Morgan Stanley, JPMorgan Settle Auction Rate Probes
New York Attorney General Andrew Cuomo, the self-appointed cop of Wall Street for his aggressive efforts to right the wrongs of investment banks over deceptive sales of auction rate securities, hailed another victory today.
Two more Wall Street investment banks - JPMorgan Chase and Morgan Stanley - have agreed to Cuomo’s terms and will buy back the illiquid instruments from investors. The banks, which are two of the largest underwriters of auction rate securities, will pay fines totaling $60 million and redeem at face value more than $7 billion of auction rate securities sold to individual investors, charities and small to mid-sized businesses.
The agreement with Morgan Stanley, which is paying a $35 million penalty, and JPMorgan, a $25 million penalty, brings the total number of Wall Street firms to settle state investigations of fraudulent auction rate securities sales to four. Last week, Citigroup, followed by UBS, agreed to buy back nearly $30 billion of auction rate securities and pay fines of $250 million. Merrill Lynch later voluntarily said it would repurchase about $10 billion. In Merrill’s case, however, no deal was reached with state or federal regulators.
At the time that Citigroup agreed to settle with Cuomo and other state regulators and the Securities and Exchange Commission (SEC), Morgan Stanley said it would buy back $4.5 billion in auction rate securities. Cuomo immediately dismissed the offer as insufficient.
As part of the Aug. 14 agreement with JPMorgan and Morgan Stanley, JPMorgan will repurchase the auction rate securities it sold to nearly 10,000 clients by Nov. 12. In addition, the bank will buy back any securities sold by Bear Stearns, which it acquired in May.
Morgan Stanley will repurchase its securities by Dec. 11. About 20,000 customers are involved in that deal.As is the case with Citigroup and UBS, JPMorgan and Morgan Stanley did not admit or deny any wrongdoing over how they marketed or sold auction rate securities to investors.
The SEC is not part of the settlement agreement with JPMorgan or Morgan Stanley.
Cuomo’s office is pursuing about 30 Wall Street banks as part of an investigation into the alleged mishandling of auction rate dealings. Other states and the SEC are investigating the issue, as well.
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