In April 2010, FINRA’s Department of Enforcement filed a complaint against Richard E. Morrison, a member of the corporate cash management group at global investment firm Jefferies and Co.
It alleged he made material omissions in the sale of Auction Rate Securities (ARS) to eight corporate clients, failed to disclose to one of these clients that the market for ARS was under stress in 2007/2008, and also failed to obtain written authorization and written acceptance from all clients for the exercise of discretion.
Read: Retail ABCP holders ask regulators to intervene, for more on ARS and their risks
Regulators found the majority of the group’s clients were sophisticated companies seeking cash management.
After reviewing the case, however, a hearing panel ruled in Morrison’s favour; it dismissed all charges against him due to weak evidence, and found he couldn’t have foreseen the fall of the ARS market in 2008.
“The ARS market collapse was catastrophic for the market as a whole precisely because it was unforeseen by sophisticated investors,” the panel says. “They’d invested $330 billion in ARS at the time the market collapsed in February 2008.”
And Bill Singer, Forbes contributor, says regulators made the right call. He says the financial industry is aware catastrophic events can happen, and there’s nothing Morrison or his clients could have done to prepare for the collapse of auction markets.
“Wall Street knows market earthquakes produce tsunamis. The oft-repeated ARS assurance that auction markets were liquid and that the investments were “good as cash in the bank” turned out to be dead wrong.”
He adds, “Nassim Taleb explained the stupidity of such false assurances and misplaced comfort in his Black Swan Theory.”