Investments block access to large sums of cash
BY SUSAN TOMPOR • FREE PRESS COLUMNIST • September 7, 2008
Shawn Eshragh, president of Concept Industries in Grand Rapids, has flat-out had it when it comes to trying to get his hands on money that’s tied up in so-called auction-rate securities.
“They sold it to me as cash — as good as cash,” said Eshragh, 56, who has complained to Michigan regulators for months about his woes. He’s furious with his securities company and state regulators.
If it’s as good as cash, he wonders, why is $750,000 untouchable? And why hasn’t that money been available for nearly seven months? The money was invested through Comerica Securities for a charity in western Michigan, where Eshragh had been treasurer.
Brokerages and other financial firms nationwide sold auction-rate securities to well-to-do investors, small companies and others as a higher-rate alternative to money market mutual funds or certificates of deposit. But hundreds of thousands of investors hit a major Wall Street pothole last February when they could no longer access what’s estimated to be $300 billion in these securities.
Essentially, an investor who wanted to buy a new house, invest in land, expand a company or buy new equipment would have to find money somewhere else, maybe take out a loan or sell other securities to raise that cash. Many deals didn’t get done.
The ongoing mess continues to create one incredible cash crunch at a time when the health of the U.S. economy is touch-and-go as it is.
“It’s not only people that are frustrated because they cannot access their money. It impacts the economy as well,” said Laurence Schultz, an attorney at Driggers, Schultz & Herbst in Troy.
At issue is whether, how or why brokers misrepresented this product as a safe alternative to money markets.
“Everybody thought these were totally liquid — and investors were told these were totally liquid,” said Schultz, who is president of the Public Investors Arbitration Bar Association.
“Individuals and companies were totally deceived.”
After pressure from regulators, several large Wall Street powerhouses that underwrote this type of debt and sold these auction-rate products have put plans in place to buy back these securities and work out settlements.
Yet not everyone is well on the way to getting their money. Some larger companies and big-name corporations that also invested in auction-rate securities are being shut out of settlements.
Regulators are widening their probe, as well, and reportedly are targeting medium-sized brokers and online firms that have not agreed to any resolution.
On Sept. 18, the House Committee on Financial Services in Washington, D.C., will hold hearings to address why investors across the country still cannot access billions of dollars tied up in auction-rate securities.
“Somebody has this money. It just didn’t go away,” said Steve Adamske, communications director for the House Committee on Financial Services.
Comerica Securities is feeling the heat now, as several customers have complained to regulators that they cannot get their money that is invested in auction-rate securities. In August, the Michigan Attorney General’s Office said it is trying to negotiate a settlement with Comerica Securities to get money back for Michigan residents.
Attorney General Mike Cox noted that national settlements are being negotiated between major national issuers and securities regulators in other states. But he pointed out that Comerica Securities has not been part of any settlement to date.
Eshragh wrote several letters this year to Gov. Jennifer Granholm. He also has contacted Comerica and state regulators. He’s upset that he’s gotten nowhere so far.
“Why is Michigan so out of touch when it comes to this stuff?” he asked.
The Michigan Office of Financial and Insurance Regulation said it has requested information from Comerica specifically with regard to Eshragh’s complaint.
Jason Moon, spokesman for the Michigan regulatory agency, said that the state has received several similar complaints related to auction-rate securities, as well. Eshragh’s complaint and others are part of the state’s ongoing investigation.
In late August, the Financial Industry Regulatory Authority began conducting an enforcement sweep involving 40 firms. The non-government regulator for all securities firms will conduct on-site inspections at a selection of global, national and regional financial firms, as well small independent companies, according to Herb Perone, a spokesman for FINRA in Washington, D.C.
Bank-affiliated broker dealers and insurance company-affiliated broker dealers would be included in the investigation. Perone would not say if any Michigan companies are involved.
Comerica declined to comment on the auction-rate securities issue.
“Our long-standing corporate policy is not to discuss communications with regulatory or other authorities,” said Comerica spokesman Wayne Mielke.
In an interview with the Free Press in April, Ross Rogers, president of Comerica Securities in Detroit, acknowledged that Comerica customers who had auction-rate securities also ran into problems.
Rogers told me at that time that auction-rate securities had been a good investment in the past, but the credit crunch meant that auction-rate debt market began to fail.
“The market just literally froze up,” said Rogers, who had said then that he believed the market would work itself out of its troubles.
Now, Comerica isn’t talking.
But others say that some firms that sold such securities appear to be making the argument that they didn’t underwrite the securities or cause the collapse in the auction-rate market and they shouldn’t be held liable to buy these securities back.
As it stands, many local investors remain in limbo.
Roger Sherr, vice president of Sherr Development Corp. in Farmington Hills, said his firm had invested several million dollars in auction-rate securities through Comerica Securities. He maintains that the firm invested after Comerica misrepresented the short-term liquidity and cash equivalent nature of the securities.
But that money wasn’t available once the auction markets collapsed.
It is money, he said, his firm could have used to take advantage of some real estate opportunities in Michigan and elsewhere in the past year.
Sherr, 49, sees the issue as one firm selling a faulty product or defective merchandise.
“They’re sold as a cash-equivalent and they’re illiquid,” Sherr said.
“If someone buys a dog, it can’t be a cat,” he said. “These were not the animals they were intended to be.”
Contact SUSAN TOMPOR at 313-222-8876 or stompor@freepress.com.
