UPDATE 1-Massachusetts sues Oppenheimer & Co over ARS sales
(Adds Oppenheimer response)
BOSTON, Nov 18 (Reuters) - Massachusetts' top securities regulator sued the small investment bank Oppenheimer & Co for fraud on Tuesday, accusing it of deceiving customers in its sales of auction-rate securities.
It is the first time a regulator has charged one of the handful of smaller brokers who resold ARS as safe and liquid investments at a time when the market for the securities was seizing up.
William Galvin, Massachusetts' secretary of the commonwealth, said Oppenheimer customers in Massachusetts could not access $56 million of their money when the market froze up in February. Oppenheimer & Co. is a unit of Oppenheimer Holdings Inc (OPY.N).
"Oppenheimer executives betrayed the trust of their clients by continuing to market these auction-rate securities as safe cash equivalents when they knew this was not the case," Galvin said in a statement.
In a statement issued on Tuesday, Oppenheimer and the executives named in the complaint denied the allegations made by the state and said they intend to "vigorously defend themselves."
"Oppenheimer and its executives and employees had no knowledge of the conduct of the major dealers which caused the entire auction rate securities market to collapse," the bank's statement said.
Oppenheimer said its executives both bought and sold auction rate securities during the period described in the complaint, and that these executives continue to hold "significant amounts" of the securities.
The bank said it was working with regulators and financing sources, including the recently approved federal Troubled Assets Relief Program to help clients cash out of auction rate securities.
Oppenheimer also said on Tuesday it was amending its charter to become a depository bank to become eligible for FDIC insurance and to borrow on a short-term basis from the U.S. Federal Reserve "Discount Window" to bridge the liquidity gap.
It also was exploring the possibility of becoming a U.S. corporation or a U.S. bank holding company, the statement said.
Large Wall Street firms have bought back billions of dollars of ARS and settled with regulators in New York and Massachusetts.
But so-called "downstream firms," including Oppenheimer, that did not issue or underwrite the securities and only sold them, have been less willing to buy back the securities, regulators have said.
(With additional reporting by Gina Keating in Los Angeles) (Reporting by Svea Herbst-Bayliss; editing by John Wallace, Bernard Orr)
