Auction Rate Securities

The Auction Rate Securities meltdown began in February 2008, when auctions began to fail and the auction market became frozen. Since that time, the Securities Division in Secretary of State Robin Carnahan's office has pursued and secured over $9 billion in relief and repurchases for investors stuck with these illiquid securities. A series of answers to common questions about Auction Rate Securities are included below.

What are Auction Rate Securities?

Auction Rate Securities are long-term bonds issued by municipalities, corporations, and student loan companies, or preferred shares issued by closed-end mutual funds, with variable interest rates that reset every 7, 28, or 35 days through a bidding process known as a Dutch auction.

How has the Auction Rate Securities Market changed?

Auction Rate Securities have been in existence for nearly 25 years, and have been touted as safe, liquid and flexible for investors. When first marketed in the 1980s, investments in Auction Rate Securities were limited to sophisticated institutional investors, with required minimum purchases in blocks of $250,000. However, in the 1990s, issuers and underwriters lowered the minimum investment to $25,000, enabling sellers to market Auction Rate Securities to retail investors that include individuals, charities, and small businesses.

What were the circumstances surrounding the Auction Rate Market failure?

The Auction Rate Securities market grew to over $330 billion, and its auctions had only occasionally failed prior to 2008. Sellers of Auction Rate Securities highlighted the investments' liquidity through the auction process and the slightly higher interest rate enjoyed over certain other liquid investments, such as some money markets. Investigations by the Missouri Securities Division reveal that many brokers sold these products to individuals by explaining that they were similar to money-markets and CDs as far as liquidity, but with a higher interest rate.

The auction market failed dramatically in February 2008, freezing most Auction Rate Securities and making it impossible for investors to sell their securities and collect their funds.

What should I do if I have money stuck in Auction Rate Securities?

Investors who still have money stuck in Auction Rate Securities should contact the Missouri Securities Division at 800-721-7996 to talk to an investigator.

What has been your office's response to the collapse of the Auction Rate Securities Market?

The Missouri Securities Division has taken a proactive approach in working with investors and investment firms to recover funds unavailable because of the failed auctions. The Securities Division is collaborating with other regulators throughout the United States in an effort to recover the illiquid funds for investors.

Which ARS cases has the Missouri Secretary of State played a major part in?

Wachovia

In August, 2008, Secretary of State Robin Carnahan announced a settlement with Wachovia Securities, which agreed to buy back $9 billion of Auction Rate Securities sold to its clients. Missouri served as the lead state on the Wachovia matter for the nationwide task force of state regulators charged with investigating investor harm arising from the Auction Rate Securities meltdown, and in addition to the multi-billion dollar repurchase, Wachovia agreed to pay a $50 million fine to be split among the states, and agreed to a variety of other measures to provide relief to harmed investors.

Commerce Bank

In November, 2008, Secretary of State Robin Carnahan announced an Auction Rate Securities settlement with Commerce Brokerage Services, Inc., an affiliate of Commerce Bank. As part of that settlement, Commerce certified that it had completed a buyback of $545 million in Auction Rate Securities. In addition, Commerce agreed to many of the same investor relief measures that Wachovia agreed to, and Commerce also agreed to make a $500,000 payment to the Missouri Investor Education and Protection Fund.

Stifel Nicolaus and Co.

In March 2009, Secretary of State Robin Carnahan announced that her office had filed a civil action against investment firm Stifel, Nicolaus & Company, Incorporated, for misleading its customers who bought Auction Rate Securities, and in December 2009 announced a settlement of that action. Carnahan's office played a lead role for the nationwide task force in investigating and ultimately settling this matter. As part of the consent order Stifel entered into, the firm will significantly accelerate its previously announced but un-endorsed repurchase plan, allowing hundreds of investors nationwide to receive full relief months ahead of schedule. Stifel is also required to pay a significant global fine for its failure to supervise and properly train its sales agents, and to pay $250,000 in costs and payments to the State of Missouri as well as hire a consultant to review and make recommendations regarding Stifel's training on nonconventional products.

NatCity Investments, Inc.

In October, 2009, Secretary of State Robin Carnahan announced that her office reached a settlement with NatCity Investments, Inc. concerning the firm's Auction Rate Securities activities and a full repurchase of all Auction Rate Securities held by Missouri investors. This settlement, handled exclusively by Carnahan's office, confirmed a repurchase of $8 million of Auction Rate Securities from Missourians, and included a $100,000 payment to the Missouri Investor Education and Protection Fund.

Investment Professionals, Inc.

