Auction Rate Securities (also known as ARS, ARPS, and Auction Rate Preferred Shares) are debt or preferred equity investments with long-term maturities that have interest rates reset through dutch auctions. The actual nature of auction rate securities were generally not disclosed to investors who were sold these investments.
According to Wikipedia.com, the auction rate security was invented by a Lehman Brothers employee and the first auction rate security was introduced by Goldman Sachs. The auctions for these securities were generally held every 7, 28, or 35 days. Through the auction process, buyers and sellers would also determine the interest rate that would be paid on the ARS for the next period. This occurred through a bidding process in which the buyers would specify the number of shares they were willing to purchase and the lowest interest rate they were willing to accept.
In 2006, the Securities and Exchange Commission concluded an investigation of 15 investment banking firms that represented the auction rate securities industry.
During the investigation, the SEC found that “between January 2003 and June 2004, each firm engaged in one or more practices that were not adequately disclosed to investors, which constituted violations of the securities laws.” As a result of these findings, the SEC issued a Cease and Desist Order to stop these abusive practices. Because these firms were largely responsible for the success of the auctions themselves, and because this fact was frequently not disclosed to investors, the SEC felt it was imperative to step in.
In 2007, these firms began to suffer liquidity problems. As such, they began taking action to exit the auction markets. As noted in regulatory findings, some executives within these firms also began selling their personal ARS holdings. In early 2008, the liquidity crisis reached its peak and the firms pulled the plug on their support of the markets. As a result the auctions froze and investors who owned auction rate securities were stuck with long-term (or in some cases, perpetual) investments that paid short-term interest rates that were still reset periodically. However, in some instances, the auction rate securities also failed to pay any interest for months at a time.
There have been several class actions and regulatory actions filed on behalf of auction rate securities investors. Nevertheless, a large number of investors are still forced to hold these illiquid “cash equivalents.”
If you were sold auction rate securities and continue to own these illiquid investments, you should speak wit an attorney to know more about your rights. Jason M. Kueser has represented auction rate securities investors in securities arbitration claims. If you would like to contact Mr. Kueser to discuss your rights, please complete the form to the left. You may also contact The Kueser Law Firm at:
