ASTAR Air Cargo Alleges Merrill Lynch Fraud; Files Complaint
Regarding Auction Rate Securities
MIAMI (Business Wire EON) March 18, 2008 --
ASTAR Air Cargo (ASTAR) announced today that it has filed an arbitration
claim against Merrill Lynch, Pierce, Fenner & Smith, Inc. seeking
compensatory damages of $9.125 million and punitive damages of at least
$27.375 million. ASTAR’s counsel, Dimond
Kaplan & Rothstein, P.A. of Miami, filed the claim with the Financial
Industry Regulatory Authority (FINRA) to gain access to ASTAR’s
funds that currently are frozen in illiquid Auction Rate Securities
(ARS) in the company’s Merrill Lynch account.
As alleged in its Statement of Claim, ASTAR instructed Merrill Lynch to
place its cash reserves in products that would provide complete safety
of principal and complete liquidity. In response, Merrill Lynch
recommended that the company purchase various ARS. Merrill Lynch told
ASTAR that ARS were completely safe and extremely liquid, with auctions
occurring no less frequently than every 35 days. ASTAR agreed to invest
significant amounts of cash in ARS sold by Merrill Lynch. In early 2008,
ASTAR’s investments became locked up and
entirely illiquid. As a direct result of Merrill Lynch’s
fraudulent misconduct, ASTAR is now unable to access substantial assets
critical to its business operations.
“Merrill Lynch decided to saddle ASTAR with an
illiquid investment rather than risk more of its own capital in the ARS
market,” said Scott Dimond, ASTAR’s
lead litigation counsel. “When Merrill Lynch
concluded that ARS were a ‘hot potato’
they decided that ASTAR would be the one to get its hands burned. ASTAR
never would have invested any of its money in ARS if Merrill Lynch had
informed the company of the true liquidity risks of the securities and
of the apparent liquidity problems at Merrill,”
Dimond said.
Background
Between October 2004 and December 2007, ASTAR maintained, on average,
between $20 million and $25 million in ARS in its Merrill Lynch
accounts, always believing that such investments gave the company ready
access to its funds.
Beginning in fall 2007, ARS auctions began to fail nationwide, causing
certain ARS to become illiquid. At that time, Merrill Lynch assured
ASTAR that it would continue to support the ARS auctions that it
oversaw, including the auctions for the ARS that it had sold to ASTAR.
Merrill Lynch continued to hawk ARS to ASTAR without providing any
additional warnings. In February 2008, however, Merrill Lynch announced
that it no longer would support the ARS market it had helped to create.
As a result of Merrill Lynch’s conduct,
$9.125 million of ASTAR’s assets are now tied
up in illiquid ARS securities, and ASTAR has no confidence that it will
be able to access its money in the near – or
even distant – future.
ASTAR alleges the following claims against Merrill Lynch:
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Negligence, gross negligence, negligent misrepresentation and
omission, and negligent supervision - Merrill Lynch had a
duty to recommend investments that were consistent with ASTAR's
investment objectives. And it knew that ASTAR wanted only safe,
liquid, income-producing investments. Yet, Merrill Lynch
recommended and sold ARS that subjected ASTAR's assets to
illiquidity and potential loss.
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Fraudulent misrepresentation and omission - Merrill
Lynch affirmatively misrepresented that the ARS it sold were both
safe and liquid. Further, Merrill Lynch never:
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-- Warned ASTAR that the securities were subject to extreme
liquidity risk;
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-- Explained to ASTAR that the reason that certain ARS auctions
had not failed in the past was because Merrill Lynch itself had
invested its own capital in the pertinent ARS in order to prevent
failed auctions;
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-- Revealed that Merrill Lynch could control the liquidity of
the ARS investments; or
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-- Disclosed that there was no active secondary market for the
securities.
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Breach of fiduciary duty - Merrill Lynch breached its
fiduciary duty to its customers by placing its own interests ahead
of those of its customers. After repeatedly providing liquidity to
the ARS market over the years - and using that self-created
liquidity as part of its sales pitch when recommending ARS
investments - Merrill Lynch decided not to invest any more of its
own money in ARS and let ARS auctions fail.
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Breach of contract - Merrill Lynch promised that it
would buy ASTAR out of its ARS positions between auctions in the
event that ASTAR required instant access to its funds. Merrill
Lynch's refusal to do so constitutes a blatant breach of its
verbal agreement with ASTAR.
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Violation of Florida's Securities and Investor Protection
Statute - Merrill Lynch recommended and sold unsuitable
securities and misrepresented material facts in clear violation of
the anti-fraud provisions of Florida's Blue Sky laws.
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In addition to compensatory and punitive damages, Merrill Lynch also is
liable for the payment of interest on the funds tied up in the ARS
investment at Florida’s statutory rate of 11
percent, minus any interest paid to ASTAR since it purchased the
investment.
ASTAR is being represented in this matter by Dimond Kaplan & Rothstein,
P.A. (http://www.dkrpa.com or http://www.investmentfraud-lawyer.com),
a litigation and arbitration boutique that represents investors
nationwide in stockbroker misconduct actions involving ARS and other
securities.
About ARS
ARS are either bonds with long-term maturity (corporate or municipal
bonds), or preferred shares of closed-end bond funds (also known as “auction
rate preferred stock”), for which the
interest rate or dividend is reset on a periodic basis through what is
known as a “dutch auction.”
In the auction, a broker-dealer submits bids for securities to an
auction agent on behalf of current and prospective investors. Brokerage
firms, including Merrill Lynch, routinely marketed and sold ARS as safe,
highly liquid, cash-equivalent investments.
About ASTAR Air Cargo, Inc.
ASTAR Air Cargo is a licensed U.S. air carrier operating a fleet of
43 aircraft from its operational hub in Wilmington, Ohio. The airline
provides all-cargo scheduled and charter services for the DHL Worldwide
Express network and charter services on a contract basis for customers
including the U.S. military and the United States Postal Service. ASTAR
Air Cargo corporate headquarters are located in Miami, FL. Additional
information can be found at www.astaraircargo.us.
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