Archive for the “JP Morgan Chase” Category

Bank of America apparently is getting ready to join Citigroup, UBS, JPMorgan and other banks that agreed to cut deals with state and federal regulators and resolve investigations into the alleged mishandling of auction rate securities sales.

On Sept. 3, Massachusetts Secretary of State William Galvin said Bank of America, the nation’s second-largest bank, must either reach an agreement with state regulators or be prepared to face legal action. On Sept. 4, New York Attorney General Andrew Cuomo followed up on Galvin’s edict, serving subpoenas to eight Bank of America executives as part of his six-month investigation on how Wall Street’s biggest banks sold auction rate securities to investors.

So far, eight Wall Street heavyweights - UBS, Morgan Stanley, Citigroup, JPMorgan Chase, Wachovia, Merrill Lynch, Goldman Sachs and Deutsche Bank - have agreed to settle claims that they marketed auction rate securities as cash-like alternatives to investors. In addition to buying back nearly $50 billion of the securities from retail investors, the banks also must pay fines totaling more than $500 million to state and federal regulators.

However, the New York attorney general says any settlements agreed to thus far do not cover any possible misconduct by individual brokers.

Meanwhile, two former Credit Suisse Group AG brokers were formally charged with violating securities laws and fraudulently selling subprime mortgages connected to auction rate securities to corporate clients.

As reported Sept. 5 on Bloomberg.com, Julian Tzolov and Eric Butler were charged on Sept. 3 for falsely representing various securities to investors as backed by federally guaranteed student loans and safe alternatives to cash or money market funds.

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.

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.

Jefferson County, Alabama, serves as a prime example of Wall Street financing gone bad. Money troubles for the county, which is home to the state’s largest city, Birmingham, began in 2002. It was then that several Wall Street investment banks, including JP Morgan Chase, devised an elaborate financing arrangement to pay for the county’s new sewer system.

The $5.8 billion arrangement that JP Morgan and other banks designed for Jefferson County was a risky venture - and one that rejected fixed-rate debt and borrowed at variable interest rates using interest-rate swaps. Failing to anticipate a future credit crunch, the plan backfired miserably. More than $3 billion of the sewer bonds have interest rates that reset frequently, with rates going as high as 10 percent.

Today, Jefferson County is on the brink of financial disaster. By some reports, the county has become one of the most indebted municipal governments in the history of the United States, with a current debt of approximately $9,000 for each resident in the county.

Meanwhile, the Wall Street banks that arranged the initial financing deal for Jefferson County have been rewarded to the tune of $120 million in fees and commissions - six times the standard rate.

Faced with few options to resolve its $3.2 billion sewer debt crisis, Jefferson County is now looking at filing Chapter 9 bankruptcy. In doing so, the county would be able to hold off paying banks and creditors while it figures out a restructuring plan for its debts.

On August 15, David Bronner, head of the Retirement Systems of Alabama, said his pension fund would be willing to buy the sewer system for up to $1.4 billion. The deal would require the county to file bankruptcy but essentially leave banks, investors, and insurers with the losses.

Bronner says in seven years he would sell the sewer system back to the county for the same price he initially paid.County commissioners are debating Bronner’s proposal. Some says the move could potentially create even more problems for Jefferson County, including tax increases, job losses, and lessen its ability to finance future infrastructure projects.

On Aug. 1, Jefferson County succeeded in winning a fourth forbearance agreement from the various Wall Street banks. In the end, however, many say the county is simply prolonging the inevitable fate of bankruptcy.

Until then, Jefferson County’s reputation is on the line. As a steward of taxpayers’ money, its future decisions have monumental consequences - and serve as a costly lesson for other municipalities to learn from.

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.