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Apr-20-2008

Auction-Bond Probes Widen as Cuomo Subpoenas 18 Firms (Update4)

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New York Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms including UBS AG and Merrill Lynch & Co. in an investigation that could lead to criminal charges, a person familiar with the probe said yesterday. (More...)
New Jersey's Attorney General's office is joining authorities from eight other states to investigate whether local investors were duped when advisers steered their holdings into the troubled "auction-rate" securities market. (More...)
Karen Tyler, NASAA president and North Dakota Securities Commissioner said state securities regulators have been responding to auction-rate securities-related complaints and have had investigations underway since late February. (More...)
Cuomo is investigating banks that underwrote and brokered the investments to determine how the risk of auction failure was disclosed to investors. (More...)
Much of the debt was guaranteed by bond insurance companies that also backed subprime mortgage-related securities. (More...)
Cuomo is also asking for information about how bankers persuaded borrowers to issue the bonds and how the banks came to decide when to stop bidding in mid-February, the person familiar with the probe said. (More...)
Now, regulators are looking at whether banking firms adequately warned investors of the risks that the auctions could fail. (More...)
Particularly in the face of what the financial press has dubbed a "worldwide backlash against capitalism" the dangers presented by cults of personality married with broad investigatory powers are significant. (More...)
Missouri is one of nine states on a national task force of state regulators examining the problem. (More...)
I am done allowing others to steal my ability to help others. (More...)

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New York Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms including UBS AG and Merrill Lynch & Co. in an investigation that could lead to criminal charges, a person familiar with the probe said yesterday. Officials from nine other states formed a task force to determine whether brokers misrepresented the debt as an alternative to money-market investments when they sold it to individuals. "To have subpoenas and the threat of criminal investigations raised suggests that somebody has made up their mind that there really are abuses there,'' said Donald Langevoort, a former U.S. Securities and Exchange Commission attorney who now teaches securities law at Georgetown University in Washington. "It certainly suggests something more than regulatory curiosity.'' Officials are increasing their scrutiny after the $330 billion auction-rate market seized up in February amid the fallout from the subprime mortgage slump, leaving some issuers paying rates as high as 20 percent and investors frozen in the debt. The SEC's inspections office sent letters to the biggest sellers of auction-rate securities this month seeking the names of customers who purchased the notes and the identities of brokers who sold them, according to information obtained by Bloomberg News. "We're all getting complaints on a daily basis from retail investors and they all have the same the story: they were told by their brokers these were safe as cash and they're not,'' said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin and head of the task force. [1] CHICAGO (Reuters) - New York's attorney general and securities regulators in several U.S. states are probing auction-rate securities and the role Wall Street firms had in enticing investors into the troubled $330 billion market. New York Attorney General Andrew Cuomo's office launched a sweeping investigation this week, sending subpoenas to 18 broker-dealers and banks, people familiar with the probe told Reuters on Thursday.[2] The city of Springfield recently made headlines due to heavy losses in auction-rate securities. Other communities are also involved, according to Galvin. Municipalities not only can't access some cash they thought they had just temporarily set aside, but they may also be getting whacked with high interest-rate penalties due to the frozen markets, another source said. Galvin's office has already launched its own investigation of the auction-rate securities market, issuing subpoenas to major Wall Street investment banks after individual people stepped forward to say they can't get their money back. Earlier this week, Galvin's securities division chief, Bryan Lantagne, was appointed head of a new multi-state task force to investigate the auction-rate securities market. New York Attorney General Andrew Cuomo also this week launched his own broad probe into the same market.[3]

Lantagne said. "States have heard complaints from a wide range of investors - young families saving for a first home, small business owners, retirees, and people with parents in nursing homes - whose lives have been detrimentally impacted because the money they thought was liquid is now tied up in this frozen market. Based on these investor complaints, this appears to be a pervasive problem." Investors "had this instrument that they thought was cash that has now, somehow, morphed into long-term debt," he said. Lantagne rejects the idea that auction-rate securities historically were safe and cash-like investments and could have continued to be characterized as such were it not for the subprime mortgage crisis. "There have been problems in the past," he said. "It wasn't like this never happened and couldn't possibly happen." The NASAA is urging investors with ARS complaints to contact their state securities regulators, and noted that contact information can be obtained at www.nasaa.org. The states' ARS task force comes after New York Attorney General Andrew Cuomo subpoenaed firms for information about auction-rate securities earlier this week.[4]

The attorney general of New York, Andrew M. Cuomo, has reportedly subpoenaed 18 banks that underwrote and brokered auction-rate securities, including Citigroup, Merrill Lynch, Morgan Stanley and UBS, as state regulators step up their inquiries into the securities and how Wall Street banks sold them to investors. Auction-rate securities are long-term bonds that were often sold as short-term investments because investors had the option of selling them at periodic auctions held every week or month. Municipalities, student loan companies and closed-end funds have issued about $330 billion of these bonds. In February, many investors found they could no longer get out of the securities because hundreds of auctions failed when several big banks trying to conserve their capital stopped bidding in the auctions they were administering.[5] WASHINGTON - New York Attorney General Andrew Cuomo has subpoenaed Wall Street banks and broker-dealers for information about their auction-rate securities transactions and sales, sources said yesterday. Cuomo, who is seeking information dating back as far back as 2003, wants to know the extent to which firms stepped in to prevent auctions from failing and whether they misled investors by marketing their ARS as cash-like investments, the sources said. The list of firms that received subpoenas includes Merrill Lynch & Co., JPMorgan, UBS Securities LLC, and others, they said. Spokesmen for these and other firms declined to comment.[6] NEW YORK (CNNMoney.com) -- New York Attorney General Andrew Cuomo is investigating 18 Wall Street investment banks regarding the collapsed auction rate securities market, according to an article from the Wall Street Journal. The report says that the New York Attorney General has issued subpoenas early this week that included large-sized financials such as UBS, Merrill Lynch, and Goldman Sachs, with even more subpoenas coming soon.[7] New York Attorney General Andrew Cuomo has launched a broad investigation into the auction rate securities market, a $330bn (£165bn) market that virtually collapsed in February when many banks chose to support the auctions with their own bids. Mr Cuomo's office subpoenaed 18 banks and financial institutions, including Goldman Sachs and UBS, earlier this week, in his bid to understand not only whether mis-selling occurred in the complex market, but also what local councils and schools were told about auction rates as a method of cheaper financing. The majority of investors in the asset-backed market have had their fingers burnt, after buying what they believed to be liquid securities only to find out they are now holding near-worthless instruments.[8] NEW YORK, April 17 -- New York Attorney General Andrew M. Cuomo has launched a wide-ranging criminal investigation of the market for auction rate securities, issuing subpoenas to 18 financial services companies, a source familiar with the inquiry said Thursday. Auction rate securities are a troubled corner of the credit market that has left investors unable to access their money and local governments with higher financing costs. Cuomo's office has requested documents from firms including Goldman Sachs, Morgan Stanley, J.P. Morgan, Merrill Lynch and UBS, said the source, who spoke on the condition of anonymity because the investigation is in its early stages. Investigators are looking at various aspects of the $330 billion industry, including how the securities were marketed to the municipalities, hospitals and schools that issue them and whether investors were adequately informed of the risks.[9] On April 18, The New York Times reported that New York Attorney General Andrew M. Cuomo is investigating how auction rate securities were marketed to municipalities and public entities, and his office has subpoenaed 18 banks that underwrote and brokered auction rate securities, including Goldman Sachs Group, Inc. In addition, securities regulators from nine other states have formed a task force investigating how banks disclosed the risks of auction failures to investors, and the Financial Industry Regulatory Authority, working with the Securities and Exchange Commission, has initiated an inquiry into sales practices in the auction rate securities industry.[10]

New York Attorney General Andrew Cuomo has launched an investigation, demanding documents from 18 institutions, including Merrill Lynch and Goldman Sachs. A multistate task force of securities regulators launched another probe of how the auctions were run, why broker-dealers stopped supporting them with their own bids last winter, and how they were sold to consumers who believed they were buying a safe and easily sold investment.[11] New York Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms including UBS AG and Merrill Lynch & Co. in an investigation that could lead to criminal charges, a person familiar with the probe said yesterday. Officials from nine other states formed a task force to determine whether brokers misrepresented the debt as an alternative to money-market investments when they sold it to individuals. These are the kind of moves needed to create the fear among the professional which eventually leads to caution and a new bull market.[12]

