Levin Papantonio is investigating claims against broker-dealers who recommended auction rate securities to investors as an alternative to “cash equivalents.” In fact, almost $330 billion of auction rate securities and other similar investments were recommended to investors as a place to hold cash for those who had short-term time horizons. Of course, these investors were not told that the liquidity for the auction rate securities came from the financial industry itself and they could walk away at any point. Nor were the investors told that the SEC had already fined several prominent broker-dealers almost $16 million over the lack of transparency in the auction markets just a few years before. Now, some auction rate securities, such as those backed by student loans, that were being pitched as “cash equivalents” just a few months ago, can not be liquidated without taking a 25% – 50% loss on the initial investment if they can be liquidated at all. Some of the more “liquid” ARS can not be liquidated in the secondary markets without taking a 10% – 15% loss.

Retail investors were not the only victims of the subprime and credit market debacle. Many institutions, including municipalities, school districts, labor unions, and pension funds, were also misled about purchasing products filled with subprime products and esoteric credit instruments. Similarly, taxpayers are hurt by the frozen market because municipal issuers – cities, hospitals, school districts – are forced to pay the fees and expenses associated with redemptions and restructuring.

Of course, the push to put retail investors into auction rate securities occurred in late 2007 and early 2008 when the broker-dealers themselves were liquidating their positions. To add to the insult, the broker-dealers who operate the now virtually non-existent auctions are still being paid 25 basis points for the securities total issue for each year of its life. The broker-dealers are also generating banking fees when the municipal issuers are forced to redeem the securities and yet again when they unwind the derivative contracts that are often intertwined with the securities. If you have apotential ARS claim, please contact Peter Mougey so we can help.

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