Auction Rate Securities Fraud Lawyer

ARS Auctions: Step-by-Step

Auction rate securities, sometimes abbreviated as ARS, are long-term bonds which have fluctuating interest rates attached to them. These variable interest rates are extremely important to ARS; they are the mechanism which allows a long-term municipal or corporate bond to act like short-term debt.

As their name suggests, auction rate securities are bought and sold through a Dutch auction system that allows buyers and sellers to interact in specific ways.

Step 1: Determining available bonds/shares. Before the auction takes place, investors who are in possession of auction rate securities (such as bonds or preferred stock) have the option of selling or keeping securities.

Step 2: Buyers and bondholders submit bids. Buyers who wish to purchase auction rate securities submit bids to purchase a certain number of shares or bonds at a certain interest rate. In this sense, the interest rate is the “price” of auction rate securities. A buyer may, for example, submit a bid to purchase $250,000 worth of ARS, so long as he or she will receive an interest rate of 3% or higher. On the other hand, bondholders can choose to submit a “hold-at-rate” order, a decision which is essentially the same as an equivalent buy order.

Step 3: Bids are ranked in order of interest rate and the clearing rate is calculated. After all bids are tallied, they are ranked in order of interest rate, from lowest to highest. From this list, the clearing rate is calculated. The clearing rate is the interest rate at which there are enough buy orders to provide for the purchase of all shares/bonds that are up for sale at auction.

Step 4: Winning bidders receive shares/bonds. A winning bid is one which falls at or below the clearing rate. All bidders who submitted winning buy or hold-at-rate orders will receive shares proportional to their bids; those who bid above the clearing rate receive nothing.

For more information on auction rate securities and why investors are losing money in the ARS market due to investment bank fraud, contact an ARS lawyer at 800-220-9341.