"I purchased auction rate securities from Schwab & Company after they solicited me in November 2007," David says. "The people who sold me the securities indicated to me that these type of securities, which were Jefferson County Alabama Sewer System Bonds, were insured and equivalent in liquidity to a money market fund.
"With that assurance and those representations, I purchased them in the amount of $250,000. As it has turned out, the person or persons at Schwab who sold me these securities later informed me that the auction—which I don't know much about—failed and the bonds were illiquid, meaning I could not sell them as was represented. To this day, I have not received any of my principle.
"I was told they were insured but there's nothing I can do. I've heard that there may be a website for a secondary market for the securities, but they are offering very little. Schwab won't do anything at all. They have offered me nothing for the securities.
"This was my first time, ever, with auction rate securities. People should stay away from them. The brokers lie. I've lost $250,000."
Problems with auction rate securities are far-reaching, with some companies now ordered to pay fines related to the marketing of those securities. Recently, Wachovia Securities was ordered to pay a $50 million fine for misleading investors about the safety of auction rate securities. In addition to that, the company said it would pay over $8.5 billion to investors who lost money in the auction rate securities market. According to the Texas Securities Commissioner, Wachovia told investors that they could access their money at any time, when in truth, the securities were long-term bonds that could only be sold via auction. When the auctions failed, there was no way to access the money.
Meanwhile, Bank of America faces a lawsuit filed by CareerBuilder LLC, alleging it has $32.5 million in auction rate securities that it cannot sell because the market is frozen. The lawsuit alleges that CareerBuilder, an online job-search company, was told that the securities were safe and highly liquid when they were not. CareerBuilder is asking the court to nullify the original transaction and return the money invested in the auction rate securities.
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Investors in auction rate securities are therefore losing out twice: first, because they cannot access their money and second, because they lose out on other opportunities and often face penalties for their inability to close on financial transactions.
Bank of America did buy back auction rate securities from investors who had accounts that were less than $15 million ($25 million for charities). However, investors with more than $15 million were left out of the settlements and have still been unable to access their money.
These investors are now filing lawsuits and arbitrations against the financial firms that sold them the auction rate securities, alleging they were misled about the safety and liquidity about those investments.