Forbes’ blogger Bill Singer narrates the story of US Airways. Registered with Lehman Brothers at the time, three individuals were ordered to pay US Airways $15 million in damages for making unsuitable recommendations and unauthorized purchases of auction rate securities (ARS) and for the failure to provide proper supervision over the transactions of ARS made on behalf of US Airways.
ARS are long-term floating rate securities whose coupon payments are determined at auctions that are typically held every 7 to 35 days. ARS are long-term securities with short-term floating rates. Broker dealers marketed ARS as liquid, short-term cash equivalents. However, when the ARS auctions failed en masse in February 2008, ARS proved to be illiquid and unsellable in the short-term. There are ARS holders who are still unable to redeem their securities even today.
SLCG has a written an in-depth paper on ARS, what they are, how their auctions worked and how they failed.
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