Secrecy, Manipulation Mar Auction-Rate Securities
Auction-rate securities, promoted as “safe as cash” investments, are marred by a history of manipulation, Bloomberg News reports.
In “Auction-Rate Collapse Costs Taxpayers $1.65 Billion,” journalists Michael Quint and Darrell Preston note that over the course of 24 years, auction-rate securities grew into a $330 billion business.
But a pattern of industry secrecy and manipulation has emerged.
In 1995, the Securities and Exchange Commission alleged that Lehman Brothers manipulated 13 auction bids and prevented two auctions from failing. Lehman Brothers paid $850,000 but did not admit liability.
Then in 2004, the SEC once again investigated allegations of market manipulation. Eventually, 15 dealers who did not admit liability were fined $13 million for manipulating the environment.
But even as the SEC fined broker dealers, it never insisted that the risk of unsuccessful auctions be listed as a material event requiring disclosure to investors, Bloomberg News explains. And the dealers association refused to push for greater disclosure.
Manipulation and the lack of regulation led unsuspecting investors to believe the claims that auction-rate securities were safe.
So in mid-February, when the auctions failed, surprised investors discovered that their investments were frozen.
If you hold auction-rate securities, contact Carey & Danis.
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