April 17 (Bloomberg) -- New York Attorney General Andrew Cuomo's office issued subpoenas to 18 banks and securities firms as part of a criminal probe into the marketing of auction-rate bonds to investors and issuers, a person familiar with the investigation said.[13] The latest case: New York state's attorney general, Andrew Cuomo, has launched a broad investigation into auction-rate securities, instruments used by municipalities, schools, closed-end mutual funds and others to raise money. Mr. Cuomo's office sent subpoenas to 18 institutions on Monday and Tuesday seeking information on their auction-rate-securities, including some of Wall Street's biggest, such as UBS AG, Citigroup Inc., Merrill Lynch & Co., J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., according to a person familiar with the investigation.[14] Wall Street might want to quiet its chortling over former New York Attorney General Eliot Spitzer's recent turn of events. His prosecutorial legacy appears to be alive and well in the form of Andrew Cuomo. Current New York Attorney General Cuomo has sent subpoenas to 18 banks to find out more about how they sold auction-rate securities, according to reports in the Wall Street Journal and the New York Times.[15]

NEW YORK, April 17 (Reuters) - New York Attorney General Andrew Cuomo this week launched a sweeping investigation of the $330 billion auction rate securities market, sending subpoenas to 18 banks and brokerages, people familiar with the investigation said on Thursday.[16] In an investigation of the auction rate securities market, New York Attorney General Andrew Cuomo sent subpoenas to 18 banks and brokerages, including Raymond James Financial Inc., according to Reuters news service.[17]

Attorney General Andrew Cuomo began the industrywide investigation into how Wall Street banks sold the securities after distress in the $330 billion (207.91 billion) auction rate securities market caused more than 50 student lenders to stop making federally guaranteed student loans, according to the official, who spoke on condition of anonymity because the investigation was ongoing.[18]

Responding to complaints, regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington have formed a task force and have launched individual state investigations, according to the membership organization. "Given the number and nature of the complaints and the damaging impact this latest manifestation of the credit crisis is having on Main Street investors, state securities regulators have structured a coordinated approach to moving forward with our investigations," said Karen Tyler, NASAA President and North Dakota Securities Commissioner, in a statement. She added that if violations are uncovered, state securities regulators will seek appropriate remedies, including a commitment from Wall Street to provide their retail clients with an acceptable solution. Auction rate debt, sold by issuers such as U.S. states, student loan agencies and closed-end funds, has long-term maturities but the interest rates paid are reset at periodic auctions.[19] April 17 (Bloomberg) -- Nine state regulators formed a task force to investigate the auction-rate securities market and whether laws were broken when they were sold to investors, the North American Securities Administrators Association said. Regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington are probing whether brokers misrepresented the securities in their marketing to individuals, the Washington-based group said today in a news release. "We're all getting complaints on a daily basis from retail investors and they all have the same the story: they were told by their brokers these were safe as cash and they're not,'' said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin and head of the task force. Regulatory scrutiny of Wall Street has been growing since the $330 billion auction-rate market collapsed in February, leaving issuers paying higher penalty rates and investors unable to sell their securities.[20] The creation of the task force - which currently includes securities regulators from nine states and is being led by Bryan Lantagne, director of the Massachusetts Securities Division - was announced yesterday by the North American Securities Administrators Association. "Given the number and nature of the complaints and the damaging impact this latest manifestation of the credit crisis is having on Main Street investors, state securities regulators have structured a coordinated approach to moving forward with our investigations," said NASAA president Karen Tyler, the North Dakota Securities Commissioner. "If violations are uncovered, then state securities regulators will seek appropriate remedies, including a much stronger commitment from Wall Street to provide their retail clients with an acceptable solution." The task force is being formed as growing numbers of investors complain that they are now stuck holding auction-rate securities that they thought were safe, liquid and cash-like investments. It essentially will help provide states with means to share information and a road map on how to investigate the investor complaints. Each state is to be assigned a bank or broker-dealer firm on which they will develop expertise, according to Lantagne. "We've been hearing from our members that they're getting these calls on a regular basis. Many states have ongoing investigations, others are in the early stages of their investigations" and have had questions about how to obtain information and what kind of direction they should be taking, he said. "NASAA established this task force to basically set up a structure whereby states can contact a lead state on a particular firm."[4]

WASHINGTON - A group of state securities regulators investigating whether investment banks adequately disclosed the risks associated with the auction-rate securities they sold investors have formed a task force to share their information and expertise with other states trying to address investor ARS complaints.[4]

FINRA's inquiry is focused on sales practices and marketing, sources said. Both agencies have sent banks and broker-dealers for questionnaires and other requests for information about the securities. All of the probes stem from hundreds of complaints that state, federal, and FINRA officials have received from investors who have been unable to sell their ARS holdings. Historically these securities, which typically were insured, were marketed as very liquid, cash-like investments that had higher yields than money market funds or certificates of deposits. When the insurers with exposure to the subprime mortgage market experienced rating downgrades because of the turmoil in that market, that lowered the value of the securities they insured. Investors lost interest in ARS and the auctions held to periodically reset the rates began to fail when they did not attract enough buyers. In the past, banks and broker-dealers put in bids of their own on these securities to prevent auctions from failing. In June 2006, 15 firms agreed to pay $13 million to settle charges that they violated the securities laws by not disclosing these and other auction-rate securities practices. Some firms began disclosing their practice of putting in bids to prevent failed auctions. The credit crunch led banks and dealers to tighten their lending standards and put a stop to this practice.[6] Cuomo has launch a big probe of the auction-rate mess. He plans to probe to know how a market which operated seamlessly since 1985 suddenly shut down. He wants to know why major banks and brokerage houses walked out on making this market. And, most of all, he want to know why investors and corporations were told that auction-rate securities were virtually the same as cash. The paper had a little bit better interest rate than a savings account, but people could take their money out at any time. That is until they couldn't. According to The Wall Street Journal "Mr. Cuomo's office sent subpoenas to 18 institutions on Monday and Tuesday seeking information on their auction-rate-securities." That would include operations like Citigroup (NYSE:C), Merrill Lynch (NYSE:MER), and Morgan Stanley (NYSE:MS). As if they did not already have enough problems on their plates.[21] Call it the Wall Street phrase of the week: auction-rate securities. These instruments, used by municipalities, schools, closed-end mutual funds and others to raise money, have been on the out since February, when many banks stopped bidding on them. Today, Citi in its earnings report said it took $1.5 billion in write downs on auction-rate securities. The WSJ reported that NYAG Andrew Cuomo (pictured) is turning his office's attention to auction-rate securities. His office subpoenaed 18 institutions this week, including Wall Street powerhouses UBS, Citi, Merrill and more. The NLJ reported this week that at least 14 lawsuits, as well as additional arbitrations, have been filed by investors. The Journal's Robert Frank a couple of months ago wrote this page-one story about a family that sold a business for more than $1 billion and gave the money to Lehman, which put a chunk into auction-rate securities.[22]

Andrew Cuomo, New York attorney-general, is investigating the $330bn auction-rate securities market that has recently collapsed, leading to unexpected high interest rates for numerous municipal borrowers and losses for investors unable to sell their holdings. Subpoenas were this week sent to 18 banks and brokerages.[23] New York Atty. Gen. Andrew Cuomo's office launched an investigation this week, sending subpoenas to 18 broker-dealers and banks, people familiar with the probe said Thursday. The securities were long touted as cash-like investments, attracting both individual and institutional investors, until the credit crunch led to a breakdown in the market. Cuomo's subpoenas seek information about what municipalities or other issuers were told about the securities and whether investors were told they were buying safe, highly liquid securities. Among the major companies getting subpoenas this week, sources said, were Merrill Lynch, Goldman Sachs, Citigroup and Bank of America.[24] New York Attorney General Andrew Cuomos office subpoenaed 18 banks and securities companies as part of an investigation into how auction-rate securities are being marketed to investors, according to a report.[25] New York's attorney general and securities regulators in nine other states are probing auction-rate securities and the role Wall Street firms had in enticing investors into the troubled $330-billion market.[24] April 18 (Bloomberg) -- Regulators are widening their probes into the collapse of the auction-rate securities market as states from New York to Washington scrutinize how Wall Street peddled the bonds to investors and issuers.[1]

More on regulators' probes into so-called auction-rate debt, which have caused misery for thousands of investors who have become trapped in the securities amid the credit crunch: Bloomberg News reports today that the Securities and Exchange Commission wants brokerages to hand over more details about how the bonds were pitched to investors. "We are looking at representations made to investors when they purchased auction-rate securities," Lori Richards, head of the SEC'''s Office of Compliance Inspections and Examinations, told Bloomberg. The SEC'''s inspections office sent letters to the biggest sellers of auction-rate debt this month seeking the names of customers who purchased the notes and the identities of brokers who sold them, Bloomberg reports. On Thursday the North American Securities Administrators Assn. said nine states were coordinating their probes of the $330-billion auction-rate market.[26] April 18 (Bloomberg) -- The U.S. Securities and Exchange Commission asked brokerages to hand over more details about auction-rate bond sales, as regulators examine whether firms improperly steered clients into securities they can't sell. The SEC's inspections office sent letters to the biggest sellers of auction-rate securities this month seeking the names of customers who purchased the notes and the identities of brokers who sold them. Inspectors want lists of bonds that clients bought, showing their values on different dates, a copy of a letter obtained by Bloomberg News shows. "We are looking at representations made to investors when they purchased auction-rate securities in coordination with Finra,'' Lori Richards, head of the SEC's Office of Compliance Inspections and Examinations, said in an interview, referring to the Financial Industry Regulatory Authority. She declined to discuss specific firms or investors.[27]

Late last month Massachusetts Secretary of State William Galvin subpoenaed Merrill, UBS, and Bank of America Investment Services Inc. for information on ARS transactions and sales. Galvin told reporters that his office had received calls from many investors who thought they were investing in safe, liquid investments only to find that they were stuck holding these securities. In addition to the state investigations, the Securities and Exchange Commission's enforcement division and the Financial Industry Regulatory Authority are also probing whether broker-dealers misrepresented the liquidity risks of auction-rate securities when they sold them to investors. The SEC is looking at other issues as well, such as whether broker-dealers favored certain customers by ensuring they would be able to sell their auction-rate securities, when others could not.[6]

The regulators are looking at how banks disclosed the risks of auction failures to investors, mostly individuals and corporations. The Times said that Mr. Cuomo'''s office is also exploring how the securities were marketed to municipalities and public entities like the Port Authority of New York and New Jersey, which was forced to pay a '''penalty''' interest rate as high as 20 percent on some of its securities when the auctions first started failing in February. '''Every state is hearing these complaints,''' Bryan J. Lantagne, the director of the Massachusetts Securities Division, told The Times.[5] The subpoenas were issued under terms of New York State's Martin Act, which gives New York investigators broad powers, along with the ability to bring criminal charges. The regulators are focusing on whether the risks of the measures was adequately disclosed after many investors found they could no longer get out of the securities because hundreds of auctions failed when big banks stopped bidding in them as the effects global credit crunch gripped the marketplace.[28]

On February 13, 2008, approximately 87% of all auctions of auction rate securities failed when all major broker-dealers refused to continue to support the auctions. As a result of the withdrawal of support by all of the major broker-dealers, the market for auction rate securities collapsed, leaving the holders of these auction rate securities with no commercially reasonable means of liquidating the investments defendants offered and sold as a suitable alternative to money market funds and other short-term cash management vehicles. On April 9, 2008, in a 10-Q filing with the SEC, Goldman Sachs acknowledged it has received requests for information from "various governmental agencies and self-regulatory organizations relating to certain auction products. and the related recent failure of such auctions." The New York Attorney General also is investigating how banks brokered auction rate securities and how they decided to allow some auctions to fail in February while supporting others.[10] New York Attorney General Andrew Cuomo is also investigating how the banks brokered the securities, supporting some auctions while permitting others to fail, The Bond Buyer reported yesterday, without citing a source for the information.[20] New York Attorney General Andrew Cuomo has subpoenaed 18 banks and securities firms, including UBS AG and Merrill Lynch & Co., in a probe that may result in criminal charges, a person familiar with the effort said yesterday.[27]

Ultra-aggressive NY State Attorney General Andrew Cuomo, clearly hoping to become the state's governor one day, has launched a huge probe into why the banks killed the market. According to The Wall Street Journal, "Mr. Cuomo's office sent subpoenas to 18 institutions on Monday and Tuesday seeking information on their auction-rate-securities."[29]

No one who pointed to questionable behavior in Spitzer could do so credibly. He was, most likely, already investigating them. He was beyond careless- hung by his own tactics, the wiretap, the money trace and the threat of public exposure. So, what are we to make of his successor, Andrew Cuomo? Well, certainly the Wall Street Journal has de facto dubbed him the new Spitzer in the growing investigation of Auction Rate Securities. This is ironic given the history of mild animosity between the two.[30] An investigation of auction rate securities is also underway by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, which oversees Wall Street.[28]

April 17 (Bloomberg) -- U.S. state and local borrowers burned by the collapse of the auction-rate bond market are bidding on their own securities in an attempt to bring down interest costs that soared as high as 20 percent. At least three dozen municipal debt issuers, from the 216- bed All Children's Hospital in St. Petersburg, Florida, to Puerto Rico, are taking advantage of Securities and Exchange Commission guidance allowing them to bid if they publicly disclose their intent and show the offers aren't below- market. All Children's used its funds to cut the rate on about $62 million of the pediatric hospital's auction debt to 1.80 percent yesterday from as high as 11 percent in February. "We had to get out of this environment,'' Arnold Stenberg, the chief financial officer of All Children's, said after the hospital dipped into its $450 million of reserves to bid.[31] "We absolutely consulted with our outside counsel,'' said Citizens Chief Financial Officer Sharon Binnun. Dealers running Citizens' auctions, including Bear Stearns Cos. and Goldman Sachs Group Inc., didn't balk at accepting bids, she said. The insurer, which issued auction-rate debt to raise money to pay claims in the event a hurricane strikes Florida, has acquired $2.7 billion of its bonds so far, using cash on hand, Binnun said. Puerto Rico started bidding on its $643 million of auction debt April 3 after interest costs jumped to as high as 12 percent in February, officials said. The effort helped lower the average rate on the bonds to 2.75 percent from about 6.15 percent before the U.S. commonwealth stepped in, a savings of about $400,000 a week, they said. "Our initial reaction was that something is not right in this picture,'' said Jorge Irizarry, president of Puerto Rico's Government Development Bank. "Definitely there was a spike and we are not going to recoup it completely,'' he said, referring to the extra interest Puerto Rico had to pay from the higher rates.[31]

The average rate on seven-day securities jumped as high as 6.89 percent on Feb. 20 from 3.65 percent on average last year. It has since declined to 5.14 percent. "I don't think anyone ever imagined that these auctions would fail,'' said Jorge Irizarry, president of the Government Development Bank of Puerto Rico, whose interest costs rose to as high as 12 percent on failed auction debt. Puerto Rico is planning to convert all of its $643 million in auction bonds to other securities by month-end, joining states, cities, hospitals and colleges who have converted or are planning to replace at least $43.1 billion of the securities by next month, according to data compiled by Bloomberg. Citigroup Inc., the biggest underwriter of municipal auction debt from 2000 to 2007, this week predicted the market will "cease to exist.''[1]

Cities, suburban school districts and corporations borrowed for long periods at lower, short-term interest rates because the rates reset weekly or monthly in a bidding process conducted by securities dealers. The market virtually collapsed when many dealers chose to stop supporting the auctions with their own bids for the paper. Investors who sought extra yield in what they believed was a cash-like, or liquid, security, are now stuck with securities they can't sell. In recent days, companies such as Best Buy, ADC Telecommunications and others have taken write-downs of up to 50 percent on their dead-in-the-water auction-rate portfolios. Lakes Entertainment Inc. of Minnetonka said it bought its $53.5 million in the securities from huge UBS Securities, which this week agreed to lend Lakes up to $11 million against the securities to meet the company's cash needs.[11] Auction rate securities are assets borrowed for a long period of time at short-term interest rates, which are typically lower than long-term rates. Auction rate securities' interest rates are reset frequently in bidding, and their investors try to make more from the cash it raises by selling the securities than the money it loses by paying the dividend.[7]

Auction rate securities are like long-term bonds. They are sold as short-term investments at weekly and monthly auctions where investors have the option to sell what they currently own or buy more. In February, thousands of investors around the country found they couldn't get their money back because large banks that usually buy the securities stopped bidding on them, causing the auctions to fail.[32] Regulators from nine other states have also formed a task force to investigate. Auction rate securities are long-term bonds that were often sold as short-term investments because investors had the option of selling them at periodic auctions held weekly or monthly.[28] Separately, nine state regulators have formed a task force to investigate whether brokers misrepresented the securities. Firms including Merrill Lynch, UBS and Morgan Stanley face lawsuits brought by clients who say they were inappropriately sold auction-rate bonds and told they were as safe as cash.[27]

Separately, a national securities group said Thursday that a task force of comprised of members of eight state regulators across the U.S. have been investigating auction-rate securities and are working to help investors who cannot access funds that brokers placed in the complex investment products.[25] Secretary of State William Galvin yesterday warned that an unspecified number of state municipalities have public funds caught up in the now-frozen "auction-rate securities" market that's being investigated by a slew of regulators across the nation. Galvin, whose office oversees the securities business in Massachusetts, said he's been told by financial industry sources that municipalities purchased the controversial bond-tied investment products. "They wanted to park their cash somewhere," Galvin said of the municipalities that invested in auction-rate securities. Now they can't access those funds while the auction markets are frozen due to the turmoil caused by the subprime-mortgage fiasco, Galvin said. "They're all kind of sheepish about it and don't want to talk about it," said Galvin, who didn't release the names of the towns and cities involved.[3] In other cases, complaints may cross state lines. An individual in Massachusetts, for example, may contact his or her state securities regulator about her mother who is in financial trouble as a result of auction-rate securities investments but is located in a different state. While the states will be sharing information, Lantagne said he expects them each to continue conducting their own investigations. "Each state is a sovereign state and will pursue its own course of action," he said. Asked if the states might band together on enforcement actions, he said, "This is a work in progress. We are still in the investigatory stages of this.[4]

Officials from the 18 banks could not be reached immediately for comment. Securities regulators in nine other states have launched their own probes and formed a task force to coordinate efforts, the North American Securities Administrators Association said on Thursday. Regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington are conducting their individual state investigations and make up the task force so far, according to the group.[2] Galvin's office in Massachusetts subpoenaed information from UBS, Merrill and Bank of America Corp. regarding the sale of the securities to investors in the state. In addition to Massachusetts, the state task force includes Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington, according to the North American Securities Administrators Association. Other states are prepared to participate in the task force, Lantagne said.[1] Bryan Lantagne, director of the Massachusetts Securities Division and head of the nine-state task force, said the state investigations are focusing on sales practices and supervisory issues. "States have heard complaints from a wide range of investors -- young families saving for a first home, small business owners, retirees and people with parents in nursing homes -- whose lives have been detrimentally impacted because the money they thought was liquid is now tied up in this frozen market," Lantagne said in a statement from the North American Securities Administrators Association.[33]

Good news for investors trapped in so-called auction-rate securities: State regulators are feeling your pain. The North American Securities Administrators Assn. today said regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington were coordinating their probes of the $330-billion market.[34] CHICAGO, April 17 (Reuters) - Probes into the troubled $330 billion auction-rate securities market are underway by securities regulators in nine U.S. states, the North American Securities Administrators Association said on Thursday.[19]

SMART LIVING & INVST. ARTICLES NY probe on auction-rate securities market creating the stealth new bull market in mortgage securities, stocks, real estate and US dollar Peter Oberois In the middle of all gloom and doom, the market and the U.S. regulators are cleaning the path for a new U.S. economic boom, dollar and mortgage securities.[12]

New Jersey's Attorney General's office is joining authorities from eight other states to investigate whether local investors were duped when advisers steered their holdings into the troubled "auction-rate" securities market. Auction-rate bonds, which until this year had appeared as safe and accessible as money-market funds, have become unavailable to holders wishing to cash them out, as widespread investor concern has dried up the market for the bonds. [33] NEW YORK - States are investigating how banks and securities firms marketed auction-rate securities to investors as recent failures in the credit markets have prevented many from liquidating the investment instruments to get their money back. Get stories by e-mail on this topic.[25] You have to love Ben Bernanke's ideas about free trade and capitalism. If you are an autoworker and lose your job to Korean imports, as a good economist, he tells you to go to school and find another job. If you are a New York banker caught paying yourself too much and run short of foreign investors to fleece, he makes you a big loan. Now foreign investors are nervous about all the money they have lent Americans and the integrity of U.S. banks. They are fleeing dollar investments for euro-denominated securities, gold, oil and just about anything sounder than the greenback.[35]

LOS ANGELES, Apr 18, 2008 (PrimeNewswire via COMTEX) -- Notice is hereby given that Glancy Binkow & Goldberg LLP has filed a Class Action lawsuit in the United States District Court for the Southern District of New York on behalf of a class (the "Class") consisting of all persons or entities who purchased and/or repurchased auction rate securities offered for sale by The Goldman Sachs Group, Inc. (NYSE:GS), and its principal U.S. broker-dealer, Goldman, Sachs & Co. (collectively, "Goldman Sachs") between March 25, 2003 and February 13, 2008, inclusive (the "Class Period"). A copy of the Complaint is available from the court or from Glancy Binkow & Goldberg LLP. Please contact us by phone to discuss this action or to obtain a copy of the Complaint at (310) 201-9150 or Toll Free at (888) 773-9224, by email at [email protected], or visit our website at www.glancylaw.com.[10]

Spokespersons and lawyers from Cuomo's office did not return calls by press time. Cuomo is at least the second state securities regulator to launch an investigation of these firms over auction rate securities.[6] Separately, The Bond Buyer reported that a group of state security regulators is investigating whether investment banks adequately disclosed the risks associated with auction rate securities.[17] State regulators say some Missouri consumers transferred money out of FDIC-insured money market accounts into auction rate securities because of better rates.[32]

Missouri regulators are investigating whether consumers were misled into plugging hundreds of thousands of dollars into obscure investments called auction-rate securities. Missouri Secretary of State Robin Carnahan's securities division is seeking information from at least eight broker-dealers, officials confirmed this week. More than a dozen consumers have complained they were told they could enjoy the benefits of a money market account, that can be cashed out at any time, but reap a higher return. Their investments became locked up so now they can't get their money back when they need it.[32] How it develops over time remains to be seen." The investor complaints mostly focus on liquidity, he said. "Investors are telling state securities regulators that they did not know that their money was being held in auction-rate securities, and were not advised about the liquidity risks."[4]

Cuomo's office is looking into every part of the auction-rate securities business, the sources said. The securities were long touted as cash-like investments until the credit crunch led to a breakdown in these markets. Cuomo's subpoenas seek information about what towns, public agencies and other issuers were told about the securities they sold as financing. The state will look to see whether investors were told they were buying safe, highly liquid securities that they now cannot sell.[16] Missouri regulators are investigating whether consumers were misled into plugging hundreds of thousands of dollars into obscure investments called auction-rate securities. They are sold as short-term investments at weekly and monthly auctions where investors have the option to sell what they currently own or buy more.[32] Auction-rate securities, which traded regularly since 1985 and were sold to many investors as "cash equivalents", hit a pocket which no one expected. The banks which ran the auctions shut them down because they did not want any of the underlying securities on their balance sheets. Now companies and individuals who bought the paper cannot readily get their money back.[29]

Brokers often pitched the securities as equivalent to money market funds, but with higher yields. As the credit crunch worsened this year, however, many investors have pulled back from complex debt issues. As auction-rate issues have failed to attract new buyers at their weekly or monthly rate resets, most current owners of the securities have been told they'''re stuck with them. That has left thousands of investors unable to get their cash back, because brokerages have refused to buy the securities from their clients, and only a small number of municipal and fund issuers of the debt so far have been willing or able to retire the securities via refinancing.[34] Auction-rate securities are long-term bonds that behave like short-term debt, with interest rates that reset frequently. They have long been popular with conservative investors because some securities are tax-exempt.[16] Auction-rate securities are a form of debt issued by many municipalities and closed-end mutual funds in recent years. They are, in effect, long-term bonds masquerading as short-term debt. The interest rate they pay typically is reset at weekly or monthly auctions.[34] Auction-rate securities are long-term bonds sold by municipalities, student loan corporations, and closed-end funds with interest rates that are reset on a weekly or monthly basis.[36] Auction-rate securities are long-term bonds whose interest resets every seven, 28 or 35 days at bidding run by a dealer. They were sold by municipalities, student loan corporations and closed-end funds, most of whom insured the debt against default.[1]

The report said the move, which is part of an expanded investigation of the regulator into the collapse of the $330-billion market for the notes, aims to uncover if clients were lured into buying notes that brokers could not sell. Bloomberg said the SEC dispatched letters to the biggest sellers of auction-rate securities this month seeking names of customers who purchased the notes and the identities of brokers who sold them. It said the SEC wants the firms to provide lists of bonds that clients bought, showing their values on different dates. It added that the SEC asked the companies to disclose the total value of the same securities in their own inventory, suggesting that the SEC is looking for discrepancies in valuations.[37]

The banks and broker-dealers most active in the auction-rate securities market generally had investors in all 50 states, Lantagne said. Some states have been in the dark about how to pursue investigations, he said.[4] The state investigations center on sales practices and supervisory issues related to auction-rate securities. 'Our focus is to determine what conduct took place at the point of sale ' what was potentially misrepresented and omitted ' and our goal is securing for investors access to their cash as requested,' Tyler said.[38]

The North American Securities Administrators Association said that several of its members have been conducting investigations involving auction-rate securities and are coordinating their efforts to help investors who cannot access funds that their brokers placed in these products.[38]

Cuomo's investigation follows similar probes by the North American Securities Administrators Association, led by members from Massachusetts, Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington.[7] In addition to Massachusetts, the nine-member task force includes regulators in Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington, according to a news release from the North American Securities Administrators Association. Other states are prepared to participate in the task force, Lantagne said.[13] Securities regulators in nine other states also have launched probes and formed a task force to coordinate efforts, the North American Securities Administrators Assn. said Thursday.[24]

The probes are being conducted by individual jurisdictions. "If violations are uncovered, then state securities regulators will seek appropriate remedies, including a much stronger commitment from Wall Street to provide their retail clients with an acceptable solution," said Karen Tyler, NASAA President and North Dakota Securities Commissioner.[25]

Today, a Dewey LeBoeuf press release announced that the firm has has an "Auction-Rate Securities Task Force" with an "integrated team" of "experienced lawyers" providing a "full-service approach" to the issues. Readers of this blog have heard of these task forces before, with regard to stock-options backdating, subprime and global warming. This one seems particularly narrow ' concerning one type of financial instrument. Then again, this was a $330 billion market before it virtually collapsed in February when, according to the WSJ, demand dried up and Wall Street firms stopped providing support for the market they'd given in the past. Buyers had thought the instruments were liquid but they proved not.[22] The Wall Street houses and banks want to minimize more capital-eating write-offs. Some are lending to their customers and letting them use the auction-rate securities as collateral. "This all points to a prolonged recession in the financial sector," said Parr, of the Carlson School.[11]

Bear Stearns collapsed, and the Federal Reserve loaned the banks and Wall Street securities dealers $600 billion against shaky bonds on a 90-day revolving basis. That essentially socialises the banks' losses on bad bonds.[35]

Essentially, the banks wrote ever-more creative mortgages and extended excessive credit card and auto loans. The banks bundled those markers into highly complex bonds, designed to generate fat paydays for loan brokers and bank executives, and sold risk-laden securities to foreign governments, insurance companies, pension funds and wealthy investors. When the worst of the bogus bonds collapsed, those backed by rising adjustable rate mortgages, the banks got stuck with billions of yet unsold bonds.[35] The Complaint alleges that defendants represented to investors that auction rate securities (also known as auction rate preferred stock, variable rate preferred securities, money market preferred securities, periodic auction rate securities and auction rate bonds) were equivalent to cash or money market funds, and highly liquid investments suitable for short-term investing.[10] In one case a consumer transferred more than $400,000 from a home sale, and now can't get access to the money. Investigators said some investors shut out from their money did not even know they had invested in auction rate securities.[32]

Cuomo is looking into every part of the auction rate securities business, Reuters reported, quoting unnamed sources. Cuomo wants to know the extent to which firms stepped in to prevent auctions from failing and whether they misled investors, according to a report in The Daily Deal, which also quoted unnamed sources. Raymond James (NYSE: RJF), a financial services company in St. Petersburg, does not have a statement at this time, spokeswoman Anthea Penrose said.[17] Specifically, the Complaint alleges that defendants failed to disclose: (i) that auction rate securities were not cash alternatives, but actually were complex, long-term financial instruments with 30-year maturity dates or no maturity at all; (ii) that auction rate securities were only liquid at the time of sale because the auction market was artificially supported and manipulated by various broker-dealers to maintain the appearance of liquidity and stability; and (iii) that auction rate securities would become illiquid as soon as the broker-dealers stopped maintaining the auction market.[10] The Complaint charges Goldman Sachs with violations of federal securities laws. Among other things, plaintiff claims that defendants' material omissions and dissemination of materially false and misleading statements concerning auction rate securities caused those securities to be overvalued and artificially inflated, inflicting damages on investors.[10] Defendants knew, but failed to disclose to investors, material facts about auction rate securities.[10]

The problem came as a shock to some investors, who were often told that the auction rate securities were as safe as cash.[18]

The interest rates on the securities are reset at regular auctions, but at the end of January many auctions failed when big banks stopped bidding on the securities. That stuck investors with long-term securities at higher rates that they could not sell.[18] When demand for the securities dried up in February, resulting in a failed auction, many of the interest rates reset at much higher levels. Investors who had bought the securities were then left unable to sell their holdings, which many thought were safe cashlike investments.[9]

Auction rate securities are long-term bonds that behave like short-term debt with interest rates that reset frequently.[17] The securities had been considered a higher-yielding alternative to cash investments. Interest rates on these instruments are set at auctions that are held as frequently as every seven days.[9]

If the minister is also selling the securities to private clients there is clearly liability. To go further there is evidence, which was discussed in the Sunday NYT article "cashless siege" that the banks saw the problem coming and got their institutional clients out by putting their less important individual clients in. Playing Gertrude Stein by saying is cash really cash doesn't change fiduciary relationships, conflicts of interest, failures of disclosure, etc. etc. which malfeasenses the SEC, FINRA and states attorney generals have not missed in their current investigations.[22] New York Atty. Gen. Andrew Cuomo was reported to have subpoenaed 18 banks and brokerages about their involvement in the securities. For more on the states' efforts check out this earlier post.[26] In New York, Cuomo is also asking for information about how bankers persuaded borrowers to issue the bonds and how the securities firms decided when to stop bidding in mid-February, the person familiar with the probe said.[1]

The SEC asked the firms for spreadsheets that list auction- rate bond holdings for individual customers, including the assets' total values at the end of December and February. It also asks the companies to disclose the total value of the same securities in their own inventory, suggesting that the SEC is looking for discrepancies in valuations. Finra, which oversees about 5,100 brokerages, has pressed firms about their marketing of auction-rate bonds to retail, wealthy and institutional investors, a person familiar with that review said on April 8.[27] When an auction fails, rates are set at a penalty level spelled out in bond documents and investors who wanted to sell are left holding the securities.[1]

Dealers also aren't obligated to disclose rates on auction debt when the securities trade. Demand for auction debt waned this year as investors grew skittish of purchasing securities backed by insurers whose own creditworthiness is under pressure because of subprime-related losses.[1]

"Obviously we would never go into the auction-rate market again,'' said David Verinder, chief financial officer at Sarasota Memorial Hospital in Sarasota, Florida, which recently converted $165 million in auction debt. Citigroup today said it took $1.5 billion of writedowns on auction debt in the first quarter as it posted its second straight quarterly loss. UBS last month cut the value of auction securities held by its customers by about 5 percent.[1] States, cities, hospitals and colleges have converted or are planning to replace at least $43.1 billion of the securities by next month, Bloomberg data show. Puerto Rico plans to convert its auction debt by the end of the month.[31]

Not all borrowers waited for the SEC's guidance to participate at auctions. Florida's Citizens Property Insurance Corp., the state's largest property insurer, started bidding on a portion of its $4.5 billion of auction-rate bonds at the end of January. Some of its taxable debt reset at yields as high as 15 percent.[31] The hospital bought $37.25 million of the debt after bidding at the Sifma municipal swap index rate of 2.33 percent, about 5 percentage points lower than the previous week's winning bid and 2.42 percentage points less than the next-lowest bid, results of the auctions show. It now holds more than $46 million of the bonds. "It was initially a challenge to get through all of the required disclosure process and where to collect all the information,'' Stenberg said. "At this point it goes pretty smoothly.''[31] The yield averaged about 0.63 percentage points less than government debt between 2001 and the end of last year. All Children's bid on its auction debt on March 26 after working for 10 days to draft disclosure documents, determine a rate and set up an account with Charlotte, North Carolina-based Wachovia Corp. to buy the bonds, Stenberg, 54, said.[31]

Here is how it works: States, student loan agencies and others sell auction rate debt. They are long-term bonds frequently sold as short term investments.[18] The state is expected to pay underwriters, attorneys and other professionals at least $17 million in fees to replace the auction rate bonds over the next two months.[33]

Taxpayers in New Jersey already have absorbed tens of millions of dollars in losses through the auction-rate collapse. Because of the market problems, interest payments on the $3.4 billion New Jersey had sold in auction-rate bonds has risen by $1.8 million a week, Nancy Feldman, director of the state's Office of Public Finance told lawmakers this week.[33] New Jersey, under Jon Corzine, sold $3.4 billion in auction-rate bonds.[33]

For two decades, auction-rate bonds allowed local governments, hospitals, and closed-end mutual funds to issue debt maturing in as long as 40 years at short-term rates that reset every seven, 28 or 35 days through bidding. Investors and dealers began to abandon the $330 billion market in February on concern that creditworthiness of companies insuring the bonds was deteriorating because of losses they took guaranteeing debt backed by subprime mortgages.[31] "The investor needs to get some kind of liquidity premium,'' said Tommy Inzina, 49, BayCare's chief financial officer. Bidding is an interim solution for many borrowers to prevent failures and keep rates down while they replace auction debt with other types of bonds.[31]

"There are going to be lawsuits all over," said Jeanette Parr, professional adviser to the investment program at the Carlson School of Management at the University of Minnesota and a onetime bond portfolio manager at Ameriprise Financial Inc. "There are phone calls between clients and brokerages. If you are a debt issuer, such as a local government or corporation, you can't get at your funds. This illiquid market reflects a lack of confidence among issuers and investors who thought this was a risk-free investment that resets all the time."[11]

"Cash is king." That's the adage during turbulent times in the investment industry. Cash is what a lot of individual and corporate investors wish they had instead of "auction-rate securities" as a higher-yielding alternative to money-market funds that were earning just 1.5 percent.[11]

NASAA said the state probes centered on sales practices and supervisory issues related to auction-rate issues. "Our focus is to determine what conduct took place at the point of sale -- what was potentially misrepresented and omitted -- and our goal is securing for investors access to their cash as requested," said Karen Tyler, NASAA president and securities commissioner of North Dakota. "If the product was represented to be a cash equivalent going in, it must be treated as a cash equivalent coming out," she said.[34] The Massachusetts Secretary of State's office said on March 28 it subpoenaed information from UBS AG, Merrill Lynch & Co., and Bank of America Corp. regarding the sale of the securities to investors in the state.[36] Massachusetts, for example, will serve as the lead state on UBS Securities LLC and Merrill Lynch & Co., Lantagne said.[4]

Karen Tyler, NASAA president and North Dakota Securities Commissioner said state securities regulators have been responding to auction-rate securities-related complaints and have had investigations underway since late February. [38] Cuomo'''s targeting of the auction-rate securities market comes amid scrutiny of the sector from regulators including the SEC.[23] Fear, loathing and the freezing of the auction-rate securities market are joining customers, lawyers and regulators in common cause against the always-creative securities industry.[11]

LB'ers: Where do auction-rate securities woes fall on the scandal scale? Wall Street types, please enlighten us.[22] Whatever one's view on the investigation, and personally I think the behavior of various parties in the Auction Rate business are, in equal measure, poor business sense and mild ethical lapses- the former being anything but criminal and the later being potentially criminal, it is difficult not to wonder if Cuomo too will draw the gravity-bound character arc that begins with the iconic smiling Wall Street Journal hedcut and ends with a flashbulb-whitewashed behind-the-podium portrait on page six.[30] Wall Street banks running the auctions stopped stepping in to buy the bonds in February when there weren't enough bidders, permitting thousands of failures that triggered rates as high as 22 percent.[13] A number of individuals have also filed lawsuits against Wall Street banks that sold the bonds.[20]

As long as China subsidises the sale of yuan to Wal-Mart and other U.S. importers, the U.S. Treasury should tax dollar-yuan conversions. When China stops manipulating currency markets, the tax would stop. That would reduce imports from and boost exports to China, create new jobs in the U.S., raise U.S. productivity and workers' incomes and reduce the federal deficit. Bernanke has given the banks a lot and received little in return. He should make the Fed's largesse conditional on reforms at the big investment houses, even if that means lower pay for Wall Street big wigs. Let the bankers try earning their money.[35]

Just consider what you are even saying. An issuer and underwriter sells an instrument to a customer and maybe 6 months or a year or 18 months later, they have some insight that only they possess (which is just regarding general market trends that relate to the credit derivative market), and they were under some duty to do what? To refund the money for the securities they sold previously? Ok, obviously not. Now what you appear to be saying, is that there is liability for sales of securities after the time that they purportedly knew. This market imploded catastrophically. Is it the notes that fall into the 2 day period before the market collapsed? This wasnt a developing problem. It was catastrophic once the music stopped and the IBs and market participants could not raise their own liquidity from the central bank, or whatever source or money they were relying on. It was all just musical chairs, but you cant now say, well, we didnt understand we were playing that game, once the music stops.[22] The Securities and Exchange Commission's enforcement division and the Financial Industry Regulatory Authority also have asked banks and broker-dealers for information about auction rate securities.[4] In recent years, investment banks have made handsome fees underwriting and selling auction rate securities.[9]

Not really. Its hard to follow exactly what you are saying and i suspect its because you are wholly unfamiliar with credit derivatives or with the auction rate securities markets or the inter-relationship.[22]

When an auction fails because of lack of demand, rates are set at a "penalty'' level determined at the initial bond offering and holders are stuck with the securities. Borrowers and dealers appealed to the SEC for help, and on March 14 the agency issued guidance allowing municipalities to bid on their bonds as long as they disclose their intention two days in advance of an auction. They must also disclose the rate they plan to bid and the amount of securities they're seeking. Issuers also need to ensure bids weren't below a market rate -- such as Sifma's municipal swap index, a gauge of yields on top-rated, seven-day tax exempt variable rate demand notes -- and they must disclose the auction results.[31] The Financial Industry Regulatory Authority last week confirmed it is also probing the sale of the bonds, and the Securities and Exchange Commission said it is participating in that investigation.[20] The Securities and Exchange Commission last week said it is working with the Financial Industry Regulatory Authority, which oversees brokerages, to examine firms' disclosures to clients who purchased the bonds.[13]

Washington, D.C. (AHN) - The United States Securities and Exchange Commission asked brokerages to provide more details about auction-rate bond sales including the names of customers and details of their accounts, according to reports.[37]

Since the first of the securities were sold in 1984 for American Express Co., the market has expanded as the bonds offered a higher-yielding alternative to money funds.[1]

There are a growing number of private lawsuits against brokers which claim, among other things, fraud. When the securities were sold, many people were not told that the auction-rate market might lose its liquidity. To a large extent, this is a case about reading the fine print. Most, if not all, of the literature given to brokers and their clients made its clear that this paper was not truly cash. That may have been buried deep in the documents, but it was there.[21] Regardless, however, on the securities side the case would be either strict liability on a prospectus or fraud liability for market statements. Considering one ever said anything about these things once they were sold, I would guess its a strict liability claim. On the strict liability side, the claim looks like its something in the range of that the securities were not "as good as cash" (turns our cash was not as good as cash, but that is another lawsuit i guess). If they were as good as cash on the day they were sold, However, and they turned out not to be the same as cash at some later date, plaintiffs are going to have a problem. I cant believe that any judge is going to agree that the banks who sold the instruments guaranteed a market for them.[22]

The banks are already facing a plethora of investigations and class-action lawsuits related to many of the toxic securities that have led to funds collapsing and the fire sale of Bear Stearns.[15] Information on the state investigations can be found at the North American Securities Administrators Association website.[33] The investigations are being conducted by individual jurisdictions through an ARS Task Force chaired by Bryan Lantagne, director of the Massachusetts Securities Division.[38] We caught up with Lawrence Hill, a senior litigation partner at Dewey LeBoeuf who helped put together the task force. Giving a sense of the range of issues the firm anticipates, he said the task force includes attorneys with experience in regulatory investigations, internal investigations and white-collar defense, as well as lawyers who worked on subprime or stock-options backdating matters. "The idea is to have a team in place that is best suited to handle a particular type of disputed issue and pools our talent and resources that we have in those areas," said Hill, "so we can service our clients in real time."[22]

The other states involved in the task force are Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington. Lantagne said he could not say which firms they will each be focusing on because they may "either by statute, or policy, not disclose ongoing investigations." "It's really NASAA's way of trying to coordinate the whole process to bring the states together and make sure everyone has the same level of knowledge and expertise in the area as they move forward," he said.[4] Cuomo's office didn't return calls made yesterday by Bloomberg News. Other states are prepared to participate in the nine-member auction-rate task force, Lantagne said.[20]

New York State Attorney General Andrew Cuomo wants the job his father used to have. He wants to be governor of the Empire State. He wants to fight evil. He want to bring the unrepentant to justice.[21] Mortgage finance company Freddie Mac said Thursday that it would buy up to $15 billion in home loans for higher-priced properties, using new flexibility granted by Congress. Freddie Mac, the second-largest U.S. guarantor of home mortgages, said it would spend $10 billion to $15 billion on mortgages up to nearly $730,000 from Wells Fargo & Co., JPMorgan Chase & Co. and Washington Mutual Inc. and hold the loans on its books. Freddie Mac's move will allow the banks to take difficult-to-sell mortgages off their books. Borrowers in expensive areas such as Los Angeles and New York could benefit with the higher ceiling on loans that the government-sponsored mortgage company can absorb.[24] The New York Times quotes knowledgeable sources as saying the subpoenaed banks were involved in underwriting and brokering the investments in question.[28]

Cuomo is investigating banks that underwrote and brokered the investments to determine how the risk of auction failure was disclosed to investors. [18] Investors have grown skittish in the past year about purchasing notes backed by insurers whose own creditworthiness is under pressure from subprime-mortgage losses. As buyers backed away, dealers who ran auctions refused to buy unwanted securities as they had in the past, resulting in thousands of failures since mid-February.[27] "You had a group of investors and issuers who wanted to undo the whole thing but didn't have a clear path to undo it,'' said Paul Maco, a partner at Vinson & Elkins LLP, and the SEC's first director of the Office of Municipal Securities.[31]

In the middle of all gloom and doom, the market and the U.S. regulators are cleaning the path for a new U.S. economic boom, dollar and mortgage securities.[12] Goldman Sachs Group Inc., the biggest U.S. securities firm by market value, said April 9 it had received requests for information from "various governmental agencies and self- regulatory organizations.'' The New York-based firm said it's cooperating.[27]

Before the regulatory guidance, dealers were reluctant to accept bids from municipal issuers for fear of violating a May 2006 settlement with the SEC over improper bidding practices, said John McNally, a partner at Hawkins Delafield & Wood LLP in Washington. Goldman Sachs Group Inc., Citigroup Inc. and 13 other firms paid $13 million to settle claims they rigged bids in the supposedly blind auctions.[31] Almost two years ago, 15 securities firms paid the SEC $13 million to settle claims of bid-rigging.[1]

In May 2006, the SEC censured and fined 15 securities firms, including Piper and the former RBC Dain Rauscher, for peddling auction-rate securities that "had the effect of favoring certain customers over others, and some had the effect of favoring the issuer of the securities over customers," in addition to several other "misstatements and omissions" in violation of securities law.[11] Auction-rate securities are debt or preferred stock, backed by student loans, municipal debt, mortgages and other long-term obligations.[11] Auction-rate securities are being peddled by bank tellers to retail customers who come in to buy a CD. They're touted as safe.[22] "We are in the first act of the dance of a thousand veils," said Terry Fruth, a veteran securities lawyer who is meeting with prospective clients and other lawyers. "One thing these auction-rate securities are not: a money-market sort of fund."[11]

"I think that clients, large and small, have been surprised by how the large investment banks have not taken responsibility, stood up and made the market for the securities," said Ty Schlobohm, managing director of the investment management group at Cherry Tree Companies in Minnetonka. George Hicks, a veteran at Varde Partners, the Edina-based fund that buys distressed debt, said he and other hedge funds have been sniffing around some auction-rate portfolios.[11] What a house of cards ARS are. They were sold and underwritten by a bunch of banks that collected huge fees for doing it (hundreds of millions per deal), then they ran auctions which they propped up by buying what didn't sell so their brokers could say ARS was the same as a money market (which it was while banks kept the liquidity scam going), then they changed the nature of the instrument itself by not giving the auctions liquidity as they had always done so the auctions failed, now they keep running failed auctions and collecting huge fees for doing so despite the failures. If the failed auctions quit running because banks or municipalities bought back the debt, then the banks lose those important fees for running failed auctions because there wouldn't be anything to "auction". The banks have huge liability for fraud here and should be very ashamed for what they have done to so many innocent people and companies.[22] Just like house-hungry consumers who bit on low, low introductory rates. This local aspect of chasing big money was glossed over in many accounts of the Jefferson County trouble, with focus instead on the change in the debt rating brought on by the failure of bond insurers. This had the effect of jumping the interest payment on the debt to $250 million a year, swamping the $138 million in revenue the system collects.[39] Given historically low interest rates, on one level it was good advice. It is also true that--exactly as in the mortgage making market--the bigger the debt, the bigger the commission for the banks and bond traders.[39] The auction-rate market seized up in late January, leading to failed auctions that left issuers stuck having to pay much higher interest rates. The auctions failed because buyers were spooked by fears the insurers that backed this debt were no longer creditworthy.[19] Granted that they are hard to sell, but they seem to still sell given time. And, when they don't sell, the interest rate bumps up, and the interest still gets paid. The utility may decide to buy the paper back and cancel their debt.[22]

The holdings continue to pay premium interest rates. Investors who had counted on being able to withdraw their holdings to cover living expenses are finding the money is inaccessible because of the market chaos.[33] Of course, bond sellers like the enterprise fund and dedicated revenue streams concept. They provide slightly lower interest rates in exchange for the perceived "sure thing" of dedicated revenue. Then localities often turn around and take the lower rate in order to increase the total amount they borrow.[39]

Goldman Sachs first introduced the auction rate bond to the market about 20 years ago, which was right about the time Jon Corzine was about to become CEO of the company.[33]

More than two-thirds of auctions failed, data compiled by Bloomberg show, and the average rate on seven-day securities shot up to 6.89 percent on Feb. 20 from 3.63 percent a month earlier, according to the Securities Industry and Financial Markets Association.[31] This market did not dramatically collapse in one day. Some banks got out earlier, some later when their upper management decided. (For instance, JPMorgan got out last and they had the liquidity to keep going.) Then on the next day the auction for their securities ran, 7 days, 28 or 35 days away, they "auctioned" off their ARS's to some unfortunate.[22] Hey Victim, You forgot the interest and fees the banks are making for lending the victims "liquidity" for the money the banks froze by selling them these "same as money market" securities in the first place.[22] There were times when the interest, which was being paid on a weekly basis, went from a an effective annual 4% yield to 10% effective yield. The securities were called and my clients recieved 100% of their original investment back. It was good while it lasted.[22] Did brokerage houses represent to clients that the paper was virtually the same as cash, redeemable at any time? If so, buyers of the securities may make a series of claims involving fraud.[29] "If the product was represented as a cash equivalent going in, it must be treated as a cash equivalent coming out,'' Karen Tyler, the securities commissioner in North Dakota and president of the North American Securities Administrators Association, said in a statement.[20] The regulators are part of the North American Securities Administrators Association, which doesnt have any investigative or enforcement authority.[25]

