Orlando Auction Rate Securities

The state of the Orlando auction rate securities (ARS) market is rightfully causing concern among thousands of investors. Since February 2008, the ARS market has been essentially frozen, unable to maintain liquidity with the periodic auctions that the securities are known for. As auctions continue to fail at an alarming rate, investors are finding few ways to extricate themselves from a market once touted as highly liquid by investment firms and broker-dealers. Those that do manage to convert their holdings to cash do so at a heavy loss; others are barred from accessing their own money by investment banks wary of pending legal action.

Birth of a Crisis – Orlando ARS

Orlando auction rate securities are a type of variable-rate debt; their interest rates are not constant and fluctuate over time. ARS often consist of long-term bonds whose interest rates are reset periodically at auction every 7, 28, or 35 days. By allowing these securities to be bought and sold frequently at auction, the ARS market created liquidity for normally illiquid long-term debt.

Unfortunately for Orlando investors, the auction rate securities market was not nearly as sustainable as it appeared. Though only a few ARS auctions have failed over the last two decades, the successful record of the market was mostly due to the support of the broker-dealers and investment banks who ran the auctions. Traditionally, these broker-dealers chose to act as bidders of last resort, bidding in their own auctions to ensure that there were enough bids to cover all available shares – in short, breathing life and liquidity into the Orlando auction rate securities market.

In February 2008, the system collapsed. Due to the declining credit ratings of ARS bond insurers and heavy losses in the subprime loan market, broker-dealers were unwilling or unable to support the auction rate securities market the way they had in the past. The withdrawal of broker-dealers and investment banks from the Orlando ARS market was devastating; starved for bids, thousands of auctions failed within weeks, locking up the funds of bondholders in illiquid, long-term bonds which were no longer sellable at auction.

Orlando Auction Rate Securities Fraud

None of this had been foreseen by investors for one simple reason – investment firms had designed it to be so. Eager to profit from the $300 billion auction rate securities market, investment firms attracted investors by promising them a relatively high rate of return on securities which were essentially safe, liquid, cash-equivalents. Many of the investors who ‘bought in’ to these promises were dependent on the liquidity of the Orlando auction rate securities market; they needed to be able to convert their holdings to cash at a moment’s notice to pay rent, living expenses, or other time-sensitive bills.

It was not until the market collapsed in early 2008 that investors discovered the key flaw which investment firms had hidden from them. When auctions began to fail, the liquidity of auction rate securities disappeared as well. Unable to access their funds, investors had few options available to them. Though some were able to sell their holdings at a steep discount, others could only watch as their finances suffered and the value of their ARS stocks and bonds continued to fall.

If you have been hurt by the misleading statements made by investment firms, investment banks, or other broker-dealers, call 800.220.9341 to speak with an auction rate securities fraud lawyer about your case. Call today to learn more about how you can hold these companies responsible for their deceptive practices.