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Home > Cases > Auction-Rate Securities > Investor Angst Intensifies Over Auction-Rate Securities

Investor Angst Intensifies Over Auction-Rate Securities

Investors with funds frozen in auction-rate securities thought they saw a brief light at the end of the tunnel when a secondary market for the securities recently opened up.

Think again.

As reported in a June 6 article by Darrell Preston on Bloomberg.com, dozens of investment banks - including Bank of America, UBS and Wachovia - that sold auction-rate securities apparently are now discouraging any efforts to create a secondary market. Their unwillingness to release the bonds, according to the article, is that they hope to “save” clients from taking any unnecessary losses on the securities - the same securities the banks initially pitched to customers as “cash-like” investments.

More than a case of altruism, however, allowing customers to sell their securities at a discount via the secondary market enables them to establish damages - and therefore possible legal action in the future, according to Bryan Lantagne, who runs the Massachusetts securities division.

Lantagne also spearheads a nine-state task force, which is examining whether investors were properly informed of the risks associated with auction-rate securities and whether brokers misrepresented the debt as a safe-as-cash investment.

In addition, the taskforce is looking into the role that the investment banks may have played in causing the auctions for the securities to fail.

Since March, at least 24 proposed class action suits have been filed against the major investment banks and brokerage houses on claims that investors were mislead about the true risks and liquidity of auction-rate securities.

What's Next?

Similar to long-term bonds, auction-rate securities are bought and sold at auctions held every seven, 28 or 35 days. In February, signs of trouble began to percolate in the $330 billion auction market, as buyers for the securities disappeared. In turn, the investment banks and brokerage firms that once supplied financial support to the market pulled out entirely. As a result, public auctions for auction-rate securities began to fail in droves.

To date, more than $300 billion worth of bonds is frozen in the auction-rate market, with retail investors holding anywhere from between $30 billion and $60 billion of those securities, according to several reports. Among the largest issuers of outstanding municipal auction-rate securities, 2000-2007:

  • Citigroup, $39.73 billion (including Salomon Smith Barney)
  • UBS, $31.50 billion
  • Morgan Stanley, $20.13 billion
  • Goldman Sachs, $17.80 billion
  • JP Morgan, $15.72 billion
  • Bear Stearns, $12.61 billion
  • Merrill Lynch, $12.37 billion
  • Bank of America, $11.03 billion
  • RBC Dain Rauscher, $10.25 billion
  • Lehman Brothers, $9.74 billion

Individual investors who are trapped in the auction-rate securities fiasco have found that their options to get out may be few and far between. Some banks are now writing down the values of the auction-rate securities in customers' accounts; others are letting customers “borrow” loans, using their auction securities as collateral.

According to the Bloomberg article, states, cities and other municipal issuers have refinanced, converted or disclosed plans to redeem by July 18 at least $76.1 billion of auction-rate securities. Mutual-fund companies have redeemed or said they would refinance about $19.8 billion.

Many investors, however, are taking action into their own hands, actively searching for buyers for their securities, even if it means selling at a steep discount. And that makes the latest news regarding various investment banks and their unwillingness to release a customer's auction-rate securities for sale on the secondary market even more preposterous.

Since February, thousands of these investors needed access to the money they have tied up in the frozen auction-rate securities market. College tuition, retirement savings, even medical bills have been relegated to the backburner - all because the promises of short term, ultra safe, cash-equivalent investments turned out to be false. The wait for these investors has been long enough.

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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