Las Vegans among investors suing over auctioned securities

By Steve Green

Tuesday, Aug. 4, 2009 | 1:55 a.m.

Investors who lost billions of dollars by buying "auction rate securities" are fighting back with lawsuits around the country -- including one involving a prominent Las Vegas family.

Betty Engelstad, widow of longtime Imperial Palace hotel-casino owner Ralph Engelstad, and other trustees of a Ralph and Betty Engelstad Family Trust filed suit over their losses in Clark County District Court Friday.

The defendants are Wells Fargo & Co. and subsidiaries Wells Fargo Bank, Wells Fargo Institutional Securities LLC and Wells Fargo Brokerage Services LLC.

The lawsuit is similar to one filed against Wells Fargo in April by the state of California accusing the banking giant of securities fraud.

California Attorney General Jerry Brown said he sued to recover $1.5 billion for California investors who purchased auction rate securities based on allegedly "false and deceptive" advice that the financial instruments were "as safe and liquid as cash."

Wells Fargo, which earlier was sued by the state of Washington, has denied wrongdoing in connection with its auction rate securities sales.

"We fully understand and deeply regret the effects this prolonged liquidity crisis has had on our clients. Wells Fargo could not have predicted these extraordinary circumstances, and even with the benefit of hindsight is not responsible for them," Charles Daggs, CEO of Wells Fargo Investments LLC, said in response to the California lawsuit.

"In April 2008, Wells Fargo led the industry in helping clients affected by the crisis by voluntarily providing significant liquidity to clients holding ARPs. Since that time, and despite the unprecedented nature and length of liquidity problems in the market, these clients have had access to 90 percent of the par value of their ARP holdings through non-recourse loans at favorable rates. We are not aware of any other similarly situated company that voluntarily provided a comparable loan program or took action on behalf of their clients before Wells Fargo implemented its loan program. We also have worked individually with clients who have special needs, and will continue to do so," said Daggs.

On July 20 the federal Securities and Exchange Commission settled charges against TD Ameritrade Inc. that alleged the online brokerage made inaccurate statements when selling auction rate securities (ARS) to customers.

The SEC previously announced ARS settlements with Bank of America and its subsidiary Merrill Lynch, Citigroup, UBS, Wells Fargo subsidiary Wachovia, RBC Capital Markets and Deutsche Bank.

"TD Ameritrade is the latest in a series of landmark ARS settlements that bring unprecedented relief to tens of thousands of investors," Robert Khuzami, director of the SEC's Division of Enforcement, said in announcing the TD Ameritrade settlement. "ARS customers of numerous firms can get back all of the money they invested in auction rate securities as more than $50 billion in liquidity is being made available to them through these historic settlements."

Brown, the California attorney general, said auction rate securities are investments with long-term maturity dates like bonds that Wells Fargo and other banks marketed as short-term investments equivalent to cash. These investments paid a slightly better rate of return than a bank account. And, investors could sell the securities at regular weekly or monthly auctions, which provided the promise of liquidity, Brown said.

In February 2008, auctions in the $330 billion market froze up nationwide, and investors were no longer able to redeem their securities for cash, as promised. This left approximately 2,400 Californians who had invested with Wells Fargo without access to more than $1.5 billion, Brown said.

The Internet is now full of stories regarding state securities regulators and individual investors suing brokerage houses over auction rate securities sales.

In its lawsuit, the Engelstad trust said Ralph and Betty Engelstad had by late 2002 deposited millions of dollars with Wells Fargo and, through Wells Fargo, invested millions of dollars in auction rate securities.

Following Ralph Engelstad's death in November 2002, the trust continued to invest in the securities through Wells Fargo, the lawsuit said.

It said Trish McArthur, a Wells Fargo executive in Las Vegas, told the trust in late 2002 or 2003 and in later years that auction rate securities "were safe, secure, liquid investments that could be converted to cash after periods of seven days or 28 days or longer, and that auction rate securities typically bore interest at rates which were slightly higher than those available for federally insured certificates of deposit and money market investments."

But on Oct. 5, 2007, the trust said it learned of problems with the securities when Wells Fargo said two auctions failed involving "Class V Funding ARS" and "Athilon ARS" securities. Wells Fargo told the trust that because these securities held some collateralized debt obligations, there were no buyers for them at the auction, the lawsuit said.

The Engelstad lawsuit alleges Wells Fargo failed to disclose that the securities at issue "only appeared readily liquid at the time they were purchased and acquired for the trust's benefit because broker-dealers in the auction market were artificially supporting and manipulating the market to maintain the appearance of liquidity and stability."

Auction rate securities were a highly profitable business for Wells Fargo, motivating the company to "make false and misleading omissions and statements of material fact about auction rate securities in order to perpetuate their interests as remarketing agents for those securities," the suit charges.

The lawsuit says that as recently as last month, Wells Fargo has refused to purchase or redeem the Engelstad trust's investments in the illiquid ARS investments.

The suit alleges violations of the federal Securities Exchange Act outlawing manipulative or deceptive securities sales practices and violations of Nevada laws barring the sale of unregistered securities and outlawing fraudulent securities sales.

The Engelstad Trust seeks unspecified damages and a court order requiring Wells Fargo to reimburse the trust for its illiquid investments.