GO
Loading...

New York Seeks Auction-Rate Pacts With 3 Banks

Reuters
Monday, 11 Aug 2008 | 5:32 PM ET

New York Attorney General Andrew Cuomo's office, investigating Wall Street's sales of auction-rate securities to investors, told JPMorgan Chase , Morgan Stanley and Wachovia that it wants to begin settlement talks immediately.

Meanwhile the office of Missouri Secretary of State Robin Carnahan on Monday announced that talks with Wachovia Securities, a St Louis-based venture jointly owned by Wachovia and Prudential Financial, continue.

Separately, Moody's Investors Service cut the long-term ratings of Morgan Stanley, citing risk management miscues and an operating performance which has been below Moody's expectations.

Cuomo's letters to the three banks and the Missouri talks show that Wall Street has only begun to pay for its actions that left tens of thousands of investors stuck with "cash-like'' securities that were impossible to cash out.

"It would be unfair to consumers with accounts at other firms, as well as to the firms that settled, if our investigation were to slow down or stop,'' David Markowitz, Cuomo's top investor protection lawyer, wrote in letters first obtained by Reuters.

State and federal regulators have been investigating whether brokerages and banks falsely told clients that auction-rate securities—a $330 billion market of long-term debt instruments that pay yields reset through weekly or monthly auctions—were as safe and liquid as cash.

Instead, auction-rate securities have been impossible to sell since late January, when investment banks stopped propping up auctions that were being abandoned by investors.

Cuomo's office sent subpoenas to 18 banks and brokerages in April. At least seven other states are also investigating Wall Street's actions in this matter.

New York, the Securities and Exchange Commission and other states announced settlements last week with UBS and Citigroup.

Citi and UBSwere the first settlements struck by New York since it began investigating five months agowhether brokerages had falsely told clients that auction-rate securities—long-term debt instruments that pay yields reset through weekly or monthly auctions—were as safe and as liquid as cash.

Combined, the banks agreed to pay $250 million in fines and will repurchase about $27 billion of the debt from their clients.

Cuomo's office, which has invoked the state's powerful Martin Act, has said it wants all banks and brokers to make tens of thousands of U.S. investors whole by repurchasing all of the debt at face value.

Missouri's Carnahan said Wachovia customers hold about $9.5 billion of auction rates.

Retail customers of Morgan Stanley and JPMorgan are each estimated to have more than $3 billion of the securities.

Last week, Merrill Lynch —outside of any regulatory agreement— announced it would buy back about $12 billion of auction-rate securitiesfrom clients starting in January 2009.

Last month, securities industry watchdogs from six states went into Wachovia Securities' headquarters seeking information about the bank's auction-rate sales practices.

"We are meeting with regulators in (Missouri) and look forward to the discussions,'' a Wachovia spokeswoman said.

"We are cooperating with all regulatory inquiries we have received,'' a JPMorgan spokesman said.

A Morgan Stanley spokesman said: "We have been and continue to cooperate fully with the regulators, and have been working with clients since February to provide liquidity on a case-by-case basis.'' The SEC had no comment on New York's probe.

An SEC spokesman said: "Getting investors their money back will continue to be a focus of the enforcement division's investigative efforts.''

  Price   Change %Change
C
---
JPM MLP ETN
---
MS
---
PRU
---
UBSN
---

Banks