Auction-Rate Securities and the SEC
When investors were recently blocked from withdrawing their auction-rate securities money, many claimed they were misled by their broker-dealers into believing the instruments were as safe as cash. But it wasn’t the first time that the market had come under scrutiny for misleading investors.
On May 31, 2006, the Securities and Exchange Commission filed an administrative proceeding against 15 broker-dealers alleging that their practices in the auction-rate securities market violated securities law.
The allegedly illegal practices included:
• allowing customers to place open or market orders in auctions;
• intervening in auctions by bidding for a firm’s proprietary account or asking customers to change orders so as to prevent failed auctions;
• submitting or allowing customers to submit orders are the auction deadlines;
• making agreements to provide certain customers with higher returns than the auction clearing rate;
• providing some customers with information that gave them an advantage over other customers.
The cumulative effect of the practices was to favor some customers and issuers over others. The SEC also claimed that “since the firms were under no obligation to guarantee against a failed auction, investors may not have been aware of the liquidity and credit risks….”
On the same day the proceeding was filed, the broker-dealers consented to a cease-and-desist order that provided for censures, a voluntary code of conduct and $13 million in penalties.
Of the $13 million penalty amount, the following broker-dealers paid $1.5 million each: Bear, Stearns & Co.; Citigroup Global Markets; Lehman Brothers; Merrill Lynch, Pierce, Fenner & Smith; Morgan Stanly & Co.; and RBC Dain Rauscher. The following broker-dealers paid $125,000 each: A.G. Edwards & Sons; Morgan Keegan & Company; Piper Jaffray & Co.; SunTrust Capital Markets; and Wachovia Capital Markets. Bank of America was required to pay $750,000.
If you hold auction-rate securities, contact Carey & Danis.
For more information, fill out our online contact form or call Carey & Danis toll-free at 800-721-2519.
