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UPDATE 2-Fidelity settles NY, Mass. auction rate probes
September 12, 2008 / 5:16 PM / 9 years ago

UPDATE 2-Fidelity settles NY, Mass. auction rate probes

(Combines New York, Massachusetts deals)

By Joseph A. Giannone and Svea Herbst

NEW YORK, Sept 12 (Reuters) - Fidelity Investments on Friday reached agreements with authorities in New York and Massachusetts to settle probes into its marketing of auction-rate securities.

New York Attorney General Andrew Cuomo and Massachusetts securities regulator William Galvin separately announced the settlements with Boston-based Fidelity, the giant mutual fund and online brokerage firm.

Fidelity told the states it would buy back about $300 million of auction-rate securities from retail customers, company spokeswoman Anne Crowley said. The company will repurchase auction-rates bought before Feb 13, when the auctions that had allowed investors to cash out collapsed.

As part of the deals, Fidelity will buy the securities by the end of this year, but will pay no penalty.

Fidelity became the first retail broker “to settle and agree to buy back auction-rate securities from its customers,” Cuomo said.

New York officials declined to comment on Fidelity’s links with Goldman Sachs (GS.N), which Cuomo’s office began investigating last month.

Fidelity’s pact followed similar agreements forged with nine large underwriters in the past two months that will restore more than $50 billion to investors and result in $522.5 million in fines.

Regulators have been pushing banks and brokers to repurchase billions of dollars of securities, billed as safe, cash-like instruments bought and sold in weekly or monthly auctions. Big banks stopped supporting these auctions in late January as the investor demand for the debt dried up, part of a broader slump in financial markets.

Thousands of investors have been stuck holding the debt. State officials have investigated whether banks sold these securities even as they internally worried market turmoil was making it harder to complete auctions.

Fidelity, along with a group of smaller brokers, said they should not be responsible for buying back auction rates because they were not underwriters and did not know the true condition of the underlying markets.

“Fidelity is very different. We did not issue these securities and we did not underwrite or auction them,” a Fidelity spokesman said.

Cuomo’s office began investigating last month whether Fidelity marketed Goldman-underwritten ARS because it received other services from the investment bank, giving it an incentive to sell these securities. Most of the auction-rate securities sold by Fidelity were underwritten by Goldman.

Goldman reached an agreement with New York and other regulators in August to buy back $1.5 billion in securities sold to wealth management clients and agreed to pay a $22.5 million fine. Goldman was the No. 5 underwriter of auction-rate municipal bonds since 2000, according to Thomson Reuters data.

Fidelity said it received no special financial incentive to sell auction-rate securities. Roughly 600 Fidelity customers who bought ARS before February 2008, when the markets collapsed, still hold them. (Editing by John Wallace and Gerald E. McCormick)

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