WASHINGTON - Fidelity Investments reached agreements with New York and Massachusetts officials to buy back at par $300 million of auction-rate securities from its customers by the end of the year, becoming the first retail brokerage firm to settle alleged fraudulent sales practices in the ARS market.
New York Attorney General Andrew Cuomo and Massachusetts Commonwealth Secretary William Galvin separately announced the settlements Friday.
The buyback agreements are the first for a "downstream" brokerage - one that did not underwrite ARS but sold them to clients.
Cuomo said in a statement that he applauds Fidelity's agreement and hopes that the firm "will serve as an example to other broker-dealers."
Brian McNiff, a spokesman for Galvin, said the secretary had received an offer from Fidelity, which Galvin accepted, to buy back ARS at par during a 90 day-window from retail investors. The settlement agreement does not include a fine, McNiff said.
A Fidelity spokesperson could not be reached for comment. The firm previously said its Web site has disclosed since September 2006 that failed auctions are a risk associated with ARS and that only a small number of Fidelity retail customers own ARS.
The retail firms had argued that they were unaware of the market's troubles before the auctions failed in February. In an Aug. 15 letter to Cuomo, the Regional Bond Dealers Association defended retail brokerages and said the firms "participated only to a limited extent" in ARS auctions and had "limited access to information regarding the deteriorating liquidity conditions" of the market until it collapsed in mid-February.
But an official in Cuomo's office refuted those claims in an Aug. 20 letter to RBDA, saying Cuomo suspected "downstream brokerages consciously avoided knowledge of the ARS market deterioration." The letter singled out Fidelity for allegedly "actively marketing" ARS to high net worth clients.
Galvin also had been investigating Fidelity and had urged the retail brokerage to accept terms of a buyback agreement that many other underwriting firms have agreed to.
"It is my hope that Fidelity will follow the industry trend and promptly repurchase these securities that it has sold to its customers, many of whom now find themselves unable to access money that they thought was as liquid as cash," Galvin wrote in the one-page letter sent Aug. 19 to Edward Johnson of Fidelity Management & Research Co., and to Fidelity Brokerage Services LLC, which are subsidiaries of Fidelity Investments.
An official with Schwab said Friday he was unaware of Fidelity's potential settlement and said Schwab continues to cooperate with regulators.
Separately, Citigroup Global Markets Inc. has agreed to purchase $20 million of auction-rate securities from the Massachusetts Water Pollution Abatement Trust. Citigroup had sold the securities to the MWPAT last winter when the ARS market was beginning to collapse.