Auction Rate Securities Fraud Lawsuit

The Basics of Auction Rate Securities

Auction Rate Securities are securities whose interest rate, during a specific period, is determined by an auction, typically a Dutch auction. There are typically auctions held to determine interest rates on these securities or preferred stocks every 7, 28, or 35 days. The interest on these securities is paid at the end of the period.

The total number of shares available at auction depends on the number of bond holders who wish to sell their bonds or hold them at only a minimum yield.

The existing bond owners and the potential investors enter a competitive bidding process via broker/dealers. Buyers will specify the number of shares they'd like to purchase and the lowest interest rate they are willing to accept. They generally specify shares in denominations of $25,000.

The bids and order sizes are ranked from lowest to highest minimum bid rate. The lowest bid rate at which all the shares can be sold at the same number establishes the interest rate for all shares sold that day. This is known as the "clearing rate." The interest rate determined by bids is paid on all shares issued for the upcoming period. Investors who bid a minimum rate above the clearing rate receive no bonds while those whose minimum bid rates were at or below the clearing rate receive that interest rate on their securities for the period.

Generally, there is not a third-party bank required for these auctions. In addition, Auction Rate securities have low liquidity. It is not necessarily possible to take money out of the market.

If you have purchased auction rate securities following misinformation from your investment firm, contact the auction rate securities fraud lawyers of Williams Kherkher at 800.220.9341 to discuss your case and to determine your legal options.