Corporate and institutional investors who have been left stranded with auction-rate securities can now expect to receive increasing scrutiny by the SEC and auditors. On December 31, 2008, the SEC announced that it would not suspend the “Fair Value” accounting rules. In connection with this announcement, the SEC is now indicating they are increasing their examination of auction-rate securities holders who carry the securities at par value, use broker quotes for valuation or use third-party valuations not based on trading data. As a result, corporate and institutional investors must value the auction-rate securities at their actual market values. Under FAS 157 (the fair-value accounting rule), market value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Accordingly, corporations and institutions can no longer blindly accept valuations provided by their brokerage firms or value their holding based on cost and guesswork. In many cases, institutions and corporations will be required to value these securities at much lower prices than previously reported.
In the exercise of caution, corporations and institutions impacted by the rule may want to document their valuations by consulting valuation services such as Pluris Valuation Advisors LLC in New York City or by obtaining bids for the securities through an organization such as Second Market also located in New York City. Many of these investors will be shocked at how little their holdings are actually worth in the open market and may wish to consider their legal options.
In fact, recent cases have illustrated a trend in which an increasing number of corporate and institutional investors (so-called “sophisticated” investors) have stood up for their shareholders and brought legal claims, with considerable success, saying we were lied to. Brokerage firms and investment banks typically argue that institutional and corporate investors do not deserve to be compensated because they are financially sophisticated and should have known better. It’s the “you never should have trusted us” defense. However, this defense is simply not justified, because even sophisticated people can’t bring their sophistication to bear when they are lied to. In the sale of auction-rate securities, many institutional investors were falsely promised that the instruments were safe, liquid “cash equivalents.” Furthermore, such investors were not informed of decreasing demand, failed auctions, and financial problems impacting the auction-rate securities market.
Many corporate and institutional investors have been devastated by the purchase of auction-rate securities. Unfortunately, while many small investors have recouped all of their losses in auction-rate securities as part of regulatory settlements, hundreds of corporations and institutions have been left holding the toxic securities.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in auction-rate securities cases. For further information, please contact us.