In the first arbitration decided against Banc of America Securities regarding the sale of auction rate securities (ARS) to institutional investors, an independent panel of arbitrators from the Financial Industry Regulatory Authority (FINRA) found the investment bank liable for its actions in the sale to an institutional investor of ARS.

The panel ordered an award worth several millions to a corporate investor who bought student loan ARS from BofA and for which auctions started to fail in February 2008. Refer to FINRA Dispute Resolution Arbitration No. 08-04948.

The FINRA arbitration panel awarded The Westervelt Co., a privately-owned paper company in Tuscaloosa, Alabama, $5.5 million in compensatory damages aside from interest on the award at 12%.

It also required BofA to pay Westervelt over $500,000 in attorney fees, as well as the full cost and fees of the arbitration proceeding. Westervelt can keep the securities and receive full payment as they mature or sell them.

After consecutive victories by broker-dealers in arbitrations where institutional and other sophisticated investors were awarded nothing, and where some even had to pay for the cost of the proceeding against the broker and where some might have just accepted their losses without compensation,  this case could be a turning point, according to a release from Saber Partners, which served as an ARS consultant for Westervelt.

“Litigation is ugly and should be avoided if at all possible. However, this award is significant and shows that, when all the facts are properly presented, primary broker-dealers who did not follow the industry’s rules are accountable to institutional investors as well as to individuals,” said Joseph Fichera, chief executive of Saber Partners. “FINRA’s rules are known as the ‘Standards of Commercial Honor and Principles of Trade,’ which means our industry has a high standard to meet to maintain the confidence and trust of market participants, particularly during periods of market stress,” he added.

Saber Partners and Fichera was a consultant and a lead expert witness for Westervelt on student loan ARS and the ARS market.

Fichera added that student loan ARS are complex securities, and the issues involving their marketing and sale to appropriate buyers are as complex. He said that it isunfortunate that litigation is needed to resolve these issues.

"However, while each case has its own fact pattern, this case sets an important precedent. It sends a strong signal to the market, and to institutional investors who purchased auction rate securities in particular, that they can recover damages through the arbitration process,” Fichera said.

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