Cuomo Pressing Major Banks in ARS Probe

New York (HedgeCo.Net) – Less than one week after UBS and Citigroup were called upon to buy back over $30 billion in bad auction-rate securities, New York Attorney General Andrew Cuomo is forcing JPMorgan, Morgan Stanley and Wachovia to follow suit.

In a letter to the three banks, Chief of the Attorney General’s Investor Protection Bureau David Markowitz wrote, “Our investigation’s focus is shifting to the next group of market participants. Any resolution would need to address the same concerns addressed in the previous settlements.”

UBS was slapped with $150 million in fines and is being forced to buy back some $18.6 billion worth of the auction-rate securities. These securities, backed by municipal bonds and other debts, were sold under the assumption they were a safe investment. Instead, the $330 market collapsed in February, leaving investors and now the government, wondering if the banks were up front about the potentially high risks associated with such investments.

The probe launched by Cuomo will investigate 18 different banks. He is insisting that banks create auction-rate securities buyback programs for the customers who got stuck selling their securities far below par.

Citigroup also got slapped with a $100 million fine and had to deal with both state regulators and the Securities and Exchange Commission. They eventually agreed to buyback $7.3 billion worth of the securities from individual customers and small businesses. In addition, they must help over 2,500 clients sell about $12 billion of the securities.

Morgan Stanley has agreed to buy back $4.5 billion worth of the securities at par.  According to the Wall Street Journal, Morgan Stanley will repurchase the securities beginning no later than September 30, from all charities and small to mid-size companies with accounts of $10 million or less that were purchased before February 13th of this year.

Merrill Lynch, in an attempt to quell the probe before it starts, offered last week to buy back about $10 billion in the auction-rate securities. However, Cuomo’s office stated that their plan didn’t contain certain “investor protection safeguards.” The Merrill case is currently under review in Cuomo’s office.

Julie Scuderi
Senior Editor for HedgeCo.Net

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