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Financial Advisors Angry Over Failed Auctions Too

The auction-rate securities market has now been frozen for over three months and it is not just the thousands of investors now holding these illiquid investments that are livid.  Many of the financial advisors who sold these products also feel duped.

The latest issue of Registered Rep. magazine highlights the anger of financial professionals.  These advisors are stepping forward claiming that they were told by their employers that these auction-rate securities were safe, money market-like investments.  Advisors were assured that the $330 billion auction-rate securities market was too big (and too important as a source of liquidity for investors) to fail.  We now know otherwise.

Many advisors interviewed in the piece noted that their firms’ never discussed risks of these products.  In fact, one former Merrill Lynch broker said that Merrill specifically trained advisors that auction-rate products were in fact cash equivalents.  Other brokers were told the same thing by the Wall Street firms.

So as the number of lawsuits and arbitrations increase, advisors are taking action to protect themselves.  Many are compiling information that they were provided by their firms to highlight Wall Street’s position as to these products.  But were the advisors really without knowledge of the risks?  There were warning signs after all.

In early 2005, all the major accounting firms were advising corporate clients to classify auction-rate securities as “investments” and not “cash equivalents” as they had done previously.  In addition, the SEC settled a case against 15 Wall Street brokerage firms in 2006 for violations relating to the attempts to save various auctions from failure.  These events were known, or should have been known, to the firms as well as the advisors.

Investors are mad and they should be.  They were sold a product carrying known risks as a safe, conservative risk-free investment.  Wall Street should not be let off the hook simply because historically the products performed without showing their inherent risks.  As Wall Street is quick to point out, past performance does not guarantee future results.       

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