Lawsuits, arbitrations and regulatory actions are on the rise against Wall Street firms for their active participation in the auction-rate securities market. Many experts contend that Wall Street is going to have a tough time defending the impending flood of claims.
One reason why Wall Street is likely to be taken to task is that the firms were so actively engaged in this segment of the market. The firms created these products as a way for municipalities, charities and others to raise money for long-term periods at short term rates. Not only did the firms facilitate the creation of these products, they were a crucial player in the auctions themselves.
Prior to the last several months, in the event that interest in an auction was not sufficient, Wall Street firms would step in and make a market with their own bids on the securities. This was an important characteristic of the auction-rate products. However, recently when the credit crisis began causing the auctions to fail, Wall Street did not step up to the plate and make bids. As such, they left investors holding these products with no market and left issuers paying higher interest rates.
According to a recent Wall Street Journal article, Auction-Rates A Legal Tangle, by Amir Efrati and Liz Rappaport, one reason Wall Street is facing such a nettlesome legal problem is because the victims in these cases are easy to identify and are more sympathetic than the institutional players who have suffered losses in other mortgage-related investments.
It is expected that more and more legal actions will be initiated as investors tire of waiting and hoping that the markets will once again become viable. Now that many firms are no longer pricing these securities on customers’ statements, investors are taking action to protect themselves against loss and seeking to recover damages caused by the inappropriate marketing and sale of these securities.