Press Room
July 18, 2008
Investors burned in auction-rate meltdown
BusinessWeek
Jul. 18--Eileen Selkis had some money left over from selling her house in Connecticut, and she knew she couldn't afford to lose any of it.
She says her broker at Wachovia Securities pointed out that she could get a good return -- better than the money market account it was in -- by moving it to something called auction-rate securities.
The higher interest rate was appealing, but Selkis wanted to make sure she'd be able to access her money easily.
"They're as good as liquid cash," she recalls her broker telling her, in late 2006. "You can get to your principal any time; you just need to let me know about seven days ahead."
That was before the market for those securities began to dry up in February, another result of the tumultuous state of the financial services industry. That means that many investors can't sell their holdings and get their money out of those securities, and they allege that brokers understated the risks of such investments.
Major financial institutions across the country -- including Charlotte's Bank of America and Wachovia -- are facing lawsuits and regulatory inquiries over how they marketed those securities. The latest twist came Thursday, when securities regulators from Missouri and other states showed up to inspect the St. Louis headquarters of Wachovia Securities, seeking documents and other records related to the sale of such bonds.
The Missouri secretary of state launched an investigation involving Wachovia and other banks in April, after hearing from hundreds of people who complained that they couldn't access their money.
Selkis, who lives in Fort Mill, S.C., remembers when her broker called in April, on her 59th birthday, to say she couldn't access her funds.
"He said, 'Well, Eileen, I never knew the risks. These things have been safe for 20 years,'" she said. "That's when my whole world collapsed."
She has succeeded in getting about a quarter of her investment out of the securities, but she's anxious to get at the rest of it. She works two part-time jobs, but health problems prevent her from returning to her full-time job as an oncology nurse.
Auction-rate securities are bonds with interest rates that reset periodically, usually every seven, 28 or 35 days. They can be issued by municipalities, hospitals, student-loan companies and other special entities.
Some financial advisers say they were viewed as safe and stable for years, but that ended abruptly in February when the country's banks, beset by dismal earnings, backed away from submitting the bids that reset those interest rates. As a result, investors have largely been unable to sell their bonds, and can't access their investments.
"It was just a house of cards," said Lawrence L. Klayman, a senior partner at Klayman & Toskes in Florida.
He says his firm is hearing from dozens of investors, most with at least $1 million in claims, who want to sue their financial institutions. Some investors have been able to sell their auction-rate securities on secondary markets, but they're earning only 40 to 70 cents on the dollar, according to the law firm.
The SEC and the Financial Industry Regulatory Authority, which regulates brokerages, are examining how dealers sold securities before the market froze. Watchdogs in 11 states have formed a task force.
Massachusetts Secretary of State William Galvin filed the first lawsuit in the sweep on June 26, seeking to make Zurich- based UBS reverse sales and compensate clients. UBS said it "will defend the specific allegations."
North Carolina, Wachovia's home state, wasn't involved in Thursday's inspection, said Liz Proctor, a spokeswoman for Secretary of State Elaine Marshall. North Carolina is conducting its own investigation of Wachovia and other firms regarding auction-rate securities, Proctor said, declining to provide further details.
