San Diego Auction Rate Securities

For years, major investment firms have advised their clients to buy into the San Diego auction rate securities (ARS) market, convincing them that the ARS market was a safe, profitable, and liquid way to invest money. In February 2008, after major broker-dealer firms pulled out of the market, ARS auctions began to fail at an alarming rate. Unable to find buyers for their supposedly liquid holdings, many San Diego investors have been trapped in the auction rate securities market with no way out.

Nor are investment firms stepping up to address the problem. Though a few efforts have been made to refinance auction rate debt held in municipal bonds, only a fraction of the $300 billion auction rate securities market is truly being affected. To make matters worse, both investment firms and broker-dealers are denying investors access to their own funds in an attempt to deter arbitration claims. For San Diego auction rate securities investors, the outlook is anything but rosy.

Overview of the San Diego ARS Market

Auction rate securities were first introduced in 1988, and became popular for several reasons. Auction rate securities investors could typically expect a higher rate of return than most money-market investments, while auction rate debt issuers could enjoy low financing costs and increased debt flexibility.

How were these benefits achieved? Auction rate securities are basically long-term bonds whose auction rates are reset periodically at auction. During this process, buyers submit bids to purchase auction rate debt at a certain interest rate. After the clearing rate (the lowest interest rate at which all available shares can be sold) is determined, buyers who bid at or below the clearing rate receive shares; those who bid above receive nothing.

San Diego Auction Rate Securities Fraud

By giving bondholders frequent chances to sell their holdings, the San Diego auction rate system created liquidity in a market of long-term debt – but only temporarily. Investment firms who used liquidity as a major selling point conveniently failed to mention that the liquidity of auction rate securities was entirely dependent on the success of the auction rate system. As long as auctions could be successfully held, bondholders did indeed enjoy the liquidity and flexibility they were promised. However, when auctions began to fail – that is, at the very moment that most investors would want to take advantage of liquidity to trade out of the market – that liquidity disappeared.

To many investors, the deceptive strategies used by investment firms to sell auction rate securities were nothing better than fraud. Complaints by investors have resulted in investigations by several government agencies, over a dozen potential class-action lawsuits, and countless arbitration claims.

To learn more about how you can hold investment firms and broker-dealers responsible for their misconduct, contact an auction rate securities fraud lawyer at 800.220.9341 today.