Cuomo Turns Up ARS Heat On “Downstream” Brokers
The lack of mea culpa from “downstream” brokers over the state of auction rate securities and the predicament of investors stuck with the now-illiquid securities may speak volumes. At least New York Attorney General Andrew Cuomo appears to think so.
In an Aug. 20 letter to the Regional Bond Dealers Association (RBDA), the New York attorney general’s office blatantly dismissed earlier claims by the RBDA that brokerage firms such as Fidelity Investments and Charles Schwab shouldn’t be held liable for the demise of the auction rate market or the illiquidity of their clients’ auction rate investments.
In the letter, Benjamin Lawsky, deputy counselor and special assistant to the attorney general, wrote:
Attorney General Cuomo’s investigation has already begun to uncover some disturbing facts that seem to belie the innocent picture of downstream brokerages you paint . . . For example, some evidence indicates that Fidelity was actively marketing auction rate securities to its high net worth clients. . . “If downstream brokerages deliberately stuck their heads in the sand but continued to actively market these products to unknowing investors, that will certainly be relevant to our calculus of the firms’ culpability.”
In early August, Fidelity Investments and Charles Schwab were among a number of brokerages to contend that state and federal regulators should focus their investigations of abuses concerning auction rate securities solely on the major investment banks that underwrote the securities, rather than the smaller brokerages. As “supporting evidence,” the brokerages suggested they were unaware of the potential pitfalls of auction rate securities and had no prior knowledge that the auction market was in trouble.
Such excuses may not hold water, however. As licensed brokers, having knowledge and information about a particular investment product is a standard part of the job. That point was reiterated in Lawsky’s letter, in which he stated that the attorney general believes it is highly unlikely that the brokerages were, as they claim, “in the dark with investors” regarding the liquidity risks of auction rate securities.
The growing concern by secondary dealers for their auction rate securities fate stems to recent settlement announcements by Cuomo’s office - settlements that do not include some $60 billion in outstanding auction rate securities purchased through smaller brokerages. Now, the brokerages fear the onus will be on them.
Indeed, next week the Financial Industry Regulatory Authority (FINRA) is planning a series of on-site inspections at approximately 40 downstream brokerages, where it will try to determine exactly what they knew in advance of the auction market’s collapse and whether they knowingly represented auction rate securities as safe and liquid investments to clients.
Meanwhile, Citigroup, JPMorgan Chase, Morgan Stanley, UBS and Wachovia all have agreed to buy back $35 billion of auction rate securities and pay more than $360 million in fines. As reported Aug. 22 in the New York Times, three other banks - Merrill Lynch, Goldman Sachs and Deutsche Bank - also plan to buy back at least $12.5 billion in the securities and pay more than $160 million in fines as part of settlements reached late in the day on Aug. 21.
Beginning in October, Merrill Lynch will buy back at least $10 billion of auction rate securities from investors holding less than $4 million of the investments. A $125 million fine also was imposed on the firm.
Separately, the Securities and Exchange Commission (SEC) is continuing its investigation into Merrill Lynch for possible corporate and individual violations.
Goldman Sachs agreed to buy back about $1.5 billion of auction rate securities from investors by mid-November, and pay a $22.5 million fine, while Deutsche Bank will buy back $1 billion of auction rate debt by mid-November and pay a $15 million penalty.
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
September 5th, 2008 at 11:46 am
What about Wells Fargo Investments? They are guilty of soliciting ARPS from their money market clients. I know, I am one of them. I am retired 66, and a divorced woman with no other means of support except SS and most of my retirement was in the MM, they are less than sympathetic.
November 3rd, 2008 at 7:43 am
What about Wells Fargo Investments? My private wealth advisor put me into an ARS Fund that I was told was 7 day liquidity I have tried for months to sell out of these securities. The same advisor told me they would provide a loan at a rate higher then the the securities are returning. My concern is more and more municipalities will default. I currently live in the city of Hoboken and have recently had a property tax increase of 50% because of a budget deficit this will cause homeowners to default as they can not meet the tax increase and further cause a tax shortfall.
November 17th, 2008 at 1:30 pm
Yes, WHAT ABOUT WELLS FARGO INVESTMENTS? We are in the same boat as Joyce Colfer and Michael. We were out and out lied to by Wells Fargo Brokerage. We’ve been given the run around for months now and are feeling extreme panic at this point. We put the majority of our available cash into ARPS which were sold to us as “cash equivalent”.