New York AG Probing Auction-Rate Securities


New York's attorney general and securities regulators in several U.S. states are probing auction-rate securities and the role Wall Street firms had in enticing investors into the troubled $330 billion market.

New York Attorney General Andrew Cuomo's office launched a sweeping investigation this week, sending subpoenas to 18 broker-dealers and banks, people familiar with the probe told Reuters on Thursday.

According to sources, institutions receiving subpoenas on Monday and Tuesday included: UBS; Merrill Lynch ; Goldman Sachs ; Citigroup ; Raymond James Financial ; First Albany; Wachovia ; Morgan Keegan; Piper Jaffray ; AG Edwards; Deutsche Bank; TD Ameritrade; Lehman Brothers ; RBC Dain Rauscher; Bank of America ; JPMorgan Chase ; Morgan Stanley and E*Trade Financial .

Cuomo's office is looking into every part of the auction-rate securities business. The securities were long touted as cash-like investments, attracting both individual and institutional investors, until the credit crunch led to a breakdown in the market.

Cuomo's subpoenas are seeking information about what municipalities or other issuers were told about the securities and whether investors were told they were buying safe, highly liquid securities.

Officials from the 18 banks could not be reached immediately for comment.

Meanwhile, securities regulators in nine other states have launched their own probes and formed a task force to coordinate efforts, the North American Securities Administrators Association said on Thursday.

Regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington are conducting their individual state investigations and make up the task force so far, according to the group.

Bryan Lantagne, director of Massachusetts' securities division and chairman of the task force, said he believed other states beyond the nine in the task force were also probing the auction-rate market after receiving complaints from individual investors.

"The complaints states are receiving are from retail investors with horror stories," he said in a telephone interview. "They bought what they thought was a cash equivalent that somehow turned into a long-term instrument they can't liquidate."

For its part, Lantagne said Massachusetts was looking at the roles of UBS, Merrill Lynch and Bank of America in the market. He also said that he could not disclose the targets of probes by securities regulators in other states.

"Many firms provided liquidity and at some point in time they walked away. How did that happen?" he said, adding that many investors were stuck in the market as a result.

Auction-rate debt, sold by issuers such as U.S. states, student loan agencies and closed-end funds, has long-term maturities, but the interest rates paid are reset at periodic auctions.

The auction-rate market seized up in late January, leading to failed auctions that left issuers stuck having to pay much higher interest rates. The auctions failed because buyers were spooked by fears the insurers that backed this debt were no longer creditworthy.

At the same time, dealers who were overwhelmed by a flood of selling from investors with the same concerns, stepped away from their role of keeping the market liquid.

Many investors who had bought this debt, which was considered almost as liquid as cash, found themselves trapped with a long-term security that they could not sell ahead of the April 15 tax deadline.

Lantagne said individual investors entered the market through closed-end funds. While a secondary market has emerged for the securities, investors were facing a 50 percent haircut to exit the market, he added.

"It's a serious, serious problem and we're just beginning to see the extent of the problem," Lantagne said.