Three securities firms have agreed to buy back roughly $128 million of auction-rate securities and pay fines totaling $600,000 in final settlements with the Financial Industry Regulatory Authority, though one firm official said the settlement process was "completely unfair."
Milwaukee-based Northwestern Mutual Investment services LLC agreed to buy back $103 million of ARS and pay $200,000. Indianapolis-based City Securities Corp. will buy back $13.1 million and pay $250,000, and Cincinnati-based Fifth Third Securities Inc. will buy back $11.9 million and pay $150,000.
The firms neither admitted nor denied the charges while agreeing to the settlements.
"As with our previous settlements, FINRA's first priority has been to ensure investor access to the money they invested in ARS," Susan L. Merrill, FINRA's executive vice president and chief of enforcement, said in a statement. Since last August, FINRA has reached final settlements with 12 firms and is guaranteeing the return of more than $1.3 billion to investors.
Federal and state regulators in August 2008 began announcing ARS settlements with the largest broker-dealers over alleged fraudulent sales practices. As they settled, the firms either declined to comment or said they were acting in their clients' best interest.
But one firm official yesterday broke with the traditional corporate response and challenged the settlement process. "We're not happy about it," said Michael Bosway, president and CEO of City Securities. "We thought the process was completely unfair."
"We had no customer complaints. We had no clients who lost any principal or interest," he said. When asked why his firm did not challenge the accusations, he said "the tone of the regulatory environment is not favorable to investment banking firms these days."
Bosway said his firm redeemed 92% of its outstanding securities 45 days after the end of February, 2008, but this was not mentioned in the FINRA release. City Securities clients held $15.45 million of ARS that the firm underwrote as of May 13, down from $158.23 million as of Feb. 29, according to the settlement documents released by FINRA.
City Securities, the largest municipal bond underwriter in Indiana, according to Thomson Reuters, underwrote ARS with other firms prior to the collapse of the market in February 2008. Northwestern Mutual and Fifth Third were "downstream" brokerages - firms that marketed ARS but did not underwrite them. City paid the largest fine among the three.
Northwestern Mutual was singled out by FINRA in a press release for "initiating its own offers" in September 2008 to buy back ARS from all customer accounts even if it did not sell the securities. Northwestern has completed its ARS repurchases.
"We felt this was a good way to serve our clients," said spokeswoman Jean Towell.
A spokesperson for Fifth Third declined to comment on the settlement.
FINRA said the firms violated disclosure rules for advertising materials offered to customers. The firms failed to state the illiquidity risk of ARS while at the same time misleading investors with claims that said the securities were a "cash alternative" or a "great place for short-term money," according to the settlement documents.
Under the settlement agreements, the firms will buy back ARS from retail clients whose account values did not exceed $10 million. They will also participate in a FINRA-sponsored arbitration program to resolve investor claims for consequential damages. FINRA said 145 arbitration claims were filed through the first six months of 2009.
FINRA said investigations are continuing at a number of firms.