Wall Street Misled Issuers of Auction-Rate Securities Too


The State of Louisiana and the Louisiana Stadium and Exposition District, the issuer of auction-rate securities, (hereinafter referred to as the”Issuer”) recently filed suit against the Financial Guaranty Insurance Company (“FGIC”) and Merrill Lynch related to the issuance of over $238,000,000 in auction-rate-securities.

The Issuer alleges that Merrill Lynch mislead it by recommending the issuance of the auction-rate-securities and the purchase of a financial guaranty insurance contract at a time when Merrill Lynch was well aware of the problems in the auction-rate securities market. The Issuer contends that Merrill Lynch was supporting the auctions and knew they would fail if they did not continue to do so and that the company was misleading the “[Issuer] and the investing public about the liquidity of the [auction-rate-securities] (and similar securities) in order to clear auctions’.. and was suppressing negative analysis and opinion regarding the securities.” The auction-rate securities market collapsed in February of 2008. In April 2008, in order to stem its losses, the State repurchased the auction-rate-securities.

The Issuer also seeks a return of the 13 million dollars paid to the monoline insurer of the bonds, FGIC, based upon allegations that that both Merrill Lynch and the FGIC were aware of the negative financial conditions faced by the insurer. According to the Complaint, the Issuer purchased the insurance based upon recommendations from Merrill Lynch to ensure that the Bonds were creditworthy and marketable and to reduce interest rates payable on the auction-rate-securities. In essence, through the insurance contract, the issuer of the bonds would purchase the credit worthiness of the insurer.

However, it appears that all did not go as advertised. The Issuer contends that shortly after the sale of the auction-rate-securities, the FGIC’s credit rating was substantially lowered as a result of the insurer’s substantial exposure to losses in the sub-prime area. As a result of the downgrading of the FGIC, the stated purpose for entering into the insurance contract failed and almost immediately the “market perceived the auction-rate-securities as being more risky, and as a result “demanded a higher interest rate to hold the [auction-rate-securities].” Shortly thereafter, according to the Complaint, the auctions on the Issuer’s securities failed causing the auction-rate securities to revert to the “Penalty” rate, a rate 3 to 4 times higher than had been the prevailing rate.

This nightmare experience with auction-rate securities is by no means an isolated occurrence. With the substantial losses incurred by issuers of auction-rate securities, those who believe they may have been mislead into issuing these types of securities should be encouraged to consult attorneys with expertise in the matter to discuss their case and options.

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, and have aided clients who have been the victims of financial adviser abuse, unsuitable recommendations, and scams. Page Perry’s attorneys are actively involved in counseling issuers of securities as well as institutional and individual investors regarding their investment problems. For further information, please contact us.