Auction Rate Securities Arizona
Arizona auction rate securities (ARS) are a type of variable-rate debt once touted as safe, flexible, and more profitable alternatives to other money market investments. ARS bonds and preferred stocks are issued by a variety of organizations, from municipal governments to non-profits. A number of major investment firms aggressively promoted auction rate securities to their clients, emphasizing their safety and liquidity as key selling points.
Market Crisis
In February 2008, the once-thriving auction rate securities market crashed. Broker-dealers, concerned about bond insurers in the wake of the looming credit crunch and subprime losses crises, decided to reduce their risk by pulling out of the ARS market. The enormous spike in failed auctions which followed froze the funds of Arizona auction rate securities investors, rendering countless individuals unable to access or retrieve their investments.
Structure of Arizona Auction Rate Securities
ARS auctions are held every 7, 28, or 35 days, depending on the particular company. These short reset periods, between which the interest rate is determined by a Dutch auction system, are the key to the short-term flexibility of ARS investments. Although ARS bonds actually have long maturity periods, the variable interest rate means that bonds can be sold or bought in short intervals.
During an Arizona ARS auction, buyers declare bids to buy a certain number of shares at a certain rate of interest. Once bidding is complete, the clearing rate is set to the lowest interest rate at which all available shares can be sold. All buyers with bids at or below this rate receive shares; those who bid higher receive none.
Arizona ARS Fraud
A closer examination of the Dutch auction system reveals an important flaw -- in order to complete an auction, there must be enough bids to account for all the available shares. If bidding is insufficient, the auction will fail. Historically, this flaw did not pose much of a problem, as the broker-dealers who ran ARS auctions generally bid on their own behalf to compensate for any lack of bids, keeping the failure rate low as a result. When these same broker-dealers abruptly exited the auction rate securities market in 2008, the result was disastrous; the rate of failed auctions exploded, and many bondholders discovered that they were unable to sell any of their shares. The liquidity provided by frequent, regular ARS auctions evaporated, leaving investors holding illiquid investments that they did not want.
Anger mounted as investors realized that the major investment firms had never warned them of such a possibility when persuading them to enter the Arizona auction rate securities market. This significant omission, in the eyes of many investors, was nothing less than deliberate fraud for the sake of profit. To date, several investigations into the practices of investment firms have been launched.
Taking Action
If you are an Arizona investor whose auction rate securities funds have been basically frozen by the recent market collapse, you may have a case against the investment firm whose deceptive and misleading practices convinced you to enter the ARS market in the first place. An
auction rate securities lawyer can help you if you live in:
Call us at 800.220.9341 for more information.