Reuters is reporting that Fidelity Investments was asked on Tuesday by Massachusetts’ top securities regulator – to repurchase auction-rate securities that it sold to clients who thought they were getting a low risk place to park their cash.
William Galvin, the state’s chief securities regulator, wrote to Fidelity’s chairman, Edward Johnson III that it was his hope that “Fidelity will follow the industry trend and promptly repurchase these securities that it has sold to its customers, many of whom now find themselves unable to access money that they thought was as liquid as cash.”
Auction rate securities were marketed as liquid, and of course, it was great so long as there were buyers and sellers in equal measure. However, once the market started to nosedive and banks withdrew support from the sector – many investors stopped buying the securities. Eventually, these so-called “cash-equivalent” securities were impossible to liquidate leaving scores of investors seriously hurt financially.
Massachusetts is not the first state to take action against this type of investment practice. New York as well has taken legal action, alleging that several co’s sold auction rate securities despite evidence that they were risky.