Investors in auction rate securities have begun suing issuers of the securities and their executive officers in an effort to recoup damages. An investor who lost money in the auction rate securities market recently filed a federal class action lawsuit against the executive officers of MRU Holdings, Inc., a student loan lender that is now in bankruptcy. The lawsuit alleges that MRU’s CEO, CFO, President and VP failed to disclose material facts about the risk and illiquidity of the student loan-backed auction rate securities that the company sold to investors.
Auction rate securities are debt instruments — in this case portfolios of student loan paper which were pooled and packaged as securities for sale to investors ? with a long term maturity for which the interest rate is regularly reset through a Dutch auction. Such auctions were once held every 7 to 35 days by the brokerage firms which dealt in such securities, but auctions ground to a halt in February 2008 because they were no longer viable investments and broker-dealers who had previously propped up the market by bidding in their own auctions were no longer willing to invest in them either. The result has been that auction rate securities’ holders have been unable to cash out, and investors who were led to believe that they were purchasing a cash equivalent have learned that they essentially have no liquidity at all.
If the subprime crisis were not reason enough, another factor that led to the decline of the auction rate securities’ market was a change in accounting standards in early 2007, when the National Accounting Standards Board (NASB) announced that auction rate securities should be treated as short-term investments rather than cash equivalents on balance sheets. When auction rate securities holdings could no longer be reported as cash, many banks, corporations and institutional investors stopped investing in the securities and the auction rate securities holdings of these investors dropped from $264 billion at the end of 2006 to just $98 billion by the end of 2007. Meanwhile the minimum investment limits for many auction rate securities, which had previously been $250,000, was dropped to $25,000 to allow more individual investors to enter the market. Just as smaller investors entered the auction rate securities market, that market began to disappear. While regulatory settlements have reimbursed many victims of this debacle, there are still thousands of mom-and-pop investors whose life savings are tied up in auction rate securities investments. They remain stranded with no access to their money.
The MRU class action, which involves student loan-backed auction rate securities sold by MRU between July 9, 2007 and September 19, 2008, is only one of many lawsuits being filed by investors who were duped by the sellers of these securities. Craig T. Jones, an attorney with the Atlanta law firm of Page Perry, says “the entire auction rate securities market was a house of cards, but nobody knew it except for the brokerage firms who were hiding the fact that they were propping up the market by manipulating the auction process.” In addition to the fact that the returns were skewed by market manipulation, investors were told that they were purchasing a cash equivalent with the short-term ability to cash out at auction. This was a misrepresentation given that liquidity was wholly dependent upon the success of the auction process. “Anyone who invested in auction rate securities potentially has a claim given the misrepresentations that were made across the board to investors,” says Jones. “Page Perry is keenly interested in auction rate securities litigation and we are continuing to file lawsuits and arbitrations all over the country to recover investors’ losses.”
Given the current financial crisis and the failure of many investment markets due to the subprime mortgage crisis, many disgruntled investors are turning to lawyers to determine whether their losses may have been caused by the unlawful conduct of investment advisors and brokers. The Atlanta law firm of Page Perry represents many investors who are seeking to recover their losses in such cases.