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From Half a Million to Uncertain Worth with Auction Rate Securities

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San Bernardino, CAOn the advice of a respected broker, Lisa invested a sizeable inheritance into auction rate securities, counting on a healthy return when she was ready to cash them out. That day may never come; the $330 billion ARS market is being devalued and the bonds are increasingly hard, if not impossible, to sell.

"My mom died and left me some money and I wanted to make sure I preserved it for my child," says Lisa. "I don't earn a lot of money and have to be careful, so a friend of mine recommended the investment advisor that she has been using for a number of years. She spoke highly of him and so I went to see him. I specified that I wanted my investment to be socially responsible--no nuclear energy or militarism.

Financial Advisor"A couple months later, in January 2008, he came over to my house; it was after work and I was tired. He said he wanted to talk to me about some investments which were equivalent to money market funds where you invest a certain cash reserve in this fund and the interest rate reflected the market, but it wouldn't be locked into a long term rate.

I don't recall him using the word auction rate securities; he just said ARS. To illustrate, he drew two parallel lines, saying 'your investment will stay within these lines'. It was safe. He did not mention they could be frozen indefinitely, nor did he mention they could be liquid. I do remember signing something but didn't get a copy. For that I don't blame him; I should've been more aware of what was happening.

I just trusted him. I mean, my friend had recommended him; his demeanor was not slick at all, he was kind of fatherly and teddy-bearish, very likeable and personable.

So I went along and didn't think that much until the market started to plummet and I called, concerned. I got a letter on March 7th from UBS (the brokerage house that had invested me in the ARS) giving me a heads-up that the ARS had been freezing and I should be aware."

Yet Lisa seemed to be the only one troubled. Her advisor tried to reassure her that the UBS letter was out of date and the market was now fine, when in fact ARS were being devalued as early as the summer of 2007. Lisa got better informed through reading and the Internet, and then proved her determination by leaving the advisor. And when the assistant manager at UBS repeated identical soothing words, adding that he himself had invested in ARS, and wasn't she getting a decent rate of return at 3-4 percent tax free, she decided to sever ties with them also, despite warnings she would be repositioned to second line in order to sell her auction rate securities.

"The question I had asked repeatedly," Lisa says, "was how low can interest go if indeed my investment of $500,000 stayed frozen for 24 years? He didn't know. So I got no answers from UBS with my all-in-one investment tied up in one B-rated bond.

Next, I called the State of California about it because they had sold the bond under their name, California Security, but the State Treasury department said they had nothing to do with the bond; they had only granted tax exempt status to the organization.

The State knew no details either of how far interest rates could fall and advised me to call my broker. By this point the UBS broker was not taking calls and I found out that the broker on the bond was packing the ARS and working with UBS to sell them. When I called Deutsch Bank they wouldn't talk to me because I wasn't an investment broker, just an investor who had bought what they'd packaged.

It was rather frustrating. When I shared this with my friend who had recommended the advisor, she was alarmed and did some investigating of her own. It turned out he had invested her money in hedge funds and lost a lot of it. I think she hired a lawyer.

I moved my account to another financial institution, where I am completely in charge. This is my advice to anyone who inherits money for themselves and their kids: become financially savvy, take charge of your own money and don't trust anyone else.

I have speculated as to why that advisor didn't tell the truth. I can only conjecture that he had to unload them; that perhaps he himself had invested for one of his clients. I never heard directly from him again but he cussed out my friend, told her I was worrying needlessly and that the ARS would unfreeze in a month or two.

You know, I've looked over the bond documents, they're about 5-700 pages long and still, I can't find one sentence addressing what would happen if the market froze and there was not one buyer. If that advisor had mentioned the word auction, I would have asked who is buying and who is selling and what if there are no buyers."

In fact, investors were not provided with documentation on the risks because they are considered secondary market issues which, unlike primary markets, do not require the delivery of offering circulars.

"I've also found out," Lisa says, "that I was sold those bonds just after the company had issued a partial recall, not necessarily for the same lot of bonds since different bonds are issued at different rates and circumstances. But it troubled me that that recall might have been an indication that this was already on shaky ground so they called in the lots to avoid paying high interest."

According to Treasure Strategies, a Chicago consulting firm, many Wall Street heavyweights and major corporations appeared to have jumped ship long before individual investors. At the end of 2006, 80 percent of all auction rate securities were held by institutional investors but that slice fell to 30 percent at the end of 2007. As the holders of these securities sped up the selling, Wall Street firms overseeing the auctions felt great pressure to find buyers to ensure success of the auctions.

"Somehow I feel it was my own fault because I didn't read what I signed," Lisa says. "I trusted him. I feel like I don't want others to be fooled but on the other hand, I don't want to become so obsessed with this that it becomes a burden.

I think I'll wait a couple months. Clearly I'm not the only one; this isn't just an individual problem, there are institutions and states who have invested in ARS so I'm hoping there will be some resolution from Washington."

Experts say it could be a long time before auction rate securities market might be called secure again. Investors who are faced with the devaluation of their ARS should seek legal advice without delay to ensure place in the line-up for claims.


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If you have purchased Auction Rate Securities from a brokerage firm or dealer, please contact a lawyer involved in a possible [Auction Rate Securities Lawsuit] to review your case at no cost or obligation.


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