Los Angeles Auction Rate Securities

The collapse of the Los Angeles auction rate securities (ARS) market in February 2008 has left countless investors unable to access the funds they invested in what investment firms assured them were safe, liquid assets. With the crash's repercussions hurting both bondholders and bond issuers, the practices of broker-dealers and investment firms are coming under scrutiny from government agencies and private citizens alike.

As ARS auctions continue to fail, angry investors, frustrated by the indifferent stonewalling of the banks, broker-dealers, and investments they trusted with their money, are turning to the justice system to resolve the situation.

The Failure of Los Angeles Auction Rate Securities

Los Angeles auction rate securities are basically long-term debt obligations, such as bonds or preferred stock, which have interest rates that are periodically reset at auction, at which bondholders can choose to sell their holdings to investors. These auctions, from which auction rate securities take their name, usually take place in intervals of 7, 28, or 35 days. The short intervals between auctions allow auction rate bonds to achieve a sort of liquidity, despite their long maturity periods.

Unfortunately, what many investors did not realize, and investment firms did not explain, was that the liquidity of Los Angeles auction rate securities was created by the auction system itself, and was entirely dependent on sufficient market demand for ARS stocks and bonds. If an ARS auction does not receive enough bids to cover all available shares, the clearing rate cannot be determined, and the auction fails. When broker-dealers pulled out of the ARS market in February 2008 and set off a cascade of failed auctions, bondholders abruptly discovered that, without frequent, successful auctions, the ARS holdings they owned reverted back to being long-term investments with virtually no liquidity at all.

Acceptable Risk or Auction Rate Fraud?

In the years before the ARS market crash, investment firms were eager to profit from the popularity of the $300 billion market. They embarked on aggressive marketing campaigns, convincing many investors that putting money into Los Angeles auction rate securities was profitable and virtually risk free, due to the liquidity of the investment.

However, after the auction rate securities market collapsed, and concern among investors swelled, and Los Angeles investors began to demand access to their funds, investment firms and broker-dealers responded with stonewalling tactics, claiming that they were not responsible for the risk associated with investing money, and that investors should legally bear the burden of risk. Unable to reclaim their own money, bondholders could only watch as broker-dealers continued to profit from the fees they charged to run failed auction after failed auction.

Despite the false and misleading promises investment firms made to their own customers, they are now unwilling to take appropriate steps to alleviate the auction rate securities crisis. If you have been deceived by an investment firm into buying Los Angeles auction rate securities, an auction rate securities lawyer can help you force these companies into accepting responsibility for their actions. Call 800.220.9341 today to learn more.