In December 2009, Secretary of State Robin Carnahan announced a settlement that required Texas-based IPI to repurchase the limited Auction Rate Securities that it had sold to Missouri investors. In a Missouri-exclusive order negotiated separate from the nationwide taskforce, IPI repaid $1.5 million to Missouri investors and paid over $50,000 to the Missouri Investor Education and Protection Fund.

Other Related Auction Rate Securities Information

Missouri Auction Rate Securities Orders

Banc of America Securities LLC and Banc of America Investment Services, Inc. -
http://www.sos.mo.gov/securities/orders/AP-09-20.asp

Citigroup Global Markets, Inc. -
http://www.sos.mo.gov/securities/orders/AP-09-11.asp

Commerce Brokerage Services, Inc. -
http://www.sos.mo.gov/securities/orders/AP-08-27.asp

Credit Suisse Securities (USA) LLC -
http://www.sos.mo.gov/securities/orders/AP-09-38.asp

Deutsche Bank Securities Inc. -
http://www.sos.mo.gov/securities/orders/AP-10-04.asp

Goldman, Sachs & Co. -
http://www.sos.mo.gov/securities/orders/AP-10-21.asp

Investment Professionals, Inc. -
http://www.sos.mo.gov/securities/orders/AP-09-46.asp

JPMorgan Chase & Co.-
http://www.sos.mo.gov/securities/orders/AP-09-31.asp

Merrill Lynch, Pierce, Fenner & Smith Incorporated -
http://www.sos.mo.gov/securities/orders/AP-09-23.asp

Morgan Stanley & Co. Incorporated -
http://www.sos.mo.gov/securities/orders/AP-09-45.asp

NatCity Investments, Inc.-
http://www.sos.mo.gov/securities/orders/AP-09-42.asp

RBC Capital Markets Corporation -
http://www.sos.mo.gov/securities/orders/AP-09-32.asp

Stifel, Nicolaus & Company, Incorporated -
http://www.sos.mo.gov/securities/orders/AP-10-05.asp

UBS Securities LLC and UBS Financial Services Inc. -
http://www.sos.mo.gov/securities/orders/AP-10-14.asp

Wachovia Securities, LLC and Wachovia Capital Markets LLC -
http://www.sos.mo.gov/securities/orders/AP-08-28.asp

Press Releases

Carnahan Launches Investigation into Auction Rate Securities
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=695

Carnahan Leads Special Inspection of Wachovia Securities : National Task Force Investigates Auction Rate Securities Meltdown
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=718

Carnahan Meets With Wachovia to Find Solution for Auction Rate Securities Investors
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=728

Carnahan Announces $9 Billion Dollar Investor Buyout of Wachovia Auction Rate Securities
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=730

Carnahan Announces Settlement with Commerce Brokerage Services: $545 Million of Auction Rate Securities Returned to Investors
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=761

Carnahan Calls Stifel's Plan "Inadequate": One Year Later, Hundreds of Missourians Still Have No Access to Their Savings
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=779

Carnahan Calls on Stifel to Provide Investors with More Than Empty Promises
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=787

Carnahan Files Civil Action Against Stifel: Action Aims to Return Frozen Savings to Hundreds of Investors
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=792

Carnahan Finalizes Auction Rate Securities Settlement with Citigroup, Disappointed in Stifel's Failure to Follow Suit
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=801

Carnahan Finalizes $400 Million Bank of America Auction Rate Securities Settlement
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=814

Carnahan Recovers Over $260 Million for Missouri Investors
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=830

Carnahan Wraps Up JPMorgan Auction Rate Securities Case: Missouri Investors Received More Than $28 Million in Returned Savings
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=844

Carnahan Statement on Colorado and Indiana actions against Stifel
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=847

Carnahan Returns $8 Million to NatCity Investors: Company must pay $100,000 to Missouri Investor Education and Protection Fund
http://www.sos.mo.gov/news.asp?id=856

Statement from Secretary Carnahan on Wells Fargo Auction Rate Securities Settlement
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=868

Carnahan Resolves Two Auction Rate Securities Cases for Missouri Investors
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=873

Carnahan and Attorney General's Office Reach Settlement with Stifel Nicolaus: Hundreds of investors to get early access to needed cash
http://www.sos.mo.gov/securities/mipc/newsrelease.asp?nID=875

Carnahan Announces Additional $40 Million Available for UBS Auction Rate Securities Investors
http://www.sos.mo.gov/securities/news.asp?nID=917

Carnahan Reaches Agreement with Goldman Sachs that Returns up to $60 Million to Missourians
http://www.sos.mo.gov/securities/news.asp?nID=920

Other Firms That Have Entered Into Auction Rate Settlements with State Regulators



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