Nuveen Trustees Sued by Investors Over Auction-Rate Securities Redemptions

Nuveen Investments Inc., the largest manager of closed-end funds, was sued for allegedly harming one group of investors by buying out others caught in the 2008 collapse of the auction-rate market.

Nuveen, as well as fund trustees, hurt the common shareholders of closed-end funds by redeeming the funds’ auction rate preferred shares at par, according to a complaint filed today in an Illinois state court in Chicago.

“The funds have no obligation to redeem the ARPs at liquidation value,” the shareholders said in the filing. “Liquidation value is the equivalent of full value.”

The auction-rate market collapsed in February 2008 during the early stages of the credit crisis, leaving preferred shareholders frozen. Nuveen has since redeemed 57 percent of its $15.4 billion in outstanding preferred shares by replacing them with various forms of financing.

BlackRock Advisors LLC, a unit of New York-based BlackRock Inc., was sued separately today in state court in Manhattan in a similar case. The lawsuits are the first on behalf of common shareholders over the ARS market’s failure.

Closed-end funds used to sell preferred shares on the auction-rate market to increase the amount of money they could invest by as much as 50 percent, boosting returns for common shareholders. Nuveen, which managed $145 billion as of Dec. 31, is a unit of Chicago-based private-equity firm Madison Dearborn Partners LLC.

Kathleen Cardoza, a Nuveen spokeswoman, didn’t immediately return calls for comment on the suit. The investors seek a court order barring the firm from further par value redemptions using trust assets, as well as unspecified money damages.

BlackRock Sued

As in Nuveen case, BlackRock Advisors shareholders are suing in the name of funds in which they invested. BlackRock fund trustees, too, are accused of overpaying on the redemption of auction-rate preferred securities and other instruments, to the detriment of common shareholders.

Bobbie Collins, a spokeswoman for BlackRock, declined to comment on the case, which seeks unspecified money damages.

Closed-end funds had about $64 billion in outstanding preferred shares when the auction-rate market froze. About $39.9 billion have since been redeemed by fund sponsors such as Nuveen, BlackRock and Boston’s Eaton Vance Corp., according to Cecilia Gondor, a closed-end fund analyst at Thomas J. Herzfeld Advisors Inc. in Miami.

Forced Buybacks

Federal and state regulators, acting to free up preferred shareholders, also forced broker-dealers who marketed auction- rate securities as highly liquid, low-risk investments, to buy back more than $50 billion of the securities. Those companies included Citigroup Inc., UBS AG and Oppenheimer Holdings Inc.

The shareholders’ lawsuits center on the cost of financing that closed-end funds have paid for leverage. They allege that the fund companies were under no obligation to buy out the frozen preferred shares, and that the replacement financing they secured has proved more expensive.

“The fund companies felt they had an obligation to balance the interests of the preferred and common shareholders,” Gondor said in a telephone interview. “Hindsight is 20-20, but it was an extremely difficult situation.”

The Nuveen case is Safier v. Nuveen Asset Management, 10ch32166, Cook County, Illinois, Circuit Court, Chancery Division (Chicago). The BlackRock case is Curbow v. Blackrock Advisors LLC, 651104-2010, New York Supreme Court, New York County (Manhattan).

To contact the reporters on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Andrew M. Harris in Chicago at aharris16@bloomberg.net.

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