Sell Side

Cuomo Rejects RBDA Claims On ARS

WASHINGTON -- New York Attorney General Andrew Cuomo is warning that he has uncovered “some disturbing facts” that show the “downstream” brokerage firms that merely distributed, and did not underwrite, auction-rate securities, were not innocent bystanders and should be held accountable for investors’ losses.

A deputy to Cuomo issued the warning in a two-page response Wednesday to the Regional Bond Dealers Association, which had urged state and federal regulators to focus their ARS probes and sanctions on the larger firms that underwrote and marketed the ARS.

“It is understandable that the RBDA would want to portray its member firms as innocent bystanders to the rampant fraud in the ARS market,” Benjamin Lawsky, deputy counselor and special assistant to Cuomo, told RBDA. “We cannot simply assume that your members were duped by the lead manager firms.”

Cuomo’s “investigation has already begun to uncover some disturbing facts that seem to belie the innocent picture of downstream brokerages you paint in your letter,” he said in the letter. “For example, some evidence indicates that Fidelity was actively marketing auction-rate securities to its high net worth clients. Obviously our investigation will continue to focus on exactly how this marketing came about and on what level of knowledge Fidelity had about the liquidity risks,” Lawsky said.

“For that matter, our investigation will closely examine whether Fidelity or any other downstream brokerages consciously avoided knowledge of the ARS market deterioration,” he told RBDA. ”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.”

Lawsky said that the regional dealer group’s portrayal of the downstream brokerages as being in the dark about the fact of the ARS market’s deterioration seems “counter-intuitive.”

“These firms are licensed broker-dealers and were obviously well-paid by their clients for their specialized knowledge and diligence regarding the appropriateness of various products as investments. It seems highly unlikely that the firms had no understanding of what was happening in the ARS market,” he said.

The letter added, however, that Cuomo “shares your concern for providing relief to all investors who were defrauded” and promises that his investigation will encompass “downstream brokerages as well as the big firms.”

Lawsky said Cuomo has subpoenaed and continues to investigate downstream brokerages including not only Fidelity and Charles Schwab, but also TD Ameritrade, E*Trade Financial and Oppenheimer & Co. 

In a statement RBDA said: "We appreciate the Attorney General’s office’s prompt response to our letter last week seeking relief for investors. We also look forward to continuing to work with the Attorney General, the SEC and other enforcement agencies as they investigate failed auction rate securities. We expect they will take full appropriate measure against any firms or individuals who have violated securities laws and we fully support them in their efforts. Our focus has been and remains on investors and ensuring they can liquidate their ARS positions as soon as possible."


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