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Home > Cases > Auction Rate Securities > Probes Into Auction-Rate Securities Heats Up

Probes Into Auction-Rate Securities Heats Up

As the number of investors who remain in limbo from the frozen auction-rate securities market continues to grow, state securities regulators have joined efforts to lend support.

Several months ago, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FIRA) began separate probes into the promises made by brokers to customers who purchased auction-rate securities. Now the North American Securities Administrators Association (NASAA), which represents state securities regulators, is following their lead and looking into the issue.

As reported in an April 17, 2008, article by Kevin Kingsbury in the Wall Street Journal, state securities regulators are prepared to take appropriate action if violations ultimately surface.

Both formal and informal probes into the recent troubles of auction-rate securities have been underway for some time now by various state agencies. The involvement of NASAA will enable the efforts to be coordinated through one task force. Among the states currently involved: Massachusetts, Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington.

The market for auction-rate securities – which are long-term bonds that act like short-term debt – has been in a state of upheaval since February, following the failure of hundreds of auctions. Since then, thousands of investors – including municipalities, student loan agencies and individuals – have been left unable to sell or refinance their securities.

Many of these investors have taken the matter into their own hands, filing lawsuits against the investment banks and securities firms that sold them the now-illiquid auction securities as safe, cash-like investments.

In March, three major brokerage firms – UBS AG, Merrill Lynch & Co. and Bank of America Corp. – were issued subpoenas by Massachusetts Secretary of State William Galvin for documents and testimony on how they sold auction-rate securities to retail investors.

A month later, Goldman Sachs Group disclosed that it also had received requests for information from “various governmental agencies and self-regulatory organizations” relating to auction products and the recent failure of such auctions.

Moving forward, the furor over auction-rate securities is likely to get much louder, as more investors discover that the brokers/dealers they trusted recklessly misrepresented the risks of the investments. For now, it's become a ticking time bomb, just waiting to implode.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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