BOSTON/NEW YORK (Reuters) - Bank of America Corp (BAC.N) agreed on Wednesday to buy back $4.5 billion of illiquid auction-rate securities, settling a probe led by Massachusetts regulators.
The second-largest U.S. bank by assets said it will, beginning October 1, offer to repurchase the securities from roughly 5,500 retail customers nationwide, Massachusetts Secretary of State William Galvin said.
Bank of America said small businesses and charities will also be eligible for the buyback, which will result in a $275 million pretax charge for the Charlotte, North Carolina-based bank. It did not admit wrongdoing.
The bank said it remains in talks with New York Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission in their probes into auction-rate debt. The SEC said it expects soon to announce its own settlement with the bank.
Auction-rate debt has rates that reset in periodic auctions. Regulators say brokerages misled investors into believing the debt was safe and the equivalent of cash.
But after the $330 billion market seized up in February, tens of thousands of investors could not sell the debt or could only sell it at a loss, according to regulators.
“This has been a terrible dislocation for people, and we have made it a priority to get the money back to people who need it the most first,” Galvin said in an interview.
Bank of America is at least the ninth major financial services company to settle allegations by U.S. regulators over how auction-rate debt was sold, joining Citigroup Inc (C.N), Deutsche Bank AG (DBKGn.DE), Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N), Merrill Lynch & Co MER.N, Morgan Stanley (MS.N), UBS AG UBSN.VX and Wachovia Corp WB.N.
These companies have agreed to buy back more than $49 billion of the securities and pay in excess of $520 million of fines and penalties.
A 12-state task force is also examining auction-rate practices in the industry.
Massachusetts was one of the first states to probe auction-rate securities and has reached similar settlements with Merrill and UBS.
Galvin said the state will now focus more on secondary sellers of the securities, including brokerages such as Boston-based Fidelity Investments that did not issue the debt but acted as middlemen for clients who wanted it.
“We have now trained our guns on them,” Galvin said.
In afternoon trading, Bank of America shares were down 52 cents or 1.6 percent at $32.00 on the New York Stock Exchange.
Additional reporting by Rachelle Younglai in Washington, D.C.; Editing by Lisa Von Ahn and Gerald E. McCormick