Legal News

The Auction-Rate Securities After-Party: Lehman Gets an Invite

By Dan Slater

Just when you thought it was winding down, Law Blog readers, the ARS party is picking up steam once again. UBS is back on the hot seat, and Lehman — one of the only major broker-dealers that didn’t agree to buy back at least some auction rate securities from customers who now can’t easily sell — has received an invite. The investigations, reports the WSJ’s Amir Efrati, are the first to look at whether individuals committed crimes as the ARS market collapsed.

Did Lehman defraud the Maher brothers? M. Brian Maher and Basil Maher sold their family’s billion-dollar shipping business and invested some of the proceeds with Lehman. After the auction-rate market collapsed, they lost access to $286 million that was tied up in the securities. Brooklyn Prosecutors are probing whether Lehman put the securities into the brothers’ and other customers’ accounts despite knowing the market could collapse.

A spokeswoman for a unit of Barclays PLC, which bought Lehman’s core U.S. business following its bankruptcy, declined to comment, as did a spokesman for the U.S. attorney’s office in Brooklyn. In a statement, attorneys for the Maher family said it is “aware of and is cooperating with an investigation of Lehman Brothers by the U.S. Attorney’s Office for the Eastern District of New York.”

Allegations of insider trading: David Shulman, who ran the ARS biz for UBS is being investigated for insider trading for selling his own ARS holdings ahead of the market’s collapse. Robert Anello, a lawyer for Shulman, declined to comment, as did a spokeswoman for the DOJ in Washington. UBS confirmed Shulman left the firm in August but declined to comment on the investigation.

Cynthia Monaco, a former federal prosecutor, said prosecutors only need to prove a defendant made trades while in knowing possession of material, nonpublic information — not that specific victims lost money. But in order to appeal to a jury, she said, prosecutors “would want to prove that there is harm to a victim, which doesn’t have to be a dollar-value loss and could be the inability to sell securities when they need to.”

Full post as published by Law Blog - WSJ.com on October 02, 2008 (boomark / email).