Litigation from Auction Rate Securities Collapse Begins to Shake-out

While the subprime mortgage crisis captured most of the spotlight during the recent recession, the little discussed auction rate securities (ARS) market, once considered a very safe investment, suffered a concurrent collapse, leaving billions of investment dollars frozen and causing an outcry amongst investors who accused brokerages of misrepresenting the reliability of the ARS market.  Peter Sonderby, a partner with Ulmer & Berne LLP (Chicago), who recently represented the first successful institutional investor in an arbitration against a brokerage firm, says that while unheralded, the auction rate securities collapse has led to serious and complicated problems that are not likely to disappear anytime soon.

"Many billions of dollars that could have been available to stimulate economic recovery have disappeared or remain tied up in now illiquid auction rate securities," Mr. Sonderby says.  "Individual investors have been compensated under pressure from regulators, including the SEC and state securities officials, but companies and other institutional investors have not."

The question, says Mr. Sonderby, is who should bear the loss here that resulted at least in part from economic events that were unforeseen?

"On one hand, these were supposedly sophisticated investors who had an obligation to investigate and understand their investments," he says.  "On the other hand, however, the brokerage firms that sold ARS had an obligation to their institutional investors to make sure these Auction Rate Securities were suitable for their customers purposes.  Each case involves a balancing of these considerations in order to decide who should bear the loss."

Mr. Sonderby is available to discuss ongoing litigation and other issues involving the auction rate securities market.  [05/25/2010]