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Auction-Rate Securities Lawyers

An entire $300 billion plus market was in limbo, the auctions that supported the market failed, the banks refused to support the auctions, and in an environment of low liquidity the issuers refused to allow investors to withdraw their money. The beginning of 2008 thus brought another crisis of investor confidence in the marketplace as the auction-rate bond market continued to evaporate close on the heels of the residential sub-prime mortgage meltdown.

It was not just the institutions that felt the pain. Individual investors were being told they could not access their funds and were worried they would not be able to recover their investments. And to add to the sense of frustration for investors, at the beginning of March 2008 only one issuer (Aberdeen Global Income Fund) had announced plans to buy back the auction-rate debt.

The investments, long-term bonds that act like short-term debt, include municipal bonds, corporate bonds or preferred stocks issued by municipalities, other tax-exempt institutions and closed-end mutual funds, with interest rates or dividend yields that are periodically re-set via Dutch auctions. They were misrepresented to some investors as safe, liquid, short term "cash equivalents" like money market funds. They may also have been sold to investors for whom these vehicles were unsuitable in light of their investment objectives. Whether this scenario gives rise to liability of the issuers is a question that investors want answered.

Investors have been contacting us to determine a course of action at this time, when there is still no certainty as to whether any other issuers will follow with their own redemption plans for auction-rate securities. We can be reached at 212-679-6000.

Back Story on the Auction-Rate Securities Market Collapse:

The bidding process for auction-rate securities among 15 of the biggest financial services firms was itself the subject of a multi- million dollar settlement with the SEC in 2006.

Without admitting or denying the SEC’s findings, the firms consented to an order which, among other things, imposed $13 million in penalties. Excerpts from the SEC press release follow:

“The SEC order finds 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. The violative conduct included

  • allowing customers to place open or market orders in auctions;
  • intervening in auctions by bidding for a firm's proprietary account or asking customers to make or change orders in order to
  • prevent failed auctions, to set a "market" rate, or to prevent all-hold auctions;
  • submitting or changing orders, or allowing customers to submit or change orders, after auction deadlines;
  • not requiring certain customers to purchase partially-filled orders even though the orders were supposed to be irrevocable;
  • having an express or tacit understanding to provide certain customers with higher returns than the auction clearing rate; and
  • providing certain customers with information that gave them an advantage over other customers in determining what rate to bid.

Some of these practices had the effect of favoring certain customers over others, and some had the effect of favoring the issuer of the securities over customers, or vice versa. In addition, since the firms were under no obligation to guarantee against a failed auction, investors may not have been aware of the liquidity and credit risks associated with certain securities. By engaging in these practices, the firms violated Section 17(a)(2) of the Securities Act of 1933, which prohibits material misstatements and omissions in any offer or sale of securities.

The SEC order (1) censures each firm; (2) requires each firm to cease and desist from committing or causing any violations and future violations of Section 17(a)(2) of the Securities Act; (3) requires each firm to pay a penalty; (4) requires each firm to provide certain disclosures of its material and current auction practices and procedures; and (5) requires each firm, not later than six months after the date of the order, to have its CEO or general counsel certify that it has implemented procedures that are reasonably designed to prevent and detect violations in the auction rate securities area.

The order requires the respondents to pay the following penalties based upon their relative market share and conduct: Bear, Stearns & Co., Inc., Citigroup Global Markets, Inc., Goldman Sachs & Co., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated/ Morgan Stanley DW Inc., and RBC Dain Rauscher Inc. - $1,500,000 each; and A.G. Edwards & Sons, Inc., Morgan Keegan & Company, Inc., Piper Jaffray & Co., SunTrust Capital Markets Inc., and Wachovia Capital Markets, LLC - $125,000 each. Banc of America Securities LLC is required to pay $750,000 rather than $1,500,000 based on the quality of its self-monitoring capabilities in the auction rate securities area.”

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