In the latest development with the auction-rate securities saga, investors are finding out that their banks won't let them sell their securities even if they find a buyer.
Franklin Biddar of New Jersey found a buyer for $100,000 worth of his auction-rate securities in Fieldstone Capital Group but Bank of America wouldn't release the bonds because they say the transaction wasn't in Biddar's best interest. Biddar would sell his securities at a 11% discount.
Bank of America, UBS AG, Wachovia and about four dozen other firms that sold the auction-rate securities are thwarting investor attempts to sell their bonds in the secondary market at a discount to regain access to their cash. The firms claim they are saving customers from unnecessary losses on the securities but these are the same people who marketed the securities as safe, cash alternatives. Note that if the banks allow investors to sell the securities at a discount, the investors will establish damages.
UBS says the secondary market is very illiquid and the firm is trying to find the best price for their investors. Meanwhile, Merrill Lynch and Wachoiva are trying to get their clients to refinance their auction-rate debt.
Frustrated investors are turning to litigation. Currently, there are 24 proposed class-action suits filed against brokerage firms over claims that investors were told the securities were almost as liquid as cash. Individual investors and corporations alike have been trapped in auction-rate debt for more than three months since the market froze back in February. Before February, the firms routinely bought securities that went unsold so as to reassure investors that their investments were liquid. The truth is about 99 percent of auctions for auction-rate securities sold by student-loan agencies and closed-end funds fail, as do 48 percent of those for municipals.
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