New York AG intensifies auction-rate debt probe
NEW YORK (Reuters) - New York's state attorney general office on Wednesday intensified its probe into auction-rate debt focusing on Bank of America Corp, Goldman Sachs and Deutsche Bank AG, while issuing a warning to brokerages.
The office of Attorney General Andrew Cuomo said the three firms were next on its list in an industry-wide probe in which five major firms have agreed to buy back billions of the illiquid debt, but without admitting wrongdoing.
The three firms could not be immediately reached for comment.
Also on Wednesday, his office said in a letter to the Regional Bond Dealers Association that it had uncovered "disturbing facts" as part of its investigation into the sales of auction-rate debt by brokerages.
"The investigation has already begun to uncover some disturbing facts that seem to belie the innocent picture of downstream brokerages you paint in your letter," said Wednesday's correspondence, referring to an August 15 RBDA letter about licensed broker-dealers that see themselves as victims of the larger dealers.
The attorney general's letter mentioned Fidelity, the world's largest mutual fund, which officials said last Friday was part of a probe including Merrill Lynch and Co Inc and discount brokerage Charles Schwab Corp.
"For example, some evidence indicates that Fidelity was actively marketing auction rate securities to its high net worth clients," said the letter signed by Benjamin Lawsky, special assistant to Cuomo.
Fidelity spokeswoman Anne Crowley said the firm did not receive the letter directly from the attorney general's office, but knew its contents.
"Fidelity does not actively market these securities and does not offer special financial incentives to representatives if they sell these securities," she said.
Cuomo's office has put itself at the forefront of reaching settlements with major banks over their handling of the debt.
The letter did not say if legal action was pending but noted that if the brokerages "deliberately stuck their heads in the sand but continued to actively market these products to unknowing investors, that will certainly be relevant to our calculus of the firms' culpability."
Regulators say brokerages misled investors into believing that auction-rate debt, which has rates that reset in periodic auctions, was safe and the equivalent of cash.
Much of the $330 billion market has been frozen since February when brokerages abandoned their traditional role as buyers of last resort.
The RBDA said in a response to the New York AG letter that it expected regulators to "take full appropriate measures against any firms or individuals who have violated securities laws and we fully support them in their efforts."
Five big banks -- UBS, Morgan Stanley, JPMorgan Chase & Co, Wachovia Corp and Citigroup -- have agreed to buy back billions of dollars of the debt to settle charges they misled investors about its risk.
The buybacks apply largely to retail customers, charities and small to mid-size businesses.
About $60 billion of the $160 billion in auction-rate securities outstanding are owned by investors who bought them from secondary dealers, according to the RBDA. These investors are not covered by agreements struck with the five big banks.
The bond dealers group argues that lead dealers should buy back the securities because they controlled every aspect of the auctions and kept regional brokerages in the dark when the market turned sour.
(Additional reporting by Joseph Giannone and Dan Wilchins in New York and Svea Herbst-Bayliss in Boston; Editing by Carol Bishopric and Braden Reddall)
