Investors around the world who were looking to put their money in a safe place that would not be subject to the volatile securities markets were advised by their brokers and financial advisors to deposit their money in Auction Rate Securities. Auction Rate Securities often come in the form of closed-end funds or municipal bonds. Many Wall Street Brokerage Firms, including Goldman Sachs, Merrill Lynch, Lehman Brothers, Wachovia Securities, Citigroup, UBS and Morgan Stanley presented Auction Rate Securities to be safe, liquid investment vehicles where customers could obtain a slightly higher rate of return than they might find in a money market account. In fact, some firms listed these investments under the “cash equivalent” section of their customers’ monthly account statements. However, Auction Rate Securities have proven to be anything but “safe” or “liquid.” Moreover, the level of risk that accompanies Auction Rate Securities far outweighs that which many investors were willing to take on.
Auction Rate Securities go to auction every 7 to 35 days, depending on the auction rate security. Ever since the week of February 11, 2008, the majority of the auction rate securities are failing at auction as there is no buyer to buy the security. With no buyer, the Auction Rate Security has become frozen with no means of liquidity. As many investors need access to their money, brokerage firms have begun to offer clients margin loans to meet their liquidity needs. Instead of receiving safe, liquid investment, the investors in Auction Rate Securities are holding an illiquid investment that will be margined if they need cash.
The entire Auction Rate Securities market is estimated to be about $200 billion. Almost half of that market is owned by corporations. Most of that money has become frozen and inaccessible. Individuals who had the vast majority of their money in Auction Rate Securities are scrambling for cash, and some companies have had to lay off employees or file for bankruptcy protection due to budget constraints. Although secondary markets for Auction Rate Securities have opened up, investors are learning that they can only recover between 40 cents on the dollar to 70 cents on the dollar. This sort of recovery, however, has been a tough pill to swallow for those customers who thought they were holding a cash equivalent.
For the money that investors cannot recover through the secondary markets, the Securities Law Firm of KlaymanToskes is filing arbitration claims on their behalf against their brokerage firm with the Financial Industry Regulatory Authority. These claims allege that the brokerage firms failed to explain to their customers the risks associated with owning Auction Rate Securities, and that they misrepresented them to be as liquid and safe as money market funds. The lawsuits also allege claims of breach of fiduciary duty, negligence and gross negligence and fraud.
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FINRA Issues Guidance to Investors Caught in ARS Auction Failures. Click here…