Auction Rate Securities freezing tech startups


Up to 20% of venture backed startups may have been convinced by their financial advisors to put much of their spare cash into something called Auction Rate Securities, on the promise of money market-like liquidity with better returns. Now, that money is frozen, and startups are scrambling to find a way to free up the cash.

The money is frozen because there are no buyers for the securities. So those who own them can’t sell and get their money out. Such investments were supposed to be just like a money market, just like cash – but then the credit crisis hit.

A reader comments to our previous post on this subject that perhaps the brokerages can be forced to respond.

My broker sold me $1,000,000 worth of ARP’s in different funds.

I have filed a formal request for a malpratice claim against the brokers E & O insurance. Since most brokerage houses are self insured and must act under the rules of all insurance companies when claims are presented. They open themselves up to bad faith claims for failure to properly respond. Considering the opposing forces at play, doing the right thing as an insuror places them at odds with themselves. My hope is they act improperly and I will have a more valid claim against them for bad faith which will not be tied to the investment issue at all. It becomes a complete separate issue, and can place tremendous pressure on these firms if everyone pursues this. Being in the insurance industry has made me aware of this angle, should an insurer act in bad faith, the claim for damages can far outweigh the losses in our frozen securities. I encourage everyone to file a written request to open a formal claim. You do not need an attorney to do so.

Thus, he appears to be trying to put the broker into an unwinnable situation where they will then act improperly and give him leverage. Meanwhile employees of those tech startups are probably hoping for an answer real soon, wondering if the company has enough cash to pay them until then.

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