California Auction Rate Securities
California auction rate securities (ARS) are another casualty of the faltering United States economy. Once promoted as safe, liquid, short-term alternatives to money market investments, auction rate securities have quickly become a financial nightmare for California bondholders. An unprecedented rate of ARS auction failure in early 2008 has shredded the potential liquidity of auction rate securities and left innumerable investors helpless in its wake.
Mechanics of California Auction Rate Securities
Purportedly invented in 1984, auction rate securities quickly became a popular investment market, with bonds and shares being issued by governments, corporations, and non-profits alike. Major investment firms aggressively promoted California auction rate securities to investors, representing them as both low-risk and easily convertible.
In general terms, auction rate securities are bonds or preferred stock with long maturity periods but interest rates which change at short, regular intervals typically set between 7 and 35 days. A Dutch auction held between these intervals determines the new interest rate through a bidding system where interested buyers offer bids to buy a certain number of shares at a certain interest rate. The lowest interest rate at which all available shares can be sold is known as the clearing rate, and becomes the applicable interest rate until the next auction.
California Auction Rate Securities Fraud
The collapse of the auction rate securities market in California and elsewhere early in 2008 has sparked a furious outcry over the unscrupulous practices of the investment firms which sold these securities to unsuspecting clients. A number of complaints, investigations, and lawsuits have claimed that investment firms' marketing strategies falsely represented the qualities and benefits of California auction rate securities. In particular, investors, investigators, and attorneys have taken aim at the property of liquidity.
In finance, liquidity is a measure of how easily an asset or investment can be converted into money. The more easily an investment can be exchanged for cash, and the less value is lost during such a transaction, the higher its liquidity. Investors typically value liquidity as a way to increase the flexibility and safety of any given asset.
Major investment consulting firms frequently used the liquidity of auction rate securities as a key selling point to their clients in California. Unfortunately for these clients, the supposed liquidity of California auction rate securities was somewhat of an illusion. When the ARS market collapsed and auctions began to fail, they quickly discovered that their "liquid" investments were, in fact, dependent on the state of the market. As the market crumbled and broker-dealers began pulling out their resources, investors suddenly found themselves holding thousands of dollars in unsellable auction rate securities -- assets that were essentially frozen. Because of the misrepresentation perpetrated by investment firms, many of these investors were completely unaware that such a thing could happen, making the shock all the more painful.
Countless investors in California and around the country are suffering as a result of the auction rate securities market collapse. If you are a victim of the fraudulent and aggressive marketing of investment firms, you may have a case against them in a court of law. Contact an
auction rate securities fraud attorney at 800.220.9341 today for more information about auction rate securities in: