Tucson Auction Rate Securities

A type of variable-rate debt, auction rate securities (ARS) were once marketed to investors in Tucson, AZ as safe investments which enjoyed a relatively high rate of return without any loss of liquidity. Despite these promises, however, the $300 billion ARS market collapsed in early 2008 as investment banks pulled their support amid concerns about their risk exposure. Tucson ARS investors, who had expected their holdings to act as cash equivalents, found themselves in financial trouble after their auction rate securities reverted to illiquid, long-term bonds which they had little prospect of selling.

The Nature of Tucson Auction Rate Securities

Tucson auction rate securities were long-term bonds with a fixed face value but a mutable interest rate. This interest rate was reset periodically by a Dutch auction system. At auctions, buyers would submit bids detailing the amount of ARS shares they wished to purchase and the minimum interest rate they were willing to accept. The lowest interest rate at which there were enough buyers to cover all shares up for sale became the interest rate paid to bondholders until the next auction.

ARS auctions could only complete successfully as long as demand was strong enough to provide buyers for all the shares that existing bondholders wished to sell. Historically, broker-dealers had stepped in with their own bids to ensure that Tucson ARS auctions did not fail. Contrary to what many investors were led to believe, however, this practice was not obligatory; it served only to heighten the illusion of safety surrounding the Tucson auction rate market.

Tucson ARS Fraud

The allure of the $300 billion auction rate securities market attracted the attention of major broker-dealers and investment firms across the country. They aggressively marketed these securities to their clients in Tuscon, Arizona, telling them that the investments were safe, cash-equivalent holdings which could be liquidated at auction every 7, 28, or 35 days.

By late 2007, however, broker-dealers were well aware of trouble in the auction rate market. Already reeling from losses in the subprime mortgage market and credit crunch, these firms were no longer willing to increase their risk exposure by purchasing unwanted ARS shares at auction. In fact, major broker-dealers were looking for ways to dump the ARS they already owned before the collapse that they knew was coming.

The solution found by these firms was to sell their existing auction rate securities to investors. Despite what they knew about the impending ARS market crisis, broker-dealers launched new marketing campaigns, advising their clients to buy auction rate securities and touting the safety and liquidity of such an investment. Thousands of investors, both corporate and individual, believed these promises and poured their funds into the ARS market.

It wasn’t until after the February 2008 auction rate market collapse that investors understood the fraud perpetuated by investment firms and broker-dealers. The liquidity of the market evaporated, leaving investors holding long-term bonds which they could not sell. With their money frozen in the now-illiquid securities, they turned to their broker-dealers, expecting relief – and found none.

Investigations by state and federal agencies into the practices of major investment firms and broker-dealers have led to charges of fraud. If you have suffered financially due to the false promises made by your investment broker, call an auction rate securities fraud attorney at 800-220-9341 today.