Secretary of state's office begins auction rate securities investigation

Sunday, April 20, 2008

KANSAS CITY, Mo. -- Add a new obscure entry to the bestiary of investments that have turned around to bite investors in recent months.

Missouri Secretary of State Robin Carnahan's office has begun an investigation into whether consumers were tricked into pouring hundreds of thousands of dollars into investments called auction rate securities.

Officials confirmed Friday that Carnahan's securities division is seeking information from at least eight broker-dealers.

At least a dozen people have filed complaints that they were told they would enjoy the benefits of a money-market account but at higher rates of return and the ability to cash out whenever they wanted.

Instead, the investments are locked up and they can't access their money when they need it.

Similar to long-term bonds, auction rate securities are sold as short-term investments at weekly and monthly auctions. At these auctions, investors can sell what they already own or buy more. The total market is estimated at $330 billion.

In February, large banks that typically bought the securities got out of the auctions and thousands of U.S. investors found they couldn't get their money back.

Regulators are now investigating whether banking firms explained the risk of failed auctions to investors. Missouri is one of nine states on a national task force looking at the problem.

"Because of the rise in complaints surrounding this issue, our office is working together with other states around the country to investigate how auction rate securities have been marketed and pitched to investors," Carnahan said Friday.

The Securities and Exchange Commission has opened an inquiry of its own and New York Attorney General Andrew M. Cuomo has issued subpoenas to 18 banks that underwrote or brokered the investment.

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