Sell Side

Cuomo Asks More Firms To Settle

WASHINGTON - New York Attorney General Andrew Cuomo yesterday expanded his investigation of auction-rate securities to include JPMorgan Chase & Co., Morgan Stanley, and Wachovia Securities LLC, asking the firms to negotiate agreements to provide relief for investors, as Citigroup Global Markets Inc. and UBS AG did last week.

Cuomo made the requests in letters sent to each of the firms, which are the third-, fourth-, and 10th-largest ARS underwriters respectively, according to Thomson Reuters.

In a related matter, Missouri Secretary of State Robin Carnahan also announced yesterday that she met with Wachovia Friday to discuss redeeming $9.5 billion of ARS held by the firm's investors.

Missouri is one of the states involved in the North American Securities Administrators Association multi-state task force investigating ARS sales practices and is the lead state investigating Wachovia.

The negotiations with Wachovia lasted 14 hours on Friday and will continue this week, Laura Egerdal, a spokesperson for Carnahan, said in an interview. She declined to say whether Missouri will impose any financial penalties against Wachovia, but said the state will "seek some form of accountability" from Wachovia and ask for similar deals to the ones New York made with Citi and UBS.

Regulators from Carnahan's office raided Wachovia's St. Louis offices last month after having trouble obtaining information from the firm regarding some 70 formal complaints the state received over its ARS sales practices.

Additionally, Raymond James Financial Inc., the 14th-largest ARS underwriter according to Thomson Reuters, said in a 10-Q filing yesterday that it has been subpoenaed by the Securities and Exchange Commission and Cuomo's office for information regarding its sales of ARS to investors.

The letters Cuomo sent to JPMorgan, Morgan Stanley, and Wachovia ask them to "enter into immediate talks" to discuss settlement agreements similar to the ones reached with Citi and UBS. Together these firms underwrote $56.2 billion of ARS deals as of Aug. 6, according to Thomson Reuters.

Cuomo's office, the SEC, and other federal and state regulators last Thursday reached an agreement with Citi, the largest dealer of ARS by market share, for the firm to buy back or help liquidate $19.5 billion of ARS held by retail investors. On Friday, the regulators, including Cuomo, announced a similar agreement with UBS to buy back or help liquidate $22.1 billion of ARS.

The agreements, the largest of their kind, will provide a rare opportunity for investors to redeem at par securities that became illiquid when the ARS market collapsed. The letters sent to the three firms said that future ARS settlements should include the six conditions agreed to by Citi and UBS: buyback programs for retail customers - agreements to make whole investors who sold their ARS at a loss, a loan program to expedite the redemption process, relief for institutional investors, refinancing fee refunds for certain municipal issuers, and penalties. Under the agreements with Citi and UBS, New York will receive a total of $125 million, while the other states involved in the investigations will divide an additional $125 million among themselves.

"We believe that when you protect the investor you also increase investor confidence, which helps the entire market," Cuomo said in a statement Monday.

Spokespersons for all three firms said yesterday that they are willing to participate in discussions with regulators.

"We have been and continue to cooperate fully with the regulators and have been working with clients since February to provide liquidity on a case-by-case basis," said a spokesperson from Morgan Stanley.

A lawsuit against Merrill Lynch & Co. from the secretary of the commonwealth of Massachusetts, William Galvin, is still ongoing even as Merrill agreed to redeem $10 billion of its investors' ARS. The investigation against Merrill alleges the firm altered research reports to present ARS in a positive light when the market was collapsing.


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