Oops. Can Lawyers Prove Damages in Auction-Rate Securities Cases?

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Oops. Can Lawyers Prove Damages in Auction-Rate Securities Cases?

Posted May 28, 2008, 10:08 am CST
By Martha Neil

Plaintiffs lawyers have been pursuing a few dozen potential class actions since March over auction-rate securities allegedly sold to investors based on promises that they could easily resell them. In fact, that proved not to be true of many of the securities, after the credit crisis led other investors to steer clear of auctions at which the municipal- and student loan-backed bonds and preferred shares were sold.

But there's one big problem for lawyers who took the complex cases on a contingent-fee basis, reports Bloomberg. Because the interest on these securities kicked into a much higher penalty rate after the auctions at which they were to be sold failed, investors not only haven't lost money but have apparently made more money than promised.

At least some plaintiffs contend they couldn't take advantage of other investment opportunities, because they couldn't sell the auction-rate securities. However, these lack-of-liquidity claims are based on the specific facts of individual cases, and thus they probably can't be pursued in class actions, the news agency says.

"I don't see how you get around the fact that, for the most part, the investors are doing better,'' says attorney David Gourevitch, who formerly worked for the Securities and Exchange Commission and now practices privately in New York. He isn't involved in any of the cases.

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