and brokerage firms haven't given them enough help to get their money back. Wall Street firms generally maintain they have done all they agreed to and have helped many clients get access to needed cash.Auction-rate securities are long-term borrowings engineered to have short-term features, with the interest rate reset at weekly or monthly auctions. Corporate treasurers and individuals loaded up on them, attracted by underwriters' promises of a relatively high-yielding investment that was as easy to tap as cash.The $330 billion market collapsed nearly two years ago as the credit squeeze worsened. When some auctions failed, owing to insufficient bidders, Wall Street trading desks didn't step in as buyers of last resort. Investors were left without the promised quick access to their money. To get their money, in many cases they would have to hold the securities to maturity, often 20 years or more.State regulators and the Securities and Exchange Commission accused banks and brokerage firms of having misled clients about the securities' safety and liquidity. Under settlements last year, banks and brokerage firms bought back auction-rate securities from the smaller, mostly individual, investors. But for larger and corporate buyers, which were deemed more sophisticated, the settlement required the securities firms only to make their "best efforts" to help.In most cases, regulators agreed not to push firms harder to find a fix for corporate clients until this year, said Matt Kitzi, co-chairman of the auction-rate securities task force of the North American Securities Administrators Association, a group of securities regulators that helped organize last year's settlement.Abercrombie & Fitch has $230 million, or 33% of its cash on hand, tied up in the long-term securities, bought from several banks, including UBS AG and Bank of America Corp. "If we had more cash, we'd be running different [business] models, with more stores and more inventory," said Abercrombie & Fitch treasurer Everett Gallagher.The retailer plans to exercise its right to sell $72 million of the securities back to UBS this spring, he said. UBS is the only firm that committed to buying back the debt from all clients.Others offered to lend to the retailer or sell the frozen securities at steep discounts. The "best efforts" called for in settlements essentially just mean the firms must offer corporate clients some remedy for their predicament. A spokesman for Bank of America said it has complied with its best-efforts obligation and will continue working to find solutions.Executives of some companies stuck with the securities say regulators are doing little to force banks and brokerage firms that marketed them to step up. Abercrombie & Fitch and other buyers recently complained to the SEC and state regulators.A spokesman for the New York attorney general's office, which led many of the settlement talks, said, "If there are instances in which firms are not making their best efforts, we will pursue those." The SEC has been hearing complaints and meeting with companies.A group of 25 companies presented the Treasury and White House with a proposal to revive the moribund auction-rate-securities market. For that to happen, borrowers and buyers would have to trust securities dealers to conduct effective auctions -- stepping in to buy if not enough investors did. Despite some efforts to revive the market, most dealers, investors and borrowers have shown no interest.To be sure, more than half of the outstanding auction-rate securities have been bought back at full face value by the municipalities, charities or other entities that issued the debt -- as part of ordinary refinancings by the borrowers. Thanks to those refinancings, some corporate buyers did get their money back in full, in addition to the individual investors who were able to sell the securities back to banks and brokers.Some securities buyers have tried to force banks and brokerage houses to compensate them through other legal avenues, with limited success. Earlier this month, a Financial Industry Regulatory Authority arbitration panel ruled in favor of Citigroup Inc. after Move Inc., a real-estate services company, alleged it was misled when it bought auction-rate securities from the bank.A spokesman for Citigroup said it "has worked diligently with issuers, investors, and regulatory authorities to identify and offer a number of solutions in the auction-rate-securities market." The company wouldn't comment on specific cases.Move Inc. said in a recent filing that it plans to hold the securities it bought to maturity. It said it doesn't need access to the cash immediately.For others, lack of access to short-term cash is taking a toll. Nanophase laid off 12 of its 54 employees and is fighting to stave off more cuts, said Jess Jankowski, chief executive of the Romeoville, Ill., company, which provides molecular technology for floor coatings and sunscreens. It said auction-rate securities have tied up about half of its $8 million, money it needs for corporate expenses.Nanophase got through 2009 in part by selling some securities at 87 cents on the dollar. Mr. Jankowski said he is being forced to focus on quick-to-market technologies to bring in short-term revenue.
Credit Suisse Group, from which Nanophase bought auction-rate securities, offered Nonphase a loan, but with too many strings attached, Mr. Jankowski said. He said he is pursuing an arbitration claim against the firm and has complained to regulators.A Credit Suisse spokesman said, "We have fully complied with the terms of the settlement."Small-business owner Bob Bridgeman was also hit. He sold a New Jersey oil-change and car-wash chain and placed the proceeds with a company that enables small businesses to invest their cash tax-free.That company, LandAmerica 1031 Exchange Services Inc., invested its entire pool of about $200 million in auction-rate securities. After the market collapsed, the frozen investment helped tip LandAmerica into bankruptcy reorganization, said an attorney for the firm.Even though Mr. Bridgeman is an individual investor, his investment got hung up because it had been pooled as part of a corporate investment, LandAmerica's. Mr Bridgeman, 60 years old, has been left without access to more than $1 million."It was a big portion of what I worked for my whole life," he said.
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