Auction Rate Securities Buy Backs Leave Out Some Investors

In the past two weeks, several large investment banks have agreed to spend billions to buy back the illiquid <"">auction rate securities they once marketed as safe, cash equivalent investments. But now, it appears that that the buy back offers won’t be much help to some investors.

Auction rate securities are long-term corporate bonds, municipal bonds and preferred stock on which the interest rates are reset periodically based on bids submitted through securities firms. Generally, rates are reset every seven, 14, 28 or 35 days. Because they can be sold during weekly or monthly auctions, banks and brokerages often touted auction rate securities as short-term investments or cash equivalents. Unfortunately, because of the credit crises, the market for auction rate securities crashed. Thousands of investors have been bewildered to find out that the investments they were sold as cash equivalents are now illiquid.

Under pressure from state and federal securities regulators, investment banks have been lining up to buy back some of the auction rate securities they once touted a safe investments. Late last week, Wachovia Corp. reached an agreement with the Securities and Exchange Commission (SEC) to buy back nearly $9 billion worth of auction rate securities. A day earlier, New York Attorney General Andrew Cuomo’s Office announced that JPMorgan Chase & Co. and Morgan Stanley agreed to buy back more than $7 billion in auction-rate securities and pay fines totaling $60 million. The week before, UBS AG and Citigroup said they would redeem about $26 billion of the auction-rate securities and pay fines of a combined $250 million. Merrill Lynch & Co. offered to repurchase about $10 billion of the securities last week and is still in talks with regulators.

Unfortunately, these agreements don’t apply to $160 billion worth of auction rate securities bought through mutual fund firms or brokers that didn’t underwrite the debt. Cuomo told that the auction rate probes so far have focused only on the investment banks that acted as underwriters for the securities because those banks have the largest concentration of clients holding the debt. Citigroup was the market’s biggest underwriter, arranging $55.3 billion in municipal auction rate debt sales between 2000 and 2008, followed by UBS at $42.4 billion.

But Cuomo says his probe of the auction rate mess is far from over. He told that his office has subpoenaed about 25 companies that sold auction rate securities. The investigation has expanded to include Fidelity Investments and Charles Schwab Corp. of San Francisco. Eventually, Cuomo plans to take action against smaller brokers and firms that sold the now-worthless securities.

But smaller brokers and dealers have argued that they are mere victims of the auction rate securities, and that the underwriting investment banks provided the same misleading information to them that was provided to investors. According to, one firm, Oppenheimer Inc., told its clients last week it is working with the Washington-based Regional Bond Dealers Association to press for SEC intervention in the probes so banks that neither underwrote securities nor brokered auctions are not forced to buy back for vehicles.

This entry was posted in Legal News, Stock Fraud. Bookmark the permalink.

© 2005-2016 Parker Waichman LLP ®. All Rights Reserved.