Fourth Circuit Decides FINRA Rules to Govern Dispute Over Auction Rate Securities
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A federal appeals court has ruled that two Wall Street brokerages must arbitrate a $234 million auction rate securities claim in a dispute with a healthcare organization over what exactly constitutes a customer. In January, a panel of the United States 4th Circuit Court of Appeals held that Carilion Clinic was a customer of UBS AG and Citigroup, Inc. pursuant to the Financial Industry Regulatory Authority‘s (FINRA) securities arbitration rules.
In UBS Financial Services, Inc. v. Carolion Clinic No. 12-2066 (4th Cir. Jan. 23, 2013), Carilion reportedly issued at least $234 million in auction rate securities on the advice of the two brokerage firms in 2005. The firms also purportedly purchased and resold the securities to other customers. Auction rate securities are liquid short-term investments that generally enjoyed a higher rate of return until the recent economic crisis. In 2008, Carilion allegedly lost millions when the $330 billion auction rate securities market failed. The healthcare organization was also reportedly on the hook for the high interest rates normally paid to investors who purchase such securities.
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