Federal Prosecutors Target Auction Rate Securities Abuses


The activities of two former Credit Suisse brokers in the $300 billion auction rate securities market has become the focus of a federal criminal investigation. For many years, auction rate securities were sold as cash equivalents or money market alternatives. The auction rate securities market allowed companies to issue long-term debt obligations while paying short-term interest rates (which are historically lower). Earlier this year, the auction rate securities market virtually ceased to exist when all of the major brokerage firms simultaneously withdrew their support for such markets and auctions failed. As a result, auction rate securities were rendered illiquid and thousands of investors have lost money. Recently, serious questions have been raised about whether enough information was disclosed to investors about the risks and possible consequences of investment in these securities.

Until recently, most cases involving auction rate securities have involved civil suits. However, two former Credit Suisse brokers are under investigation by Federal prosecutors for criminal activities in auction rate securities. They are being investigated about whether they lied to investors about where the investors’ money was being placed. The investors were allegedly told that they were investing in student loan auction rate securities, and that the securities were like money market funds. Instead, the investors were apparently sold much riskier auction rate securities issued by structured financed vehicles. The investors have experienced significant losses as a result.

The Wall Street Journal quoted Christopher Clark, a former federal prosecutor, as making the following observation: “You can’t tell a half-truth or lie about the nature of an investment ? that’s criminal securities fraud ‘ It’s fairly common ground for criminal prosecution because it goes to the heart of confidence in the markets; brokers can’t lie about what you’re giving them money to buy.”

Right now, there are $6 to $10 billion worth of auction rate securities issued by CDO’s, which are backed by subprime mortgages or similar exotic investments. The values of these CDO’s have decreased substantially due to the subprime mortgage and credit crises. The auctions for these securities began failing last August. Are more criminal probes ahead?

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.