Auction Rate Securities

Auction rate securities are fixed-income debt instruments for which the interest rate is regularly reset through an auction process. Auction rate securities were marketed as liquid, safe, and cash equivalent investments.  However, many broker-dealer firms failed to disclose that the liquidity was entirely dependent upon the success of the auction process.

Auctions were once held every 7 to 35 days by the brokerage firms that dealt in auction rate securities, but because of the deteriorating mortgage lending crisis and its effect upon the financial markets, auction rate securities auctions ground to a halt in February 2008.  The failed auctions resulted investors losing liquidity and being unable to sell or if they were able to sell, the investor incurred a large loss.

Many investors who lost money when the auction rate securities market collapsed in 2008 have been made whole by regulatory settlements and redemptions.  However, other investors have not have recovered and are still holding on to illiquid securities.

It has been almost three years since the collapse of the market.  Investors who are still holding auction rate securities should be aware that the statute of limitations may bar claims as untimely.  Most cases involving auction rate securities can be brought under multiple legal theories such as  fraud, negligent misrepresentation, negligence, breach of fiduciary duty, and breach of contract. While the statute of limitations may bar one claim, there may still be time to file a claim under other theories.

Investing in fixed income oriented investments, like auction rate securities, has risks that should be explained to the investor.  Just because an account or an individual investment has decreased in value does not necessarily mean that a financial adviser has acted inappropriately.  At Crary Buchanan, we provide consultations concerning negligence arising from improper financial advice.  We invite you to call us to discuss your rights and remedies under the law.

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