Large Investors Who Have Sustained Losses on Auction Rate Securities Investments Need to Take Action


While many investors who lost money when the auction rate securities market collapsed in 2008 have now been made whole by regulatory settlements and redemptions, others have not been as fortunate and are still holding on to illiquid securities. Because regulatory settlements focused on the worst offenders in the industry, not all firms that sold auction rate securities were included in the settlements. Furthermore, most of the regulatory settlements have only benefited smaller investors leaving many corporate, institutional and other investors to fend for themselves. According to Craig T. Jones of Page Perry in Atlanta whose firm has represented many large investors in auction rate securities cases, “we are continuing to file arbitration claims for investors nearly 3 years after the market failure. A lot of investors have patiently waited to be made whole, and now that the statutes of limitations are starting to run out, they are realizing that they must take action in order to protect themselves legally.”

Auction rate securities are fixed-income debt instruments ? typically municipal bonds, preferred shares of closed end mutual funds, or asset-backed securities collateralized by student loans or mortgages ? for which the interest rate is regularly reset through an auction process. Auction rate securities were once routinely marketed as safe, cash equivalents that were highly liquid, but the broker-dealers who sold them failed to disclose that liquidity was entirely dependent upon the success of the auction process, which was being artificially supported by the undisclosed participation of brokers bidding in auctions where they had an interest. Auctions were once held every 7 to 35 days by the brokerage firms that dealt in auction rate securities, but because of the subprime lending crisis and its effect upon the financial markets, auction rate securities 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 inclined to invest in them. The result has been that many auction rate securities investors have been unable to cash out even at a loss, and investors who were led to believe that they were purchasing a liquid cash equivalent ended up with no liquidity at all. Others have been forced to take steep losses by selling at a discount in a limited secondary market.

Because it has been almost three years since the collapse of the market, investors who are still holding illiquid auction rate securities need to be concerned about the statute of limitations. In some states, it may already be too late. Each state has its own statutes of limitations that vary according to the type of claim being brought, but most cases involving auction rate securities can be brought under multiple legal theories?for example, fraud, negligent misrepresentation, negligence, breach of fiduciary duty, and breach of contract. Typically, statutes of limitations vary from state to state depending on the type of claim. If the statute has expired for a fraud claim, there may still be time to file a claim for breach of contract or vice versa. It is important to note that there may be more than one state’s law that applies to a given case. “If you still do not have liquidity on your auction rate securities,” says Jones, “you may never get it and you will probably never recoup any losses unless you take legal action. If you do not know what legal deadlines apply to your situation, you need to immediately consult a lawyer who handles these kinds of cases.”

There have been some significant arbitration awards in auction rate securities cases for both individual and corporate investors, and many more cases have settled before hearing.

Page Perry, is based in Atlanta but represents investors in securities arbitrations and lawsuits all over the country.