Auction Rate Securities Attorneys — Bakhtiari & Harrison
What are auction rate securities?
Auction rate securities (ARS) are long-term debt instruments — typically municipal bonds, corporate bonds, or preferred stock — whose interest rates are reset periodically through a Dutch auction process. The auctions, typically held every 7, 28, or 35 days, allowed investors to buy or sell their holdings at each auction date, creating the appearance of short-term liquidity in what were actually long-term instruments.
ARS were marketed to retail and institutional investors as highly liquid, safe alternatives to money market funds — offering slightly higher yields while purportedly maintaining the same liquidity. This representation was fundamentally false. ARS liquidity depended entirely on the continuous participation of new bidders at each auction. When bidder demand fell below the supply of securities being offered, the auction failed — and holders were locked in at the maximum interest rate specified in the indenture, unable to sell their holdings until a new auction succeeded.
The 2008 ARS market collapse
In February 2008, the ARS market collapsed virtually overnight. Major broker-dealers — including Citigroup, UBS, Merrill Lynch, Wachovia, and others — had been propping up auctions by placing their own bids to prevent failures. When those broker-dealers withdrew their support in the face of the broader financial crisis, auctions failed en masse. Billions of dollars of investor funds were frozen in instruments that had been sold as liquid cash equivalents.
The SEC and FINRA subsequently brought enforcement actions against virtually every major ARS underwriter and dealer, resulting in buyback programs that returned billions to institutional investors. Many retail investors — particularly those at smaller broker-dealers not covered by the major settlement programs — remain unable to access their frozen ARS holdings.
ARS misconduct claims
- Misrepresentation as cash equivalents: the core ARS claim is that broker-dealers marketed ARS as liquid, safe alternatives to money market funds while knowing that the auction market’s liquidity was supported only by broker-dealer bids — and that the failure of any major auction would trigger a cascade of failures across the market.
- Failure to disclose auction failure risk: broker-dealers had specific knowledge of increasing auction failures in the months before the February 2008 collapse but continued marketing ARS as liquid to retail investors without disclosing the deteriorating auction market conditions.
- Unsuitable recommendations: recommending ARS for investors who needed short-term liquidity — for operating capital, business expenses, or personal cash needs — was unsuitable given the instruments’ true long-term nature.
- Failure to participate in buyback programs: some broker-dealers settled regulatory actions and agreed to buy back ARS from their customers. Customers of dealers that settled but failed to implement their buyback obligations may have additional claims.
Frequently asked questions — auction rate securities
My broker-dealer settled with the SEC — why haven’t I received a buyback?
Settlement agreements between regulators and broker-dealers specify which customers are entitled to buybacks. Some settlements covered only certain account types or customer categories. If you believe your broker-dealer settled but you were not included in the buyback, Bakhtiari & Harrison can evaluate whether you have a separate claim for the firm’s failure to honor its obligations.
Can I still recover if I eventually received some of my ARS funds back?
Yes — if you did not receive the full principal amount, or if you suffered consequential damages from the period your funds were frozen (missed business opportunities, penalty fees on other obligations, interest income lost), those damages may be recoverable even if you eventually received partial or full principal repayment.
For a full overview of the firm’s investment product failure practice, visit the Product Failure page.
Contact a auction rate securities attorney — free consultation
Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys evaluate every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.
Investor cases are handled on a contingency fee basis — no recovery, no fee.
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