Tampa Auction Rate Securities

Tampa auction rate securities (ARS) investors were caught by surprise when broker-dealers withdrew from the market in early 2008, setting off a series of auction failures which eventually caused the entire market to freeze up. Countless investors who thought they were buying safe, liquid stocks and bonds found themselves in financial trouble after discovering that their auction rate securities were all but unsellable on the defunct market.

How the Tampa Auction Rate Securities Crisis Developed

Auction rate securities are long-term bonds with interest rates that are reset every 7, 28, or 35 days by a Dutch auction system. At these Tampa ARS auctions, prospective buyers submit bids proposing to buy a number of shares at a certain interest rate. After all bids are tallied up and arranged by interest rate, a clearing rate, or the lowest interest rate at which there are enough bids to cover all available securities, is determined. This clearing rate becomes the new interest rate for the period until the next auction.

By implementing this auction-rate system, investment firms created an artificial liquidity for long-term bonds that would normally be highly illiquid. They aggressively marketed this liquidity to Tamp auction rate securities investors, claiming that ARS investments were safe, profitable, and virtually equivalent to cash, since investors could, in theory, sell their holdings at almost a moment’s notice.

However, in 2008, when broker-dealers stopped bidding in their own auctions, ARS auctions around the country began to fail for lack of bids. Unable to determine valid clearing rates in the vast majority of its auctions, the entire $300 billion market ground to a halt, freezing the funds of hundreds of Tampa investors.

Tampa Auction Rate Securities Fraud

The failure of the Tampa auction rate securities was yet another example of the willingness of the finance and securities industry to take advantage of investors in order to increase their own profits. After years of assuring investors that the auction rate market represented safe, liquid, cash-equivalent investments, investment firms immediately disclaimed responsibility after the market froze up, locking investors’ funds in illiquid holdings for which not even a secondary market had yet been established.

Yet, when Tampa investors attempted to take matters into their own hands and sell their auction rate securities at a loss in an effort to create such a secondary market, they found themselves stonewalled at every turn by investment banks who refused them access to their own money under the pretense of providing a safeguard against inefficient transactions.

In reality, these banks were once again acting in self-interest. By barring investors from exiting the ARS market at a loss, they could keep them from establishing concrete damages to use against investment firms in arbitration claims or lawsuits.

If you have been hurt by the deceptive tactics of investment firms and broker-dealers, contact an auction rate securities fraud lawyer at 800.220.9341 today.