The auction rate securities market imploded in mid-February, 2008. Auction rate securities are debt instruments most commonly issued by municipalities, governmental agencies, student loan organizations, or closed-end mutual funds as preferred securities. Auction rate securities are long-term bonds for which the interest rate was regularly reset at auctions held every seven, fourteen, twenty-eight, or thirty-five days, depending upon the terms of the offering documents for the securities. Auctions began failing on a widespread basis in February, 2008, and the auction rate securities market never recovered.
Many broker/dealers and brokers marketed auction rate securities to their customers as cash equivalents to be used for cash management purposes, similar to treasury securities, money market securities, or commercial paper. In other words, auction rate securities were marketed as safe, secure, liquid investments. However, such presentations misrepresented the characteristics of auction rate securities, including, among other things, liquidity risk and credit risk. Other facts that brokerage firms and brokers failed to disclose included the substantial financial support that was being provided by brokerage firms in buying up auction rate securities at auctions so that auctions would not fail and the virtual certainty that auctions would fail on a wholesale basis if brokerage firms stopped supplying such financial support.
After the auction rate securities market imploded in February, 2008, state and federal regulators brought enforcement proceedings against a number of large brokerage firms and otherwise pressured major players in the auction rate securities market to repurchase the auction rate securities sold to their customers at par. Most of the major brokerage firms in the auction rate securities market entered into settlement agreements with the regulators and repurchased auction rate securities sold to customers at par. However, some of those settlements did not include customers of securities firms with accounts having a value in excess of $10 million. There were other limitations on customers included in the settlements. Some brokerage firms, including Charles Schwab, ETrade, and Raymond James, have refused to repurchase any auction rate securities from customers.
It has not been almost three years since the failure of the auction rate securities market. Investors still holding auction rate securities need to be aware of the effect that statutes of limitation could have on their auction securities claims. Statutes of limitation vary from state to state and from claim to claim. For example, there may be different statutes of limitation applicable to fraud, breach of fiduciary duty, negligence, and breach of contract claims. Investors still holding illiquid auction rate securities need to be aware that the statute of limitations clock is ticking and that action by investors through filing of an arbitration proceeding may well be necessary to recover their frozen funds. If investors do not know what statute of limitation time periods apply to their claims, they should consult with a securities arbitration lawyer as soon as possible.
Johnson, Pope, Bokor, Ruppel & Burns, LLP, the law firm with which Scott Ilgenfritz has been affiliated for 27 years, has offices in Tampa and Clearwater, Florida. The firm’s attorneys have in excess of 60 years experience in representing institutional and individual investors in securities-related litigation and arbitration claims across the country.