Monday, July 30, 2012

Wells Fargo-GJN-Securities Act of 1933

I thought that I would add a comment on the GJN situation and then leave it alone for at least a few days. I am really angry about what WFC did to the GJN individual investors. 

I did not take a course in securities law and have never had any trial work in that area. In short, I am simply aware that there is a Securities Act of 1933, and I have read stories in the press about companies charged with violating that Act. 

In connection with the egregious actions related to the redemption of GJN, another area of research is whether that Act was violated by failing to place a clear warning in bold type at the start of a long and complicated prospectus. While I have never done any research on the subject myself, it would seem relevant to me that this product is being sold to individual investors. If an adequate warning had been placed in bold and large type at the beginning of the prospectus, WFC/Wachovia would  not have been able to sell those certificates to the public at $25. The deal would not have gotten off the ground. There may be a statute of limitations issue, but I seriously doubt that the average individual investor could have reasonably foreseen the events that led up to their loss of capital until WFC took their money in mid-July 2012. On that issue, it is relevant that GJN was trading near $25 up to the time of its delisting. 

Please keep in mind that the trustee's notice was dated 7/17/12 and the security was delisted prior to that notice.

Subsequent Posts:

J P Morgan-Make Whole Payment-Redemption of Its 2035 Trust Preferred/Those Who Wish To Defend Wells Fargo In Connection with GJN Need to Specifically Address the Facts (8/7/12 Post)

District Court Decision in Turkle Trust v. Wells Fargo (N.D. Cal)/Summary of Argument: JPM Potential Obligation to Pay Make Whole for its Recent 2035 TP Redemption/Other JPM Capital Trust Preferred Securities: Language on Make Whole Payment and Capital Treatment Event (8/13/12)

GJN-Wells Fargo-New York Times (8/2/12 Post)

Legal Claims: GJN-Wells Fargo. I am retired.

GJN-JPM-Make Whole Payment (8/6/12 Post)

Introduction to Closed End Portfolio as of 8/7/12/Romney's Tax Plan/ARCC/Bought 50 YMLP at $19.05-Regular IRA (8/8/12 Post)


  1. Yes, it stinks. Glad I didn't own, I was warned to stay away from "3rd party" Trust preferreds, on the message bds. I've traded GYB, that's a 2-party, right? I don't trust anything left over from Wachovia. I sold GYB near 18, buy near 16, rinse & repeat. Have you approached quantumonline about recourse? Makes me wonder how many others have this "escape clause".

  2. GYB is a synthetic floater with a swap agreement. In addition, GYB and PYT have as their underlying security the same trust preferred security issued by GS Capital maturing in 2034.

    There are some important differences however, between GYB/PYT and GJN.

    The 2034 GS TP does not have an escape hatch for capital treatment event. That is important. Without that escape hatch, GS would have to pay a "make whole" payment to redeem that TP before maturity.

    I am not equipped to calculate that sum. It would be the present value of the principal amount plus all interest payments until maturity in 2034, discounted to present value. That has to be a huge number, particularly when the discount rate is small, and it explains why so many bonds with make whole provisions are selling at large premiums to their par values. The underling security in JZJ is a senior ATT bond, is selling at close to a 50% premium to par value in the bond market. If it could be redeemed now at par value plus accrued interest the price would be hugging par value. There are other pertinent reasons in my view that distinguish GYB discussed in prior posts.

    I would be very, very cautious with these securities after the GJN event. I own only 150 GYB right now, and have traded it profitably a number of times. I am playing with the house's money. It may be drifting down in price some due to what happened to GJN.

    The capital treatment event is relevant only to TPs. It occurs when the TP can not be counted as TIER 1 capital, an issue relevant only for TPs. If there had never been a Dodd-Frank law, JPM would not have redeemed the underlying TP in GJN and everything would be fine for those poor souls who owned it at the time of redemption. I would add that the security was trading near $25 before it was delisted, so both institutions and individuals did not put it together.

    The swap agreement termination fee would be relevant for only the synthetic floaters like GYB, GYC, GJP, PYT, etc. I list them in my Gateway Post on Synthetic Floaters.

    I will discuss the importance of the make whole issue some in tomorrow's post.

  3. I see that I may not have answered your specific question directly. I apologize.

    GYB is what quantumonline calls a third party trust preferred. And it has the swap agreement issue that was the source of the GJN hosing by Wells Fargo.

    Tomorrow I will discuss JZV, which is also characterized by quantumonline as third party trust preferred security. It does not have a swap agreement. It is a fixed coupon trust certificate. The main issue with those types of third party trust preferred issues is the "call warrant" that allows the broker to redeem the TC at par value plus accrued interest, take possession of the bonds owned by trust, in that case senior CNA bonds maturing in 2023 and then sell them at a guaranteed profit in the bond market. That is a different issue than what happened to the owners of GJN. I have lost a bundle of trust certificates to call warrant exercises by the brokerage company that formed the Grantor Trust.

    Your are thinking about regular trust preferred securities issued by financial institutions. An example would be STLPRA, which I own, where Sterling bank (STL) forms a Delaware Trust that sells trust preferred securities and the trust then uses the proceeds to buy a junior bond from STL. The TP represents a beneficial interest in that junior bond, so there are only two layers in a regular trust preferred security. There are three layers in GYB.