The state of Virginia has sued Stifel, Nicolaus & Company on behalf of investors in the state who purchased over $8 million worth of auction rate securities from the firm. This is the latest of many similar suits which are being filed by all over the country on behalf of investors who were misled about the risk and liquidity of auction rate securities. These securities were routinely misrepresented as conservative cash equivalents.
Auction rate securities are debt instruments ? usually backed by municipalities, closed in mutual funds or portfolios of student loan debt, 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 complex auction process. Such auctions were once held every 7 to 35 days by the brokerage firms which dealt in such securities, but the 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 either. The result has been that many holders of auction rate securities 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.
One factor which contributed 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 treated as available cash on balance sheets. When auction rate securities holdings could no longer be reported as cash, corporate and institutional investments in the auction rate market dropped precipitiously. Meanwhile the minimum investment limits for many auction rate funds, which had previously been $250,000, were dropped to $25,000 to allow more individual investors to enter the market. Just as smaller investors entered the auction rate securities market, the market began to disappear. Now there are thousands of mom-and-pop investors whose life savings are tied up in auction rate investments that have left them stranded with no access to their money, at least not for the time being. According to one source, the collapse of the auction rate market left investors holding as much as $330 billion which they are presently unable to access.
Craig T. Jones, an attorney with the Atlanta law firm of Page Perry, says that “the entire auction rate securities market was a house of cards, but nobody knew it except for the brokers 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 cash equivalents; 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 lawsuit given the misrepresentations that were made across the board to investors,” says Jones. Page Perry is filing lawsuits and arbitrations all over the country to recover investors’ losses from auction rate securities and other fraudulent investments tied to the subprime mortgage crisis. “If you are an investor who was misled, ” says Jones, “we would be happy to review your portfolio and help you make an informed decision about your legal options.”