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Caught with Auction Rate Securities

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New York, NYWhat Barbara requested from her broker was a safe liquid alternative to her placing large sums in the bank but what she ended up with was auction rate securities that cannot be cashed out.

"I told my broker that I had quite a bit of cash on hand and was looking to park it," says Barbara. "The bank was charging me too high interest fees in connection with the money market rate they were offering. My broker said no problem; he had some short-term paper that was safe and easily redeemable. No issues. I must've asked him ten different ways about the liquidity and safety, making it clear I needed to be liquid because I pay quarterly tax estimates. He said, 'This short term paper is rolled over every 7-35 days with no problem getting into it or out of it--liquid and safe. I'd get three tax exempt bonds. I thought they would be Triple A underwritten municipal bonds.

Stock BrokerI had the money wired to him, which I'd done on a previous transaction with him. He never sent me anything except a confirmation statement. The term auction rate security was never mentioned nor was any possibility of an auction situation. As far as I was concerned, I was buying a safe, completely liquid alternative to a bank account.

But in late December, I had to make a tax payment and called him to redeem $100,000. I sent him a fax, as he requested, along with the destination of the money wire, and two days later I had it in my account. It was simpler than buying gas."

Barbara had no inkling that anything was going wrong, until the call came.

"On March 14," Barbara continues, "he wanted to know if it was a good time to call, knowing that I'd been in the south taking care of my seriously ill father. And that's when he proceeded to explain that we had a problem. I had no idea he had put me into something that was different from what he'd originally described to me. What he explained was that the securities were bought and sold at auction and held for a substantial amount of time, normally without problem. It was a very orderly process; the securities were easily redeemable--someone sold them, someone else bought them. I myself had just witnessed in December that the pattern had worked quite nicely--or so I thought.

He went on to explain that my two remaining bonds were in that inaccessible category. Their principal was safe but they had become illiquid. This was the first I'd ever heard of this.

I was quite distressed, given my state of mind at that time. My father had been in the hospital 91 days and I was just about exhausted, although I usually have a good level of energy. The broker assured me that his firm was working out different ways to deal with the situation and that they were going to make me their 'number one priority'. I said fine, go deal with it now.

But I kept calling and emailing every two or three days for a couple weeks and eventually I opened a margin account with them and borrowed some money on margin in order to make the tax payments.

That's when I found the lawyer Diane Nygaard on the Lawyers and Settlements site. We sent out a demand letter requesting that the broker buy back the securities, as they should never have been sold under false pretenses. If they don't comply, we will file for arbitration.

This has been a major learning experience for me. As educated as you are, you have to rely on others, like doctors or investment professionals, and even if the broker has the best intentions in the world sometimes they get mislead. But in this case here, they sold one thing that turned out to be completely different. There's no way I would have invested in anything that risked liquidity.

Barbara is a sophisticated New Yorker, who is not only annoyed and enraged about her own situation but for others. "Everything I read," she says, "is investment houses making money hand over fist and get preferential tax treatment but the bulk of the people injured in this $330 billion debacle are individual investors and companies but not the larger institutional places. If they knew about it, didn't they have a fiduciary responsibility to their clients? That's the issue here."

If your auction rate securities have been devalued or marked down, and are considering arbitration or a class action suit, the council of a lawyer will steer you in the direction of your best interest.



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