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Auction Rate Securities

For years brokers and advisors marketed auction-rate securities (ARSs) and variable rate demand notes (VRDNs) to high net worth individuals and institutions as safe, liquid, slightly higher-yielding, tax-exempt alternatives to money-market funds. However, the $330 billion auction rate securities market was being inappropriately propped up by the same firms. In mid-February 2008, the entire auction rate securities market came to a halt as the broker-dealers stopped bidding for them. Investors around the globe are now trapped in these low (or no) yielding long term investments.

Rich, Intelisano & Katz, LLP has successfully represented numerous investors in arbitrations who were eventually made whole by broker-dealers who misrepresented ARSs and VRDNs, including in one matter, recovering full attorneys’ fees.

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Auction rate securities (ARSs) are municipal bonds, corporate bonds and preferred stocks with interest rates or dividend yields that are periodically reset through auctions, typically held from daily to 35 days. ARSs were created in 1984 to allow municipalities, hospitals, student lenders and funds to borrow long-term at money-market costs by adjusting interest rates through bidding. While a majority of the $330 billion auction rate securities market consists of debt obligations issues by municipalities and non-profit organizations, approximately $65 billion is in preferred shares issued by closed-end funds.

Variable rate demand notes (VRDNs) are long term, taxable, or tax-exempt bonds issued on a variable rate basis that can be tendered for purchase at par whenever rates reset upon seven-day notice by the investor. The bonds tendered are then resold by the remarketing agent in the secondary market to other investors. VRDNs can be converted to a long term fixed rate security upon appropriate notice by the issuer.

ARSs and VRDNs are not short term, completely liquid, safe municipal bonds or bond funds.

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