Auction Rate Probes To Include Secondary Dealers
“Nobody gets a pass.†That’s apparently the verdict from Christopher Cox, chairman of the Securities and Exchange Commission (SEC), who says investigations into the collapse of the auction rate securities market will indeed extend beyond major Wall Street investment banks to include secondary dealers who sold the securities.
Cox’s clarification follows recent criticism by smaller brokerages like Fidelity Investments and Oppenheimer & Co., which contend they should not be obligated to buy back billions of dollars of auction rate securities from investors based on the fact they didn’t underwrite the securities nor run the auctions for the securities. The big investment banks did.
Moreover, the brokerages say that when it came to knowing about potential problems brewing in the auction rate market, they were kept in the dark right along with investors.
The finger pointing over who’s at fault over auction rate securities has gained momentum in the past week after several of Wall Street’s biggest players - including UBS, Citigroup, JP Morgan Chase and Wachovia - agreed to settle claims of auction rate fraud with New York Attorney General Andrew Cuomo and buy back more than $42 billion of auction rate securities from their customers. Now, smaller brokerages say even though some of Wall Street’s larger investment banks are agreeing to Cuomo’s terms, it doesn’t mean they need to follow suit.
As reported Aug. 19 in the Wall Street Journal, secondary dealers of auction rate securities like Fidelity and Oppenheimer believe regulators should put the onus of blame for the auction market’s demise - as well as any agreements to buy back auction rate securities from investors - solely on the underwriters of the securities and the controllers of the auctions: Wall Street investment banks.
“None of the rest of the market knew about how auction dealers allegedly controlled the whole auction process for 25 years,†said Michael Decker, chief executive of the association that represents regional brokerages, in the Wall Street Journal article.
Whether regional brokers had prior knowledge about the inner workings of the auction rate process may be irrelevant. At the heart of the state and federal investigations regarding auction rate securities is the issue of whether the securities were presented and sold to investors as “safe†and “liquid†when, in fact, they were not. In many cases, investors contend brokers sold them the instruments as cash alternatives - investments they could cash out of at will.
It was only when the auction market collapsed in February - and their auction securities became illiquid - that investors learned their “cash alternative†investments strayed far from the promises of brokers.
Moving forward, the issue of culpability for smaller brokerage houses will be contingent on what regulators uncover in their investigations. Period. Interestingly, several of the brokerages mentioned in the Aug. 19 Wall Street Journal story, including Oppenheimer, E-Trade Financial Corp. and Fidelity Investments, have refused to specify the dollar amount in auction rate securities their clients hold.
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