Some Wall Street Firms Near Pact On Auction Debt

Some Wall Street banks and brokerages are nearing a settlement with regulators over allegations that they misled investors over the sale of auction-rate securities, CNBC has learned.

The New York Stock Exchange, downtown New York City.
Oliver Quillia for
The New York Stock Exchange, downtown New York City.

Three firms could reach a settlement: Morgan Stanley ,JP Morgan Chase , Wachovia, according the the officer of New York Attorney General Andrew Cuomo, which has been leading the investigation.

The Wall Street firms have agreed in principle to a settlement, where they would pay a fine and reimburse clints who bought the securities. The settlement has not been signed off on by all the state and federal regulators, however. For example, state securities regulators in Missouri who must sign off on the settlement with Wachovia have not yet done so, sources said.

The 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.

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Other firms involved in the probe include GoldmanSachs and Lehman Brothers . Talks between regulators and Merrill Lynch have turned contentious, however, so a settlement there is unclear.

The settlement with Morgan Stanley, JP Morgan and Wachovia would mirror those already reached with Citigroupand UBS , according to the Cumo's office.

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.

—Reuters contributed to this report.