Goldman, Sachs & Co. and Wells Fargo repurchased $26.8 million of auction-rate securities from New Jersey investors affected by the failure of the auction-rate market in 2008, Attorney General Paula Dow announced Monday.
In certain circumstances, Goldman Sachs will also reimburse municipalities refinancing fees they paid to the bank to refinance outstanding ARS into other modes, according to the May 6 consent order.
In transactions where Goldman underwrote auction-rate securities in the primary market and then later served as underwriter to refinance the bonds into fixed-rate mode or convert the securities into variable-rate debt, the bank will repay the municipal issuer such refinancing charges.
“Goldman Sachs shall promptly refund to municipal issuers refinancing fees paid to Goldman Sachs for the refinancing or conversion of their auction-rate securities that occurred between Feb. 11, 2008, and [May 6], where Goldman Sachs acted as underwriter for the initial primary offering of the auction-rate securities between Aug. 1, 2007, and Feb. 11, 2008.”
Before the first quarter of 2008, most banks would step in and buy any unsold ARS so that the auction would be successful. That changed in early 2008, when investment firms needed to save money due in part to their failures in the mortgage-backed securities market.
The municipal auction-rate market fell apart in February 2008, when lack of demand in the secondary forced investors to retain securities they wanted to sell at auction. Issuers were then charged higher interest costs as a penalty for failed auctions. To escape from the soaring interest costs, states and localities went back to Wall Street to refinance their ARS into fixed-rate debt or switch the bonds into variable-rate mode.
Dow’s office found that Goldman and Wells Fargo did not properly train and supervise theirr employees regarding the mechanics of ARS and the risks involved in order to educate their clients.
“The failure of these firms to disclose known risks ultimately harmed investors who purchased auction-rate securities,” Dow said in a statement. “State law requires disclosure of all material facts to investors, particularly when their hard-earned money is on the line.”
Goldman Sachs and Wells Fargo repurchased $25.5 million and $1.37 million of auction-rate bonds, respectively, from New Jersey investors. Goldman will pay New Jersey $959,794 in civil penalties while Wells Fargo will pay $4,666 to the state.
To date, firms have repurchased more than $2.8 billion of auction-rate securities from New Jersey investors. The agreement is New Jersey’s share of a settlement negotiated by a multi-state panel of state regulators formed by the North American Securities Administrators Association.
The consent agreements state that Goldman and Wells neither confirm nor deny New Jersey’s findings. Goldman declined to comment. Wells Fargo said in an e-mail: “The N.J. settlement reflects the implementation of a national settlement reached by Wells Fargo Investments on Nov. 18, 2009, and is related to the repurchase of auction-rate securities stemming from the failure of ARS auctions in 2008.”
