Category Archives: Raymond James Financial

Broker/dealer Raymond James Financial has agreed to pay a $1.7 million fine and buy back $300 million in auction-rate securities from clients as part of a settlement with eight states and the Securities and Exchange Commission (SEC).

Broker/dealers have been dealing with the auction-rate securities debacle since February 2008, when the market froze for the products came to a standstill. As a result, thousands of individual and institutional investors were left holding illiquid investments.

In August 2008, Raymond James announced that it was the subject of several investigations by state securities regulators over the auction-rate securities its registered reps had sold to clients.

As reported June 29 by Investment News, the states leading the charges against Raymond James’ settlement are Florida and Texas. Other states involved include Indiana, Missouri, New York, North Carolina, Pennsylvania and South Carolina.

Like many broker/dealers, Raymond James’ registered representatives and financial advisers allegedly characterized auction-rate securities as “cash equivalents” and “highly liquid” short-term investments to customers. In reality, the supposedly “cash-like products” became illiquid investments after the Wall Street firms that once supported the auction-rate market pulled out entirely.

In the face of regulatory inquiries and pronouncements by the Financial Industry Regulatory Authority (FINRA) on the inherent risks they pose to retail investors, more brokerages are curtailing their activity in leveraged and inverse exchange traded funds (ETFs).

FINRA initially raised questions about inverse and leveraged ETFs when it issued a notice to brokers/dealers on June 11, cautioning them that the instruments may not be suitable investments for retail investors who plan to hold onto the instruments for more than one trading session.

Shortly after FINRA’s edict, Saint-Louis based Edward D. Jones announced its intent to halt sales of leveraged ETFs. UBS and Ameriprise soon followed. Other brokerages, including Charles Schwab, Raymond James Financial and LPL Financial are reviewing their policies concerning ETFs, with some firms posting information on their respective Web sites that inverse and leveraged ETFs “are not right for everyone.”

Leveraged ETFs allow investors to amplify bets on a wide range of markets, while inverse ETFs make profits when prices fall.

Many investors, however, are unaware about the complexities and underlying risks of inverse and leveraged ETFs. Leveraged ETFs, for example, are designed to deliver their stated leverage on a daily basis. If an investor holds the ETF longer than one trading session, it potentially could lead to financial disaster. Leveraged ETFs also employ, as their name implies, leverage. This, in turn, increases the level of financial risk for investors.

On August 5, a lawsuit involving ETFs was filed in New York, accusing ProShare Advisors LLC and others of violating a securities act by failing to disclose the risks of its ProShares UltraShort Real Estate fund (SRS). Among the risks that the complaint contends the inverse leveraged exchange traded fund failed to cite: “Spectacular tracking error.”

Specifically, the lawsuit alleges that the fund’s index fell 39.2% from January 2008 to December 2008, but the fund fell 48.2%, which was not in accordance with ProShares’ stated objective that UltraShort ETFs go up when markets go down.

The complaint is seeking class-action status, according to an Aug. 6 article in the Wall Street Journal.

The dramatic losses of the SRS fund reiterate the inherent risks posed by inverse and leveraged ETFs, especially in times of a volatile market. In the 12 months through July 23, the Dow Jones U.S. Real Estate Index shed 38%, but the ProShares UltraShort Real Estate fund lost 82%, according to the Wall Street Journal article. This year through July 23, the index is down 3.5%, but the fund has slipped 67%.

Citigroup did it, followed by Morgan Stanley, UBS, Merrill Lynch, Wachovia, Bank of America (BofA) and, most recently, Morgan Keegan and Ameritrade. The “it” concerns settlement agreements with the Securities and Exchange Commission (SEC) to repurchase billions of dollars worth of auction-rate securities from retail investors. Scores of Wall Street firms agreed to the deals with regulators, with only a few holdouts. One of those holdouts: Raymond James Financial. 

Raymond James Financial is the subject of Gretchen Morgenson’s Aug. 1 column in the New York Times. In the article, she writes that clients of the Tampa-based brokerage currently hold some $800 million of illiquid auction-rate securities, down from $1 billion earlier this year.

The decline is tied to redemptions by issuers of auction-rate securities, such as closed-end funds and municipalities. So far, Raymond James has shown no interest in redeeming customers’ holdings. Its reasoning? Buying back $800 million of auction-rate securities at par is equal to more than 4% of the company’s total assets and 42% of its shareholder equity. 

On the other hand, Raymond James apparently had the financial stability last year, at the height of the credit crisis, to raise its dividend 10%. The move proved especially beneficial for Thomas James, CEO of Raymond James Financial. James owns 12.2% the company shares outstanding. Dividends on those shares generated a handsome profit totaling about $6 million for James and another total another $6.5 million this year if the company continues to pay the current rate of 44 cents a share.

The payments are in addition to James’ salary and pay package, which is valued at $3.55 million, according to the New York Times story.

Then there’s the money Raymond James came up with to fund its corporate branding campaign. In 2008 and 2009, the company spent $6.3 million to acquire the naming rights to the stadium where the Tampa Bay Buccaneers play. The contract runs until 2016, and the costs rise 4% every year.

Meanwhile, as the “financially strapped” Raymond James funds million-dollar salaries, raises its dividend and outlays millions of dollars on corporate advertising and marketing efforts, its clients remain permanently caught in an auction-rate securities nightmare.