Fort Lauderdale Auction Rate Securities

The February collapse of the auction rate securities (ARS) market continues to affect Fort Lauderdale, FL investors even today. As hundreds of ARS auctions failed in the wake of broker-dealers' refusal to take up their traditional role of bidding in their own auctions, investors in Ft. Lauderdale suddenly discovered that the investments they had counted on being safe and liquid cash equivalents had reverted to being long-term bonds which were almost completely unsellable.

Anatomy of Ft. Lauderdale Auction Rate Securities

Auction rate securities are a type of variable-rate debt; at their core they are long-term bonds and preferred stock with interest rates or dividends which are reset every 7, 28, or 35 days at auction. These auctions, which also serve as periodic marketplaces for Fort Lauderdale auction rate securities investors, are responsible for creating the liquidity so important to ARS bondholders.

At auction, buyers submit bids to purchase a set amount of Ft. Lauderdale auction rate securities at a certain minimum interest rate. After all bids are tallied, the issue is sold at the lowest interest rate at which there are sufficient bids to cover all available shares. This interest rate, known as the clearing rate, is paid to bondholders until the next auction.

Unfortunately, one fatal flaw exists in the liquidity created by this auction system – liquidity is only present while the market is attractive to both bondholders and potential buyers. When the market collapsed in February 2008, investors were suddenly left holding illiquid assets which were a far cry from the 'cash equivalents' they thought they were buying.

Broker-Dealers and the Fort Lauderdale ARS Market Crash

Over the twenty-year history of auction rate securities, the broker-dealers who ran Ft. Lauderdale ARS auctions were also responsible for preventing auction failure by supplying bids to their own auctions and ensuring that all available shares were covered. This system, while effective, meant that the success or failure of the entire auction rate market was essentially dependent on the actions of broker-dealers. This fact, which was conveniently hidden from investors by overzealous investment brokerage firms, was the root cause of the February market collapse.

Because of financial pressures placed on broker-dealers by the credit crunch and subprime loan crisis, dozens of major broker-dealers and investment banks decided in early 2008 to pull their funds out of ARS auctions in Ft. Lauderdale and elsewhere. Yet though these firms knew of the impending auction rate trouble, they continued to sell securities to unwitting investors for months.

In February, when broker-dealers abruptly stopped filling their traditional roles of bidders-of-last-resort, thousands of auctions failed for want of bids. Without buyer demand, the market locked up, freezing the funds of Fort Lauderdale auction rate securities investors.

Liability for Ft. Lauderdale ARS Losses

In their eagerness to make money from the $300 billion auction rate securities market, investment firms, brokers, and banks neglected to tell Fort. Lauderdale investors about the true nature of the securities they were purchasing. If you have been hurt by these fraudulent practices, contact an auction rate securities lawyer to hold investment firms responsible for their conduct. Call 800.220.9341 today to learn more.