“accurate reporting of risk actually may not have been a high enough priority in the mortgage-backed securities business, not when there was so much to be made off unsuspecting investors induced to buy into this hyped market.”

Securities Fraud Hotline Post, March 15, 2008.

Questionable business practices that have wreaked havoc in the credit markets has led to a series of probes in addition to the sub-prime investigation by New York state’s attorney general. As reported in the Wall Street Journal recently by Liz Rappaport, New York’s AG Andrew Cuomo’s latest target is, not surprisingly, the marketing of auction-rate securities. The AG has turned up the heat with subpoenas to Wall Street’s big players such as Merrill Lynch, Goldman Sachs, UBS, and Citigroup. It was also reported that Bryan Latagne, director of Massachusetts’ aggressive Securities Division, will spearhead a task force of state securities regulators investigating the auction-rate market debacle.*

In most cases investors who have contacted us were misled into thinking that their investment in the auction-rate market was as secure and as liquid as money market funds; for sure, not everyone received a prospectus or any other information to the contrary. Individual investors who have contacted us don’t want to take it any more, especially those who have a need for liquidity but now realize they may be stuck for quite some time (albeit earning some interest). The more troubling scenario for investors is if firms who aggressively marketed these long-term instruments decide to discount the securities, a phenomenon that has already begun. For the regulators there are myriad issues to explore including conflicts of interest by brokerage firms that sold auction-rate securities out of inventory and then abruptly stopped supporting the auctions en mass.

Investors should carefully consider their options when seeking to recover investment losses in general. There’s so much uncertainty about where the bailout will come from in the $330 billion auction-rate mess, where in most cases there are no out of pocket losses–yet. Aggrieved investors should not feel rushed to follow the pack, for example, to join a class action – and many of these are being filed – because any eventual recovery there may only amount to pennies on every dollar lost.

*Mr. Latagne is a Public Member of SICA, the Securities Industry Conference on Arbitration. The other Public Members are Ted Eppenstein and Professor Constantine Katsoris.