Investor Arbitration over Auction-Rate Securities

As the crisis in the auction-rate securities market continues, individual investors are getting more frustrated and angry over the fact that Wall Street broke their promise of safety and liquidity to them when brokers sold them these securities. Investor backlash is brewing as investors learn their assets are frozen or sharply devalued.

Harriet Johnson Brackey, from the Florida Sun-Sentinel, reports hearing many complaints with auction-rate securities. Brackey cites the case of a Delray Beach woman who thought she was depositing $370,000 with UBS AG in a money market-like fund which turned out to be an auction-rate securities fund. A short time later, the value of her account was written down by UBS and she lost $97,000 without even touching the principal. Since the collapse of the $330 billion auction-rate market, some companies like UBS have written down the value of the accounts to what UBS thinks the securities could be sold for today.

The Delray Beach woman isn’t taking this lying down. She’s filing an arbitration claim against UBS. Besides arbitration, some investors are also finding buyers but they are selling their securities at a 25 percent discount. State regulators are getting into the action too. Nine states have formed a task force to investigate the collapse of the auction-rate securities market and how those securities were sold to investors by brokerage firms.

Brackey points out that it is not only the broken promise of liquidity that has infuriated investors. High-yield bond funds that were heavily invested in securities backed by risky subprime mortgages are also hurting investors.

John Klecha complained to Brackey that his brokers at Morgan Keegan, a unit of Regions Financial Corp. sold him the RMK Multi-Sector High Income bond fund which was invested in risky mortgage-backed securities that wasn’t disclosed to investors. In 2007, that fund dropped 61 percent and it has dropped 29 percent so far this year. Like other trapped investors, Klecha is filing an arbitration claim against Morgan Keegan.