Texas Auction Rate Securities
Investors who own Texas auction rate securities (ARS) have been hit hard by the ARS market's recent meltdown in early and mid 2008. As a record number of ARS auctions fail, Texas investors find themselves unable to sell or convert their ARS shares and are left helplessly on the sidelines while the market and economy continue to deteriorate. The prognosis is far from rosy; experts say that there is no way to tell how long it will take for the Texas auction rate securities market to regain its footing. Until then, Texas investors may find it impossible to recover their valuable ARS investments.
Texas Auction Rate Securities Market Overview
Auction rate securities are a subcategory of variable rate debt which may take the form of municipal bonds, corporate bonds, or preferred stock. Texas ARS offerings are made by local governments, private companies, large corporations, and even non-profit organizations.
In simple terms, auction rate securities are a long-term bond with an interest rate that changes based on market forces at set intervals, usually 7 to 35 days in length. Between each period, broker-dealers hold ARS auctions, at which existing bondholders have the option to sell their shares to prospective investors. These investors submit bids detailing how many shares they would like to purchase and the lowest interest rate they will accept for that purchase. The lowest interest rate at which all available shares are covered by bids becomes the interest rate for the next ARS period.
Causes of the ARS Market Collapse
ARS auctions are dependent on bids; if there are not enough bids to cover all shares being offered for sale at an auction, the auction fails and no shares are sold. In the past, the Texas auction rate securities broker-dealers who ran auctions usually chose to submit their own bids as a way to fill in the bidding gap and ensure the success of their auctions.
The recent downward trend of the economy, as evidenced by the festering mortgage crisis and skyrocketing subprime losses, caused many Texas broker-dealers to pull out of the auction rate securities market in 2008. Due to the decision of broker-dealers not to act as bidders of last resort in their own auctions, thousands of ARS auctions failed. As these failures continued, existing ARS bondholders realized that, without successful auctions to complete transactions, their Texas auction rate securities investments were basically frozen in place.
Texas Auction Rate Securities Fraud
The frustration of Texas investors quickly turned to anger as they watched the safety and liquidity touted by auction rate securities investment firms evaporate before their eyes. Preliminary investigations have hinted at possible misconduct by these investment advisors, and several major firms have been accused of misrepresenting the nature and benefits of auction rate securities for the purpose of selling them to investors, even when such a purchase did not fit the investors' goals.
Investment firms told their clients that Texas auction rate securities were risk-free investments with high liquidity, i.e., that they could easily be converted into cash. They failed to mention, however, that the liquidity of auction rate securities was not an inherent property, but one tied to the vitality of the ARS market. When auctions succeed, ARS investments change hands rapidly and remain liquid; when auctions fail, on the other hand, the same investments become completely illiquid.
Texas Auction Rate Securities Fraud -- Take Action Today
Have you been deceived into purchasing Texas auction rate securities by the fraudulent practices of an investment firm? Are you unable to convert the ARS investments you were tricked into thinking were safe? If so, call a
Texas auction rate securities lawyer at 800.220.9341 today to discuss your legal options. We can help clients in: