Three big banks settle with NY state over ARS

NEW YORK (Reuters) - Merrill Lynch & Co Inc MER.N, Deutsche Bank (DBKGn.DE) and Goldman Sachs (GS.N) have agreed to buy back billions of dollars of auction-rate securities to settle with state regulators that accused them of understating the debt's risk.

The banks also agreed to pay a total of more than $162 million in fines, said New York State Attorney General Andrew Cuomo, who added that other banks are still under investigation.

Merrill Lynch agreed to pay a $125 million fine, second-highest to UBS's $150 million among banks to settle so far, and will buy back between $10 billion and $12 billion in auction-rate securities from individual investors.

The three banks are the latest to settle with states led by Cuomo and the North American Securities Administrators Association. Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N), Morgan Stanley (MS.N), UBS (UBSN.VX) and Wachovia Corp WB.N have also settled with Cuomo and the group.

The attorney general's office is still working on a settlement with Bank of America (BAC.N), as well as with some discount brokers.

Dealers told investors that auction-rate securities were safe, cash equivalents that would return more than money-market instruments and could be easily sold. The securities offered interest rates that reset periodically in auctions, but those auctions have been failing, turning the notes into hard-to-sell longer-term debt worth less than face value.

Cuomo and other state regulators have been bearing down on dealers that sold the instruments. Even regional dealers that say they were duped by larger brokers may be sued, Cuomo said on Wednesday.

In addition, the attorney general said his office is investigating individuals at the banks. "These settlements are corporate settlements and individuals at these banks are not absolved from future action," Cuomo said.

GOLDMAN, DEUTSCHE

Goldman Sachs will pay a $22.5 million fine and buy back about $1.5 billion in auction-rate notes by November 12, while Deutsche Bank will pay a $15 million penalty and buy back about $1 billion of the notes within 90 days. Merrill will start to make its buybacks October 15 and must finish by January 2.

Merrill Lynch earlier this month said it would buy back auction-rate securities starting in January, but Cuomo said that was not soon enough, making its voluntary offer unacceptable.

Cuomo said Merrill Lynch Chief Executive John Thain met with him on Thursday and was involved in agreeing the terms of the settlement. "I want to applaud him for his leadership," said Cuomo. "These are difficult issues, these are large numbers."

The attorney general also 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.

Documents laid out by Massachusetts' top securities regulator, William Galvin, seem to show that Merrill Lynch analysts were pressured to write positive reports about the notes, breaching an agreement the bank had made with regulators in 2002 over conflicts in research.

Merrill Lynch's settlement with the New York attorney general and the North American Securities Administrators Association is separate from an agreement the bank made earlier on Thursday with Galvin.

(Reporting by Elinor Comlay; Editing by Gary Hill)