January 22, 2009 / Law Alert

Auction Rate Securities: Opportunities for Corporate Investors to Recover

The collapse of the market for auction rate securities ("ARS") left investors who thought they had a safe, liquid investment with illiquid securities. While there have been a number of government settlements with sellers of ARS, the agreements have focused on providing a recovery for small investors, leaving corporate and institutional purchasers of these securities to pursue their own remedies. Nevertheless, there are meaningful opportunities for corporate purchasers of these securities to recover their investments. Prompt action is required.

Auction rate securities, a type of derivative product whose interest rates that were set at periodic auctions, were marketed as cash equivalents that provided a safe, liquid investment with a good rate of return. The ARS market crashed in February 2008 and ARS investors were left with illiquid investments and no immediate way to access their funds. Beginning in August 2008, the SEC, the New York Attorney General, and a number of other states entered into settlements with banks and brokers who sold auction rate securities. Those settlements focused on small retail investors and offered little assistance to corporate and institutional investors.

Corporate and institutional investors do have options for recovering their investment, despite being largely left out of the government settlements. These options include: (1) holding their position and redeeming the auction rate securities on the maturity date; (2) removing the underlying security from the vehicle into which it was packaged as an auction rate security and trading it; (3) monitoring these various pending class actions and, at the time of settlement, determining whether to participate or opt out; (4) filing their own private action against the bank or broker who sold the security and perhaps others under federal or state law or commencing arbitration if appropriate; and (5) for those who acquired auction rate securities from Lehman, carefully evaluating whether they should file a claim in Lehman bankruptcy proceeding.