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Home > Cases > Auction-Rate Securities > ARS Investors Were Misled By Wall Street, Says Lawyer

ARS Investors Were Misled By Wall Street, Says Lawyer

(This is an abstract of J. Boyd Page's June 17 radio interview with June Grasso of Bloomberg. To listen to the interview in its entirety, please visit: http://www.bloomberg.com/tvradio/podcast/law.html.)

Since February 2007, retirees and high-level executives have shared something in common: frozen investments in the auction-rate securities market.

For months now, investors have been held hostage by the auction-rate market. Investment banks - which previously conducted auctions for the securities - pulled back their support after losses mounted on debt linked to subprime mortgages.

Auction-rate securities are municipal bonds, corporate bonds, or preferred stocks that have interest rates reset through auctions held every seven, 14, 28, or 35 days. When the auction market seized up in February 2008, the securities became illiquid, leaving investors holding what they thought was once a cash-like investment.

To date, 24 class-action suits have been filed by investors against various Wall Street investment houses and brokerages.

In a June 17 radio interview with June Grasso of Bloomberg, J. Boyd Page, senior partner at Page Perry LLC, discusses the basis for the lawsuits, beginning with the fact that even prior to the current auction-rate crisis, Wall Street inappropriately sold the securities to investors who were looking for money market-type investments.

“The securities were sold as safe, liquid, cash-equivalent investments,” said Page. “They were marketed to investors who did not want to speculate and only wanted quick access to their cash.”

When the auction market froze up, however, investors who thought they were earning interest on their investments learned otherwise, as they discovered they could no longer even access their own money now.

“In many cases, investors [in auction-rate securities] never received a prospectus for their investment,” Page said. “They simply relied on information from their broker, which in the majority of instances was no information whatsoever.”

Page says the most appalling fact in the auction-rate debacle is that in August 2007 60 failures in the auction-rate market had occurred, yet Wall Street failed to relay this critical piece of information to investors.

Meanwhile, investors are now turning to the secondary market in hopes of getting at least some of their cash in auction-rate securities back. Until recently, a number of investment banks were blocking attempts by investors to go this route.

For investors who hold student-loan-backed auction debt, however, the future remains uncertain. To date, almost all of the auctions in the student-loan auction-rate market continue to fail, with only $1 billion of the $85 billion outstanding being refinanced.


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