Raymond James sees up to $50 mln auction-rate loss

Tue May 10, 2011 11:31am EDT

* Losses if forced to repurchase auction-rate securities

* Clients hold about $370 mln of the securities

* Raymond James in talks with regulators

By Joseph A. Giannone

NEW YORK, May 10 (Reuters) - Raymond James Financial Inc (RJF.N) said it may incur losses of $25 million to $50 million if state and federal regulators force the brokerage to repurchase auction-rate securities it sold to clients.

The securities, touted as offering investors cash-like liquidity, have been illiquid since early 2008. St. Petersburg, Florida-based Raymond James is just one of many brokerages that sold the long-term debt, designed to be traded in weekly or monthly auctions.

Raymond James on Tuesday disclosed it has been in talks with regulators "to resolve the investigations," according to the company's fiscal second-quarter financial report filed with regulators.

The company previously said it was under investigation by the U.S. Securities and Exchange Commission, the New York state attorney general and Florida's financial regulation office.

Three years ago, the SEC and New York state forced Wall Street's big investment banks, which underwrote the ARS and hosted the auctions, to repurchase billions of dollars of the securities from customers.

Regulators said the banks had continued to sell the securities even as they internally worried about credit market conditions. The banks left investors in the lurch when they suddenly quit supporting the auctions.

As a secondary broker of ARS, Raymond James argues it should not be forced to repurchase the securities.

"We believe we have meritorious defenses and, therefore, any action by a regulatory authority to compel us to repurchase the outstanding ARS held by our clients would likely be vigorously contested by us," the company said in its filing.

Raymond James, for the first time, estimated its potential losses if it were forced to repurchase ARS still held by clients at par value: $370 million as of March 31.

Because the market value of the securities is likely to be less, Raymond James estimates its losses would be $25 million to $50 million. The estimate does not include ARS held by clients who moved holdings to another brokerage.

Raymond James said it has cash on hand to complete all or a significant portion of repurchases.

Potentially softening the blow is Nuveen Investments, a large mutual fund manager that has been redeeming certain ARS. Raymond James says about 40 percent of its clients' ARS were issued by Nuveen, which said in early May that it would redeem up to $94 million of the securities.

Raymond James clients' holdings in ARS have been steadily shrinking thanks to redemptions or notes reaching maturity. Raymond James customers held $550 million of the securities at Dec. 31. (Reporting by Joseph A. Giannone; editing by John Wallace)

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