Auction-rate probes stoke New York-Boston rivalry

NEW YORK (Reuters) - The age-old rivalry between Boston and New York, a part of everything from business to baseball, is alive and well in securities regulation.

Federal regulators and officials from 50 states have come down hard on Wall Street over its handling of auction rate securities markets, as hundreds of thousands of investors who thought they had cash-like instruments suddenly found they were unable to cash out when auctions broke down in January.

Behind the scenes of the ongoing clean-up is competition between Massachusett Secretary of the Commonwealth William Galvin and New York Attorney General Andrew Cuomo, whose states host the country's largest financial centers.

"You can take the view that it's just tit-for-tat. People always like to be in the press first, but I think this is more nuanced than just politicians trying to score points," said Charles Whitehead, a securities law professor at Boston University. "To the extent there are issues, if someone finds a problem, they're talking to each other."

Like the Yankees and the Red Sox, officials from the Big Apple and Beantown vied to announce the fruits of their investigations. Often one state would get the word out just hours after the other had gone public with their own latest breakthrough.

BANK OF AMERICA

The latest to score points is Galvin, who on Wednesday told reporters Bank of America Corp (BAC.N) had agreed to repurchase $43 million of auction rates it sold to Massachusetts towns. The news spread as regulators from New York, the SEC and other states continue to investigate BofA.

The BofA buyback followed news earlier in the day that Cuomo was turning the heat up on Boston-based mutual fund giant Fidelity Investments. Cuomo's office revealed it was probing whether Fidelity's business ties to underwriter Goldman Sachs Group Inc (GS.N) prompted sales of auction rates to brokerage clients.

Galvin's office did not return calls seeking comment.

Benjamin Lawsky, special assistant to Andrew Cuomo, told Reuters that chatter about a heated rivalry was overstated.

"This auction rate investigation has been one of the best examples we have ever seen of interstate cooperation," Lawsky said. "We are working extremely close with all of the states."

Settlements with eight of the largest auction-rate banks in the United States also have involved officials from Texas, Missouri and the North American Securities Administrators Association (NASAA), as well as the Securities and Exchange Commission.

Galvin and Cuomo to their credit have pushed banks hard to help small investors get $50 billion of now-illiquid debt redeemed as soon as possible and helped secure $525 million in fines. Yet as elected officials, they have also worked hard to let the public know whom to thank.

UBS AND MERRILL

Galvin led the charge on June 26, when he filed suit against UBS alleging fraudulent sales and insider dealing. A month later Cuomo filed his own suit, alleging similar misdeeds by unnamed officials, and began a flurry of legal actions.

On August 7, Cuomo announced a sweeping settlement with Citigroup and suggested a broad agreement was pending with UBS -- a case where Galvin had invested months of work. So late in the morning of Friday August 8, Galvin broke the news of the settlement to the media, a couple of hours before Cuomo, Texas and other states were to announce the multi-state UBS pact.

There was also some back and forth surrounding the Merrill Lynch & Co Inc MER.N talks.

When on August 15, Galvin said he was close to a settlement, Cuomo responded by saying talks were not proceeding as he wished and threatened to bring legal action within five days.

By Monday Aug 18, Cuomo went on television to declare talks were progressing, but warned he could file suit if Merrill did not come to terms. The brokerage had already announced a plan to repurchase $10 billion of auction rates starting in January.

Not to be outdone, Galvin late on Thursday morning announced a settlement with Merrill, several hours before a news conference scheduled by Cuomo. New York, the SEC and NASAA announced deals with Merrill, Goldman and Deutsche Bank AG agreed to buy back a combined $15 billion in securities.

With regard to Merrill, both sped up the repurchase date to October. The rest of the terms were roughly the same.

"There's always been a rivalry among the agencies. These are high profile people with egos and aspirations," said one bank insider familiar with his company's regulatory talks with the states. "But this is completely off the charts."

(Editing by Andre Grenon)