San Francisco brokerage accused of sticking unsuspecting customers with $16 million in securities
California brokerage Thomas Weisel Partners Group Inc. stuffed $16 million in shaky securities into the accounts of three unsuspecting corporate customers so the brokerage could pay executive bonuses, according to a civil complaint by regulators that was made public Monday.
The customers were stuck with the securities when the market for the so-called auction-rate debt froze weeks later as the financial crisis was unfolding in early 2008, according to the complaint filed by the Financial Industry Regulatory Authority, which oversees and is funded by the brokerage industry. The regulatory group released details of the complaint Monday.
In a Securities and Exchange Commission filing, Weisel said it would defend itself “vigorously” in the case, which could result in sanctions such as fines. The San Francisco firm declined Monday to elaborate.
The case ties together two issues arising from the global financial crisis: bonuses that securities-industry executives paid themselves despite the financial system’s near-meltdown and the treatment of customers stranded with auction-rate debt.
Auction-rate securities, long-term debt in effect masquerading as short-term instruments, were popular before the credit markets froze in 2008. They paid more interest than money market funds did but were widely pitched by brokers as safe and easily redeemable — which they were until demand for such engineered securities dried up during the debt crunch.
Overall, investors were stuck with about $330 billion of auction-rate issues that they couldn’t sell.
Some investment firms have since bought back the securities after they were sued by government regulators.
The three unidentified Weisel customers, a California company and two Arizona firms, had to wait 17 months to get their money back, the complaint says.
Weisel had put almost all the money it had planned
to use to pay bonuses into auction-rate securities, but the company feared in early 2008 that the market for them was weakening, telling one client of “extreme levels of uncertainty” in the market, according to the complaint.
In late January 2008, Weisel sold 52 customers’ auction-rate holdings as well as $9 million of its own holdings, but was unable to unload $16 million of its holding, the complaint says.
The company then sold the remaining $16 million in auction-rate debt to the three customers without their knowledge or consent, according to regulators.
