Going Dutch With the Dealer

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Q: I am a dealer – at Dutch auctions in securities.  Auction procedures generally permit me to buy, and sell, auction rate securities for my own account.  In the past, I routinely submitted such orders – whether to acquire securities for my inventory or to prevent an auction from clearing at a rate that did not reflect the market.  My bids were likely to raise or lower the clearing rate.

A year ago, at an online auction, one of my customers purchased a hefty amount of securities.  I was serving as dealer.  In those days, dealers invariably prevented these auctions from failing.  A few months later, the credit market deteriorated, and we stopped placing support bids and started allowing the auctions to fail.  After another few months, all of us dealers totally withdrew our support.

From then on, most of these auctions have failed.  Investors like my customer have been left with illiquid securities.  What are my chances if sues me for market manipulation?

A: You should always post on your website a description of your current auction practices and procedures, such as the ones you describe.  In order for market conduct to be manipulative, that conduct must involve misrepresentation or nondisclosure.  So long as you have made full disclosure – and your practices do not depart from the industry norm – then your chances should be good.

By: Scott Baron,
Attorney at Law Advertorial

The law responds to changed conditions; exceptions and variations abound. Here, the information is general; always seek out competent counsel. This article shall not be construed as legal advice.

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