Bank of America Withheld Important Information about Auction-Rate Securities from Investors


Today, Beth Healy of the Boston Globe reported that Bank of America warned the State of California about problems in the auction-rate securities markets late in 2007 while the firm was still marketing auction-rate securities to individuals and other investors without disclosing such risks. Among other things, Bank of America warned the State of California that there had been “significant dislocation” in the auction-rate securities marketplace, that demand for auction-rate securities was dropping, that many corporate clients were selling auction-rate securities, and that there was significant uncertainty in various parts of the auction-rate market. Reportedly, Bank of America also warned the State of California that it was “in a defensive position, facing capital constraints,” due, in part, to its high inventory of auction-rate securities.

The Boston Globe had previously reported that other major Wall Street firms expected the failure of the auction-rate securities markets prior to the collapse in February of this year, and yet failed to warn investors of the impending disaster. For example, in the months leading up to the collapse, JP Morgan Securities, Inc., Lehman Brothers, Morgan Stanley, Bear Stearns Cos. and Merrill Lynch & Co. warned the Commonwealth of Massachusetts that the auction-rate markets were in trouble and that the state should consider refinancing some of its debt. Unfortunately, this information was not shared with smaller state entities or individual investors.

Other sources had also reported that, as early as last summer, UBS, Citigroup and Bank of America, among others, had been advising issuers of student loan auction rate securities that their auctions were going to fail unless the issuers agreed to waive caps on the amount of interest they could pay. This information was also withheld from individual investors.

This information would have been particularly important to investors given how auction rate securities were sold. Auction rate securities, which are long term bonds which are issued by cities, non-profit organizations, student loan agencies, and closed end mutual funds, whose interest rates reset by auction every 7 to 35 days, were sold to many investors as “cash equivalents.” Unfortunately, these securities become illiquid, long-term investments when auctions fail. Obviously, any reasonable investor would have wanted to know that the Wall Street firms expected auction failures with attendant illiquidity.

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 representing institutional and individual investors in auction-rate securities cases. For further information, please contact us.