Auction Rate Securities Probe Focusing on Fidelity, Goldman Sachs Ties

A probe into <"http://www.yourlawyer.com/topics/overview/auction_rate_fraud">auction rate securities sold by Fidelity Investments is concentrating on the discount broker’s relationship with investment bank Goldman Sachs, The Wall Street Journal is reporting.  Investigators with the New York attorney general’s office are trying to determine if Fidelity’s close ties with Goldman Sachs gave it an incentive to sell the now-illiquid securities.

Auction rate securities are long-term corporate bonds, municipal bonds and preferred stock on which the interest rates are reset periodically based on bids submitted through securities firms. Generally, rates are reset every seven, 14, 28 or 35 days. Because they can be sold during weekly or monthly auctions, banks and brokerages often touted auction rate securities as short-term investments or cash equivalents. Unfortunately, because of the credit crises, the market for auction rate securities crashed earlier this year. Thousands of investors have been bewildered to find out that the investments they were sold as cash equivalents are now illiquid.

According to The Wall Street Journal, the attorney general’s office wants to know whether Fidelity sold auction rate securities underwritten  by Goldman because it was getting other services from the investment bank, said a person familiar with the matter. The Journal’s source  said the services include possible Goldman underwriting of private offerings that Fidelity develops for wealthy investors, and financial-counseling services that Goldman’s Ayco unit provides to Fidelity executives.

Various state and federal agencies have been investigating the auction rate securities crash, amid suspicions that investment banks misled their clients about both the liquidity of the vehicles and safety of the market.  In the past two weeks, UBS AG, Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley, Merrill Lynch & Co. and Wachovia Corp. have reached settlements with regulators, and have agreed to buy back more than $40 billion of auction-rate securities from their clients.

But those deals do not cover an additional $160 billion worth of auction rate securities bought through mutual fund firms or brokers that didn’t underwrite the debt. Some investors still stuck with the worthless investments are looking to the brokerages to buy back the auction rate securities they sold.

Fidelity is a discount brokerage and does not provide investment advice; it mainly places buy and sell orders on behalf of customers.  Fidelity has allowed customers to buy auction rate securities online since 2006.  Before that, customers bought them after talking to a Fidelity representative.

Last week, the Massachusetts Secretary of State, William F. Gavin wrote a letter to Fidelity, saying  he hoped the Boston-based brokerage would follow the lead of several large investment banks, and repurchase the now-illiquid securities.

But most brokerages do not appear too interested in that idea. Like investors, the brokerages say they were deceived about the condition of the auction rate securities market.  According to The Wall Street Journal. the Regional Bond Dealers Association sent a letter last Monday to regulators including New York Attorney General Andrew Cuomo, the Securities and Exchange Commission and the North American Securities Administrators Association asking that investment banks be required to buy back all the securities for which they conducted auctions, not just all the securities they sold to their own clients.

This entry was posted in Legal News, Stock Fraud. Bookmark the permalink.


© 2005-2016 Parker Waichman LLP ®. All Rights Reserved.