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Howard Rosenfield: Investors Call Off the Dogs-- For Now

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Farmington, CTInvestors caught in the Auction-Rate Securities mess have been promised they'll get their money back, eventually. Thousands of investors were pretty choked earlier this year when they discovered they could not liquidate the Auction-Rate Securities (ARS) they thought were as good as cash in the bank.

Some investors sold the securities at a loss because they needed the money immediately. Others were getting ready to sue some of America's best-known financial institutions for fraud. Then US regulators started putting on the pressure, and institutions like UBS, Merrill Lynch, Wachovia and Lehman Brothers agreed to make amends to investors.

Attorney Howard Rosenfield's entire legal practice is devoted to fighting for investors burned by brokers and financial institutions. He regularly goes to bat for investors whose portfolios become picnic baskets for unscrupulous financial advisors.

One of his clients was getting ready to go after a brokerage firm for selling an ABS, but decided to hold off. "These financial institutions all say they are going to buy back the bonds over the next year," says Rosenfield, "We will just have to wait and see."

Others that want their cash right immediately have been offered loans at low, low interest rates.

Auction-Rate Securities have been around since the 1980s. Traditionally, large mutual funds or corporations dabbled in ARS trades. However, as interest rates declined, more and more retail investors jumped in looking for higher returns.

The asset-back bonds were usually sold to high net worth individuals. The minimum investment was often at least $25,000, sometimes at lot more.

"They weren't even getting the promised return," says Rosenfield. "They were just getting a couple points more than a money market fund. It was 'no great shakes' as an investment, and nobody would have invested in it if they knew the real risks. It was an absolute fraud."

The Auction-Rate bonds were made up of car loans, student loans, securitized credit card debt and residential mortgages.

Oops! Did someone say residential mortgages? Everything worked fine until the sub prime crisis started whipping the heck out of banks. They no longer wanted to participate in Auction-Rate Securities game and the value of those bonds began to take a dive. The market was suddenly flooded with investments nobody wanted to buy, and retail investors found they couldn't liquidate the securities.

The important issue here for investors and maybe for the whole US economy is disclosure. Many folks out there had no idea what they were buying.

"It's insane," says Rosenfield, "Investors must be provided with a piece of paper and have full disclosure of the merits of the investment."

If people had been accurately informed, there is no way a retail investor would have bet their savings on an Auction-Rate Securities, according to Rosenfield.
"If you said to investors, on a scale of one to ten, this is a nine in terms of risk; people would never have put their money there."

Forget the buyer beware philosophy at this point in the ARS goof-up. "The problem is that these bonds are embedded in your company pension plans, and institutional investments," says Rosenfield. "The financial services industry created these products, and now there is no demand for them."

"Now we are trying to inflate our way out of the problem," says Rosenfield.

So what is the bottom-line?

"The merits of the investment were misrepresented," says Rosenfield, "We will find out in the next year or so if people get their money back. It is outrageous that financial firms can get away with this. They shouldn't be able to."

And if investors don't get their money back, well, Howard Rosenfield is just itching to have a go at doing it for them.

Howard M. Rosenfield is an attorney specializing in arbitration and mediation for investors who have a dispute with their broker and/or brokerage firm. He is a member of the Public Investors Arbitration Bar Association (PIABA) and can be contacted by calling 1-800-637-3243 or visit his website at



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