Firms settle auction-rate probes; but more to come

NEW YORK (Reuters) - Three of Wall Street's top investment banks agreed to pay millions of dollars in fines and buy back billions of dollars in frozen, illiquid securities after U.S. regulators reached settlements over the way the firms sold auction-rate securities.

Despite the settlements, the industrywide investigation into auction-rate securities looks far from over as regulators said that, starting next week, they will review about 40 firms' practices, sources familiar with the investigation said.

In Thursday's settlement, New York Attorney General Andrew Cuomo said Merrill Lynch & Co Inc MER.N, Deutsche Bank AG (DBKGn.DE) and Goldman Sachs Group Inc (GS.N) have agreed to the settlement.

The banks agreed to pay the fines and buy back securities from investors who were left holding the notes earlier this year when the auction rate market collapsed.

As part of Cuomo's settlement, Merrill will pay a fine of $125 million and buy back between $10 billion and $12 billion in securities from investors. Goldman Sachs will pay a $22.5 million fine and buy back about $1.5 billion in auction rate notes, while Deutsche Bank will pay a $15 million penalty and buy back about $1 billion of notes.

"After meeting personally today with Attorney General Cuomo and NASAA President (Karen) Tyler, I am pleased to report that we have reached an amicable resolution and global settlement of this matter," Merrill Chief Executive John Thain said in a statement.

Cuomo said Merrill's penalty and the terms of the settlement took into account evidence of conflicted research at the bank.

"Part of our theory on the case dealt with Merrill's research," he said.

Cuomo said Merrill's settlement is separate from an agreement the firm made earlier with Massachusetts' top securities regulator, William Galvin.

MORE TO COME

While the New York settlement represents the biggest money payouts to date, more investigations will be starting soon.

Attorneys and investigators will be undertaking the on-site review for the 40 firms during the weeks of August 25 and September 8 to target firms with large amounts of auction rate securities in accounts.

The probe to enforce the rules of the Financial Industry Regulatory Authority -- the group formed following the merger of the regulatory arms of the National Association of Securities Dealers and the New York Stock Exchange -- comes as authorities nationwide are pressing the big investment banks into settlements.

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.

A letter to the firms from FINRA and obtained by Reuters said the investigators were asking firms to provide electronic lists of auction rate securities issues, auction failures and identify employees on their auction rate securities desks.

"If applicable, identify all individuals who were involved in determining when the firm would place supporting bids or placed such bids," the letter sent to the firms said.

It also asks "whether the firm participated in surveying investor interest and providing 'price talk' guidance to customers."

PLAYING BALL

For Merrill Lynch's part, the New York settlement was the second major deal they reached this week.

On Wednesday, Merrill agreed to buy back about $12 billion of the securities to settle its claims with the Commonwealth of Massachusetts.

On Thursday, Galvin said that Fidelity Investments had replied to him after he urged it earlier in the week to buy back frozen auction-rate securities the company had sold.

Galvin told Reuters that Fidelity dropped off a letter at his Beacon Hill office on Wednesday.

Fidelity left open the door to possibly helping on the auction-rate securities matter, Galvin said on Thursday.

Fidelity, which is privately held, has long said it neither issues nor aggressively markets these securities and that it expects underwriters who issued the securities to stand behind them.

"We do not comment on communications with regulators," Fidelity spokesman Vincent Loporchio said.

(Reporting by Dan Wilchins, Elinor Comlay and Grant McCool in New York and Svea Herbst-Bayliss in Boston; Writing by Patrick Fitzgibbons; Editing by Andre Grenon))