Sunday, November 8, 2009
Gretchen Morgenson, the New York Times financial columnist, addresses the plight of investors in auction rate securities (ARS) whose investments, sold on the basis of their liquidity and safety, became illiquid as a result of the credit crisis. A Way Out of the Deep Freeze. Ms. Morgenson, who has been harsh in her assessments of mandatory securities arbitration in the past, finally sees value in arbitration. She notes the judicial hostility toward class action ligitations involving ARS and recognizes that individual arbitrations may provide the only recovery for investors. Those of us who have studied this area closely have long recognized that whatever the faults of arbitration, in a legal reality where investor rights are so meager and difficult to enforce, securities arbitration, and its appeal to equity, may be the best solution for investors. However, my initial assessments of investor recovery in arbitration are less sanguine than Ms. Morgenstern's. The reported awards, at least, have not shown a willingness on the part of arbitrators to award consequential damages resulting from the investors' inability to liquidate their investments -- to make a down payment on a residence, for example, or pay a child's college tuition. While it is true that most arbitrations are settled and thus the terms are not publicly disclosed, I have not heard anecdotally that investors are faring well. If any readers have heard differently or can speak from personal experience, I would appreciate hearing.