Auction Rate Securities Settlement as Anniversary of Market Failure Nears

Raleigh, NCYet another bank has agreed to buy back auction rate securities from investors who say they were misled about the liquidity and safety of the securities. The move comes almost two years after the failure of the auction rate securities market in 2008.

According to the 1/14/10 edition of the Wall Street Journal, Deutsche Bank AG has agreed to buy back approximately $7.8 million in auction rate securities from investors in North Carolina—including individuals, nonprofits, and businesses—with assets of $10 million or less.

Although the bank is buying back the auction rate securities, it will not compensate investors for any losses endured while their money was tied up in auction rate securities, such as missed business opportunities or lost deposits on real estate. To recover these losses, known as consequential damages, investors will have to enter into arbitration for damages.

Investigators found that Deutsche Bank did not supervise investment salesmen and improperly sold the auction rate securities to investors as highly liquid. Deutsche Bank will have to pay $92,000 for the cost of the investigation.

Other banks that have settled auction rate securities-related lawsuits include Merrill Lynch, UBS AG, TD Ameritrade, J.P. Morgan Chase & Co. and Citigroup.

Many people who put their money in auction rate securities did so under the belief that the securities were highly liquid and a safe investment. However, the market was frozen in 2008, leaving many investors with no access to their money. Investors learned that the safety of auction rate securities was only possible if periodic auctions could be held. When the auctions dried up, the securities became worthless.

Companies that face or have faced lawsuits regarding auction rate securities are alleged to have known that the market for the securities was failing but continued to sell them as safe and highly liquid.

At the time the auction rate securities market collapsed, its estimated worth was $330 billion, according to The New York Times on 3/09/08. It has been almost two years since the market failed and there are still investors fighting to get their money back from financial firms that misled them about the nature of the securities.