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Auction Rate Securities (also known as ARS) are debt instruments that have been marketed by brokerage firms as a safe alternative to money market funds.  Most investors are finding out that this is not the case. A securities attorney can help with your case.

One thing, which makes ARS unique, is that they are sold through a process known as a Dutch auction. At a normal auction, the price starts off low and the floor bids continue to go higher until eventually the item is sold to the top bidder. A Dutch auction is the reverse. The bidding starts off high, and then descends until eventually a purchaser is found who is willing to buy the item at the offered price.

Auction Rate Securities are issued by government municipalities, tax-exempt institutions and closed-end mutual funds which place them out for bid through brokerages and other financial institutions. The advantage of issuing ARS for sellers is that no third-party bank support is required, and there are fewer fees involved.

For buyers, the ARS provides a slightly higher after-tax yield than a money market. While not totally secured, most of the Auction Rate Securities that were sold were AAA-rated, as well as federally tax exempt. They also provided the investor with the opportunity to diversify his/ her cash portfolio.

Each ARS share has a $25,000 par value.  When the security is put up for auction, the new yield could be higher or lower, reflecting the market condition at that time, as well as supply and demand.

Because their minimum denomination is $25,000 or more, most ARS holders are wealthy individuals or financial institutions.

When ARS auctions produce no bidders, the result is a failed auction. Just prior to February 2008, when all trading was suspended there were an unprecedented number of failed ARS auctions.

Since the collapse of the ARS market in February 2008, buyers have been unable to convert these securities back to cash. Many are now forced to hold onto them until the next auction which may not happen for a long time, if ever!

Although banks have agreed to re-purchase around $50 billion of the estimated $350 billion bonds now in frozen securities, the future of the ARS market remains a big question mark.

Who Can Sue

As a result of the failed ARS market, many consumers are deciding to hold the investment firms, which mislead them, responsible. Auction Rate Securities lawsuits, both class action and individual, have already been filed against the major financial companies which dealt in ARS auctions.

If you are confused over whether an individual or a class action claim is right for you, consult a financial attorney who can go over the facts of your case and advise you of your best legal options.

If you were one of the thousands of investors nationwide misled by an investment firm advising you on auction rate securities, contact an ARS fraud attorney who may be able to help you recoup your loss.

Don’t remain in financial limbo, with your funds frozen in what you once were told was a safe cash investment, talk to a financial attorney about the details of your case.

In 2008 alone, an estimated 10 class action lawsuits were filed by brokerage clients alleging deceptive market practices in the sale of ARS. Among the investment companies now facing class action litigation are: Merrill Lynch, Morgan Stanley, Deutsche Bank, UBS, E*Trade and SunTrust Bank.

Only a financial attorney skilled in the intricacies of Wall Street finance can determine whether or not the firm, which advised you to select ARS for your portfolio, engaged in fraudulent misconduct. If your brokerage firm is in violation of Section 17(a)(2) of the Securities Act of 1933, prohibiting material misstatements and omissions in any offer or sale of securities, you may have a winning case.

Interesting Facts

A Dutch auction, which the ARS market later imitated, originated during the early tulip flower auctions in Holland.

The first tax-exempt, auction rate security was introduced in 1988, by Goldman Sachs.

In 2006, the Securities and Exchange Commission (SEC) launched an investigation into the ARS market and concluded there were significant problems. They accused 15 Wall Street investment firms of using deceptive tactics in their sales.

The firms cited by the SEC are: Bear, Stearns & Co., Inc., Citigroup Global Markets, Inc., Goldman Sachs & Co., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Inc., Morgan Stanley DW Inc. and RBC Dain Rauscher Inc. who were fined $1.5-million each; A.G. Edwards & Sons, Inc., Morgan Keegan & Company, Inc., Piper Jaffray & Co., SunTrust Capital Markets Inc. and Wachovia Capital Markets, LLC , who were fined $125,000 each; and Banc of America Securities LLC, who was fined $750,000.

Despite this SEC wrist slap, ARS sales continued to flourish for another year. By the end of 2007, the ARS market had reached a high of $200 billion. 

On February 2008, however, the ARS market collapsed, bringing with it an industry-wide freeze on all accounts. 

While auction rate securities are not illegal, financial firms misrepresented them to investors as safe, short-term cash equivalents and as attractive alternatives to the liquid money market. In addition, they were often sold to cautious investors who did not understand the risks they presented.

Though auction rate securities can be easily bought, sold and converted with minimal value loss, they are a sound investment only in optimal market conditions. When the market falls, as did happen, these investments are as undesirable as bad breath.

Potential Recovery

In August 2008, the Securities and Exchange Commission (SEC) announced a preliminary settlement with Citigroup Global Markets, Inc., that would give $7.5 billion to 38,000 individual investors, small businesses and charities, which essentially will pay back all their ARS debts. An additional $12-billion will be paid to the 2,600 institutional investors at a later date.

The allegations in the various ARS class action lawsuits are nearly all the same; Plaintiffs allege that the true risk of Auction Rate Securities was never disclosed to them.

Allegedly, many, but not all of the investment firms involved, are choosing to settle their ARS legal challenges by refunding the money they owe to their clients, plus paying their respective penalties, rather than going to court to fight these cases.



Class-action lawsuit filed against Stifel over auction rate securities

Morgan Stanley & Co., Inc. : Auction Rate Securities

Goldman Hit With Auction-Rate Securities Suit

Citigroup Agrees in Principle to Auction Rate Securities Settlement


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