Three More To Settle ARS Cases

WASHINGTON - Merrill Lynch & Co., Goldman, Sachs & Co., and Deutsche Bank AG will buy back at par as much as $14.5 billion of auction-rate securities and pay $162.5 million of fines under separate agreements in principle reached with New York Attorney General Andrew Cuomo and the North American Securities Administrators Association.

Cuomo and Karen Tyler, president of NASAA and commissioner of the North Dakota Securities Department, detailed the settlements along during a telephone press conference yesterday. Cuomo said he reserves the right to file charges against individuals at those firms over questionable ARS sales practices and that his office is investigating multiple individuals at several banks, but he declined to identify anyone.

The agreements come as William Galvin, secretary for the commonwealth of Massachusetts, announced that he had reached a tentative settlement with Merrill to resolve a lawsuit he had filed against the firm late last month. That agreement would not require Merrill to pay a fine.

Asked about Galvin's agreement with Merrill, Cuomo said that his settlements go further by requiring fines and faster buy-backs so that investors get their money sooner.

Under the terms of the Cuomo/NASAA settlement, Merrill will buy back at par $10 billion to $12 billion of ARS held by retail investors with deposits of $4 million or less beginning Oct. 1 and continuing through Jan. 2. Merrill agreed to pay $125 million, which will be distributed between the states based on the number of effected ARS investors.

In comparison, Galvin's terms require Merrill to buy back at par all illiquid ARS held by investors with less than $3 million of deposits beginning Oct. 15.

Cuomo noted that the his agreement with Merrill addresses concerns that the firm's trading and sales officials unduly influenced the firm's research materials on ARS to present the securities in a favorable light and to avoid any mention that the market was under stress. But he would not elaborate.

Galvin had raised these concerns in his lawsuit against Merrill, but his spokesman declined to discuss them yesterday, as well.

Meanwhile, Goldman agreed to buy back at par about $1.5 billion of ARS from its retail customers by Nov. 12 and to pay a $22.5 million fine, Cuomo said.

Deutsche Bank agreed to buy out at par all of its retail customers' ARS within 90 days and to pay a $1.5 million fine, he said.

In a statement, Merrill's chief executive officer John Thain noted that he had met with both Cuomo and Tyler and said, "I am pleased to report that we have reached an amicable resolution and global settlement of this matter. I want to thank them for their leadership and would also like to thank the [Securities and Exchange Commission] and the states for their efforts in this process. We will accelerate the plans we first announced two weeks ago for purchasing ARS ... All of our clients will retain the right to sell their ARS to us through January 15, 2010. We are pleased our clients have the certainty of a favorable resolution to this unprecedented liquidity crisis."

Merrill two weeks ago, had offered to buy back at par $10 billion of ARS from retail clients from Jan. 15, 2009 through Jan. 15, 2010, but Cuomo said at the time that those terms were not sufficient.

Officials from Goldman and Deutsche Bank said they were unaware of the Cuomo press conference and could not comment.

Yesterday's announcement brings to eight the total number of firms that have reached agreements in principle over ARS sales practices. The other firms are: UBS AG, Citigroup Global Markets Inc., JPMorgan Chase & Co., Morgan Stanley, and Wachovia Capital Markets.

Other firms remain under investigation from the NASAA's coalition of states, Cuomo and Galvin.

Cuomo is also conducting investigations of so-called "downstream" firms as well as regional brokerages including Fidelity Investments, Charles Schwab & Co., TD Ameritrade Inc., E*Trade Financial Corp., and Oppenheimer & Co Inc., that distributed but did not underwrite ARS.

Illinois, the lead state investigating Goldman Sachs Group Inc. for NASAA, could not be reached for comment. But Tyler said yesterday that the settlement ends that state's probe of Goldman.

Georgia is also investigating an unnamed firm as part of the NASAA coalition. Robert Terry, director of the Secretary of State's securities division, declined to comment.

Cuomo warned earlier this week that he has uncovered "some disturbing facts" that show the "downstream" ARS brokerage firms 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."

In a statement yesterday, 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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