Auction Rate Securities: FAQ, How ARS customers duped?

• What is ARS?
• How are auctions issued?
• How was This bank involved?
• How were customers deceived?
• How much does it cost to be represented in an ARS arbitration case?
• How frequent is it that banks and investment firms have to buy back these bad ARS investments...in this case $61 billion?
• What is FINRA?

Auction Rate Securities: Frequently Asked Questions, FAQ

What is ARS?
An auction rate security (ARS) typically refers to a corporate or municipal bond debt instrument with a long-term nominal maturity for which the interest rate is regularly reset through an auction. Since February 2008, most such auctions have failed, and the auction market is frozen.

How are auctions issued?
ARS are usually issued with maturities of 30 years, but the maturities can range from five years to perpetuity. ARS are bonds issued by municipalities, student loan entities, and corporations, or preferred stock issued by closed-end mutual funds, with interest rates or dividend yields that are periodically reset through auctions, typically held every 7, 14, 28 or 35 days. The issuer of each auction rate security selects one or more broker-dealers to underwrite the offering and to manage the auction process. If the issuer selects more than one broker-dealer, then the issuer designates one of the broker-dealers as the lead broker-dealer. Other contractual broker-dealers may enter into agreements with the issuer to participate in the auctions. Only sole, lead, or contractual broker-dealers can submit customer orders directly to the auction agent, who runs the auction.

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How was The bank involved?
The bank underwrote and acted as sole or lead broker-dealer on approximately 96 ARS offerings, totaling $3.5 billion. The bank also acted as a contractual broker-dealer in hundreds of other ARS auctions. For customers who purchased ARS through accounts at A.G. Edwards, The bank provided a secondary market between auctions. The bank did not place any limitations on par daily liquidity. As of February 2008, The bank customers held over $14 billion in ARS in about 97,000 accounts.

How were customers deceived?
In a May 2007 document titled “Considerations and Disclosures for Investors in Auction Rate Securities,” the bank disclosed that it may support auctions and that auctions may fail. The bank posted the document on its intranet site for its financial advisors, but did not post it on its public website. Other documents posted on the intranet site, however, treated ARS as money market securities. Customers were told that ARS were similar to money market investments with a better return.

How much does it cost to be represented in an ARS arbitration case?
If you decide to hire Anapol Schwartz and if we decide to be retained, we take your ARS arbitration case on a contingency-fee basis. That means you pay no out-of-pocket expense and at the end of your arbitration, Anapol Schwartz is paid their previous agreed upon amount. Retaining a lawyer makes good fiscal sense because we know the players and the intricate patterns of securities arbitration.

How frequent is it that banks and investment firms have to buy back these bad ARS investments...in this case $61 billion?
Historically, offering rescission has been the most significant penalty on securities firms for misleading sales practices. Allowing aggrieved investors to collect consequential damages significantly increases potential liability. Could this be a brave new world for securities enforcement or is does this only apply to ARS investments. Time will tell.

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What is FINRA?
FINRA is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA stands for Financial Industry Regulatory Authority and is dedicated to investor protection and market integrity. FINRA touches virtually every aspect of the securities business-from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.

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