Much of the debt was guaranteed by bond insurance companies that also backed subprime mortgage-related securities. Demand for the debt fell earlier this year after AAA-rated bond insurers were downgraded because of their subprime guarantees. [36] For now, the county has another 30 days to come up with a $53 million payment. As financial mishaps go, it's perhaps not the sexiest storyline. That is precisely what should scare anyone who has followed the way local governments have thrown debt around this decade. Much like home buyers seduced by the largest possible mortgage, local officials were wooed by bankers and bond underwriters to float the largest possible debt they could afford.[39]

Fannie paid a record $400 million civil fine in a settlement with OFHEO and the Securities and Exchange Commission in May 2006. It also agreed to make top-to-bottom changes in its corporate culture, accounting procedures and risk management.[22]

First of all, its not a fraud action. Its a disclosure case, based on the disclosures in the prospectus. Can i glean from the above, that you are saying they didnt disclose that they were acting as market makers in the same securities and supporting or maintaining a market for these shares? I can tell you from having read hundreds of Offering Prospectuses in my life, that i have never seen one that did not say that the underwriters would make a market for the securities. That, however, does not mean that they guarantee liquidity in the market. They will use their best efforts to supply liquidity, but they are not obligated to lose money so that the customer doesnt.[22] In reading through the various articles and comments above, all I see are issues related to liquidity. Are there any issues related to loss of value? Has anyone who is holding, say $250,000 in MARS investments, lost their all or part of their principle? Or is the only issue that they have not been able to cash them out on a timely basis? We have money invested in MARS, and don't need cash until some time next year.[22] Up-to-date UK money news, personal finance advice from The Telegraph's money experts, and all the latest stock market news from around the world - telegraph.co.uk's Money section. For both small businesses and large organisations, Money from telegraph.co.uk brings you information on OEIC investment funds, money experts' advice on personal finance, the latest UK money news and stock market information from around the world.[8] The post is too long for the time of day: early mornings people just want to scan the headlines -- there is already information overload from all the overnight news, no time to appreciate all the subtleties and complexities.[30]

Cuomo is also asking for information about how bankers persuaded borrowers to issue the bonds and how the banks came to decide when to stop bidding in mid-February, the person familiar with the probe said. [13] Adding to the complexity, many public state agencies, including student-loan agencies, around the country bought or issued bonds through the auctions. "Missourians need to double-check promises made about investments they are unfamiliar with," Carnahan said.[32] "There was a concern that it might be market manipulation for an issuer to enter a bid that could influence the price at which the auction occurred,'' said McNally, who serves on the board of directors of the National Association of Bond Lawyers, a municipal bond attorneys' group.[31]

Now, regulators are looking at whether banking firms adequately warned investors of the risks that the auctions could fail. [32] Investors are pointing fingers at the likes of UBS, Citigroup, Merrill Lynch, Wells Fargo and Piper Jaffray. Wells Fargo was sued this week by a California firm seeking to represent multiple clients.[11]

Particularly in the face of what the financial press has dubbed a "worldwide backlash against capitalism" the dangers presented by cults of personality married with broad investigatory powers are significant. Apparently, no one, including the Wall Street Journal, has learned from the saga of Eliot Laurence Spitzer, his naked ambition, or his aggressive tactics in bringing low both the various financial institutions that became his favorite shoe pounding crusade, and political opponents like Joseph L. Bruno upon which he unleashed various state police surveillance teams. That "fast-and-loose" became Spitzer's calling card, along with the adroit ease with which he manipulated the press and the public, should have been alarm bells aplenty, hinting urgently at the deep, throbbing vein of hypocrisy and duplicity you just sort of knew (but likely could not articulate) lurked beneath the contours of Spitzer. That he even revealed his fatal flaw at all is more a function of some ingrained pathology of self-destruction, than the realization any kind of inevitability. [30] Goldman Sachs provides investment banking, securities, and investment management services to corporations, financial institutions, governments and high-net-worth individuals worldwide.[10]

Missouri is one of nine states on a national task force of state regulators examining the problem. [32] Representatives from Florida are among the members of a task force established by regulators to share information and expertise.[17]

I am done allowing others to steal my ability to help others. The leaders of this nation assume they know were my money should be spent to help the most. I argue they don't even know what it's like to be, hungry, cold, or in debt. I unfortunately fell for this attack on my liberal heart until I realized they steal from hard working taxpayers to pay the interest on money they have printed. They stick me with the bill then dole out the cash (bribe) in the form of subsidies to win people over to their philosophy. They also undermine the value of our money by producing more currency. [22] New York-based Lehman Brothers Holdings Inc. was fined $850,000 in 1995 by the SEC for manipulating auctions conducted for American Express.[1]

SOURCES

1. Bloomberg.com: U.S.
2. State officials probing auction-rate market | Reuters
3. Some towns' funds frozen - BostonHerald.com
4. State Regulators Form ARS Probe Task Force - 04.18.2008 - Bond Buyer Article
5. New York A.G. Said to Subpoena 18 Banks Over Auction-Rate Securities - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times
6. Cuomo Opens ARS Probe - 04.17.2008 - Bond Buyer Article
7. N.Y. Attorney General probes auction securities: report - Apr. 17, 2008
8. cnrates118.xml
9. N.Y.'s Attorney General Subpoenas Finance Firms - washingtonpost.com
10. Glancy Binkow & Goldberg LLP, Representing Investors Who Purchased Auction Rate Securities From The Goldman Sachs Group, Inc., Announces Class Action Lawsuit and Seeks to Recover Losses -- GS
11. Broken securities market draws fire
12. IndiaDaily - NY probe on auction-rate securities market creating the stealth new bull market in mortgage securities, stocks, real estate and US dollar
13. Bloomberg.com: Worldwide
14. Free Preview - WSJ.com
15. Cuomo Probes Auction Rate Securities - Portfolio.com
16. UPDATE 1-New York AG probes auction rate markets-sources | Markets | Bonds News | Reuters
17. Report: Raymond James part of New York AG probe - Tampa Bay Business Journal:
18. New York attorney general subpoenas 18 banks in market probe - International Herald Tribune
19. UPDATE 1-Auction-rate probes underway in 9 US states -group | Markets | Bonds News | Reuters
20. Bloomberg.com: Worldwide
21. 24/7 Wall St.: Andrew Cuomo: The Eliot Ness Of Auction-Rates (C)(MER)(MS)
22. Law Blog - WSJ.com : Auction-Rate Securities -- the Latest Legal Rage?
23. FT.com | NY probes auction securities market
24. Auction-rate securities market probed - Los Angeles Times
25. Credit Crisis Backlash as States Probe Auction-Rate Securities - International Business Times -
26. SEC seeking info on auction-rate debt sales : Money & Company : Los Angeles Times
27. Bloomberg.com: Worldwide
28. NY Attorney General Subpoenas Banks In Securities Probe [] - RTTNews, Today's Top Stories, Global Newswires, ToDay's Top News,Global Business news .
29. NY's Cuomo goes after auction-rate market (MER) (C) - BloggingStocks
30. Dealbreaker - A Wall Street Tabloid - Business News Headlines and Financial Gossip - Spitzer II: Son of Spitzer
31. Bloomberg.com: Exclusive
32. www.kansascity.com | 04/18/2008 | Missouri investigating auction-rate securities
33. NJ joins 8 other states to probe investment scheme - Breaking News From New Jersey - NJ.com
34. States ramp up probes of auction-rate debt mess : Money & Company : Los Angeles Times
35. Business Spectator - Toppling American idols
36. N.Y. subpoenas 18 banks, firms - The Boston Globe
37. US SEC Seeks Details In Auction Bond Sales | April 20, 2008 | AHN
38. Investment Executive : State securities regulators coordinate ongoing auction-rate securities investigations
39. Reason Magazine - Up From the Depths

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