The number of investors complaining that they were misled into buying now illiquid auction-rate securities must have reached a tipping point. The SEC and the Financial Industry Regulatory Authority (FINRA) have begun looking into how brokers sold these products.
Jaime Levy Pessin of The Wall Street Journal reported on April 8, 2008, that FINRA had recently sent a survey to broker-dealers seeking a breakdown of total auction-rate securities holdings by customer type, how the auction-rate securities are classified on customer statements, and how firms marketed the products, together with the number of customer complaints received since October 1, 2007. FINRA has also started a “sweep” investigation. A sweep is a broad look at an industry practice and does not automatically imply that enforcement action will be taken. The SEC has confirmed that it is working with FINRA to look into “representations made to investors when they purchase auction-rate securities.”
Last month, Massachusetts securities regulators subpoenaed three large brokers ? UBS, Merrill Lynch, and Bank of America ? for testimony and documents on how they sold auction-rate securities to retail customers.
On Wednesday, April 9th, Goldman Sachs disclosed that it had received requests for information from “various governmental agencies and self-regulatory organizations” relating to auction products and the recent auction failures. This is the first time that Goldman had been linked to these probes.
Auction-rate securities are long term bonds issued by cities, student-loan agencies, and closed-end mutual fund whose interest rates reset by auction every seven to 35 days. With the recent credit crisis, hundreds of auctions have failed and the investors’ assets are tied up in securities they cannot sell.
The sales pitch for auction-rate securities was that they were liquid, super-safe investments with interest rates slightly superior to conventional money market funds. Customers are asking why they were told that auction-rate securities were cash equivalents and why they were not warned about the possibility of failed auctions, among other things. We are all waiting for the answers to those questions.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their auction-rate securities investment problems. For further information, please contact us.