Missouri Auction Rate Securities

Auction rate securities investors in Missouri and around the United States are scrambling to cope as the collapse of the $350 billion market in February 2008 froze the invested funds of thousands. As the number of failed ARS auctions soars beyond anything seen since the idea was conceived in 1984, investigations are being launched into the role of investment firms in exposing their unsuspecting clients to this economic crisis.

Missouri Auction Rate Securities Basics

Auction rate securities (ARS) are long-term financial obligations which carry some of the flexibility of short-term debts. Essentially, they are municipal or corporate bonds or preferred stock with interest rates which are reset at predetermined intervals, usually 7, 28, or 35 days. At each interval, an auction is held where a Dutch auction bidding system determines what the interest rate will be for the next interval.

During an ARS auction, investors submit bids to buy a certain number of available shares at a certain interest rate. The clearing rate, or the lowest interest rate at which all available shares can be sold to buyers, becomes the set interest rate for the next period, after which it will once again be reset. This short cycle is the key to the nature of Missouri auction rate securities investments. Because auctions are held so frequently, auction rate securities were promoted by investment firms as safe and liquid variable-rate debt instruments.

Failure and Fraud in Missouri Auction Rate Securities

Liquidity in finance is a measure of how quickly an asset or investment can be sold (i.e., converted into money), and how effectively that investment will maintain its value after the transaction. Investment firms, eager to take part in the burgeoning Missouri auction rate securities market, played up the liquidity of these investments to convince clients to purchase shares.

What many investment firms conspicuously failed to mention, however, was that the liquidity of auction rate securities exists only as long as the ARS market itself thrives. That is, if ARS auctions go smoothly and transactions are easily completed at short intervals, then the auction rate securities maintain their liquidity. If, on the other hand, a large number of ARS auctions fail (as in 2008), auction rate securities bonds and stocks become unsellable and almost entirely lose their liquidity.

To many investors, investment firms were committing nothing short of fraud in their misleading promotion of auction rate securities. In fact, many shares were sold to investors even when they were inconsistent with the investor's individual goals.

As Missouri investors begin to understand the full effects of the ARS market collapse, many are taking aim at the deceptive practices of their investment brokers. If you live in Missouri and were tricked by an investment firm's misleading promotion of auction rate securities, call 800.220.9341 to speak with an auction rate securities fraud lawyer today.