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New York AG Targets More Banks in Auction Rate Securities Probe

Aug 11, 2008 | Parker Waichman LLP Less than a week after announcing settlements with UBS and Citigroup over the way the investment banks handled their auction rate securities business, the New York Attorney General's office is pressing three more banks to enter into similar settlements.  Today, New York Attorney General Andrew Cuomo told JPMorgan Chase & Co., Morgan Stanley and Wachovia Corp that his office wants to begin settlement talks immediately.

Auction rate securities are long-term corporate bonds, municipal bonds and preferred stock on which the interest rates are reset periodically based on bids submitted through securities firms. Generally, rates are reset every  seven, 14, 28 or 35 days. Because they can be sold during weekly or monthly auctions, banks and brokerages often touted auction rate securities as short-term investments or cash equivalents.  Unfortunately, because of the credit crises, the market for auction rate securities crashed.  Thousands of investors have been bewildered to find out that the investments they were sold as cash equivalents are now illiquid.

Cuomo has been investigating the auction rate securities business for the past five months.  Last week both UBS and Citigroup reached settlements with Cuomo's office, other state regulators and the Securities and Exchange  Commission (SEC).  The Citigroup settlement involves the buyback of $7 billion worth of auction rate securities from some 40,000 individual investors.  The settlement also includes payment of $100 million in fines.  The fine will be paid to New York state and the North American Securities Administrators Association, which represents securities regulators in the 50 states and the District of Columbia.  The SEC is also said to be considering additional fines against Citigroup.

Today, it was announced that UBS, the largest bank in Switzerland, had also settled with the SEC and state regulators.  Under terms of the settlement, UBS will buy back $19.4 billion of failed auction-rate securities and pay a $150 million fine.

According to letters sent to Wachovia, JPMorgan and Morgan Stanley, Cuomo is looking for deals similar to the ones struck with UBS and Citigroup.  "It would be unfair to consumers with accounts at other firms, as well as to the firms that settled, if our investigation were to slow down or stop," David Markowitz, Cuomo's top investor protection lawyer, wrote in the letter. "Our investigation's focus is shifting to the next group of market participants."

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