The Securities and Exchange Commission and New York Attorney General Andrew Cuomo yesterday announced they had finalized settlements with several investment banks over allegations the firms had misrepresented the risks of auction-rate securities.

Last year, the auction-rate securities market seized up, leaving investors holding billions of dollars worth of illiquid securities and issuers paying penalty interest rates as high as 20%.

Both the SEC and Cuomo's office had reached preliminary agreements with some of the firms last year after they and other states launched investigations into the collapse of the ARS market. The SEC announced it had finalized settlements with Banc of America Securities, RBC Capital Markets, with which it had previously entered preliminary settlements, and Deutsche Bank Securities, which had not had a preliminary settlement. Cuomo's announcement included those banks as well as Goldman Sachs, Morgan Stanley and JPMorgan.

Prior to yesterday's announcement, the SEC had reached final settlements with Citi, Wachovia, and UBS.

"Through these latest settlements and prior ARS settlements with other firms entered into by the commission, more than $50 billion in liquidity is being made available to tens of thousands of customers so they can get back all of the money they invested in auction-rate securities," Scott Friestad, deputy director of the SEC's division of enforcement, said in a press release.

Under the settlements, the firms agreed to buy back ARS at par from individuals, charities, and small or medium businesses to whom they sold the securities and to provide liquidity to institutional investors and others who cannot participate in the buy-back program.

Certain customers are also eligible to receive the difference between par value and sale price of their ARS if they were sold below par. Eligible investors must advise the firms that sold them ARS of their intention to participate in the settlements or they could lose their rights to sell the securities, the SEC said.

"These historic settlements provided billions to cash-strapped consumers and gave investors the confidence that regulators are looking out for their interests," Cuomo said in a press release. "Our goal has been to give investors relief from the collapse of the auction-rate securities market, which is exactly what these deals do."
Cuomo gave a higher figure than the SEC, $61 billion, for the value of the buy-back obligations.

The firms misled investors by representing the ARS as liquid, cash-equivalent investments without disclosing the extent to which they propped up the auctions and the risk that those auction would fail if the firms and other broker-dealers withdrew their support, the attorney general's office said in its findings, included in the settlements.

The banks were aware of problems in the ARS market that threatened its viability from the fall of 2007 through the collapse of the market in February 2008, but led investors to believe that the market was functioning, according to the findings.

The firms neither admitted nor denied the allegations as part of the settlements. Cuomo's settlements outlined a requirement for firms to refund refinancing fees that municipal issuers paid to those banks to get out of ARS where that bank was the primary underwriter on securities sold between Aug. 1, 2007 and Feb. 11-13, 2008.

Both the SEC and Cuomo's office said other ARS investigations are continuing.


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