Jacksonville Auction Rate Securities

Since February 2008, hundreds of investors in Jacksonville, FL have been unable to access the funds they invested in auction rate securities (ARS). Despite assurances from investment brokers that the securities were safe, liquid cash equivalents, the ARS market froze up in February, leaving investors trapped and frustrated. The stonewalling tactics employed by investment firms and banks only served to worsen the situation, stoking the anger of Jacksonville investors who had been deceived by the firms’ fraudulent tactics.

Background of Jacksonville Auction Rate Securities

Jacksonville auction rate securities are a type of debt instrument which combine aspects of both long-term and short-term debt. They are essentially long-term municipal or corporate bonds and preferred stock whose interest rates and dividends are reset periodically by a Dutch auction system. These ARS auctions are generally held frequently, in cycles of 7, 28, or 35 days, and allow investors and bondholders to buy and sell these long-term bonds.

At auction, prospective buyers submit bids to buy a certain number of shares at a certain interest rate. The lowest interest rate at which there are enough bids to enable the purchase of all shares which are available for sale is known as the clearing rate, and becomes the active interest rate until the next auction.

Because of this fluctuating interest rate and the fact that ARS auctions were held so often, investment firms often told their clients that auction rate securities were highly liquid investments which could be converted back into cash at virtually any time. What they neglected to mention was that the liquidity of Jacksonville auction rate securities was entirely dependent on the success of the auction system.

Auction Failure and Jacksonville ARS Investors

The ARS auction system was not foolproof; an auction could only be successfully completed if a clearing rate could be reached. If supply exceeded demand, i.e., if there were more shares for sale than buyers wanted to purchase, the entire auction would be declared a failure. To prevent failures from occurring, investment banks would usually bid in their own auctions and purchase any unwanted shares – a practice which was largely successful for two decades.

Unfortunately, the necessity of such bids of last resort meant that the entire $300 billion auction rate securities market was heavily dependent on the support of investment banks and other broker-dealers. In February 2008, this dependency became the market’s downfall. Broker-dealers, worried about the credit ratings of bond insurers following the credit crunch and subprime loan crisis, were unwilling or unable to supply bids in Jacksonville ARS auctions. As one might expect, the sudden dearth of bids led to thousands of auctions failing, and the collapse of the entire market.

Recent events have begun to expose the shady dealings and fraudulent practices of the financial industry. While investment firms and broker-dealers continue to make millions, Jacksonville investors like you are still waiting for access to their own money. If you have been hurt by the deceptive strategies employed by these corporations, contact an auction rate securities lawyer today at 800.220.9341 to discuss your legal options.