Friday, April 18, 2008

Harry Potter to investigate firms over auction-rate securities

Harry Potter investigating auction-rate securities (ARS)? Well, it hasn't gone that far, yet, but the news is full of talk of stepped-up investigations of major investment firms and how they improperly peddled auction-rate securities and improperly managed the auction process.

Bloomberg: SEC Seeks Customer Names in Auction-Rate Bond Inquiry

The U.S. Securities and Exchange Commission asked brokerages to hand over more details about auction-rate bond sales, as regulators examine whether firms improperly steered clients into securities they can't sell.

The SEC's inspections office sent letters to the biggest sellers of auction-rate securities this month seeking the names of customers who purchased the notes and the identities of brokers who sold them. Inspectors want lists of bonds that clients bought, showing their values on different dates, a copy of a letter obtained by Bloomberg News shows.

``We are looking at representations made to investors when they purchased auction-rate securities in coordination with Finra,'' Lori Richards, head of the SEC's Office of Compliance Inspections and Examinations, said in an interview, referring to the Financial Industry Regulatory Authority. She declined to discuss specific firms or investors.

Bloomberg: Auction-Bond Probes Widen as Cuomo Subpoenas 18 Firms

Regulators are widening their probes into the collapse of the auction-rate securities market as states from New York to Washington scrutinize how Wall Street peddled the bonds to investors and issuers.

New York Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms including UBS AG and Merrill Lynch & Co. in an investigation that could lead to criminal charges, a person familiar with the probe said yesterday. Officials from nine other states formed a task force to determine whether brokers misrepresented the debt as an alternative to money-market investments when they sold it to individuals.

"To have subpoenas and the threat of criminal investigations raised suggests that somebody has made up their mind that there really are abuses there," said Donald Langevoort, a former U.S. Securities and Exchange Commission attorney who now teaches securities law at Georgetown University in Washington. "It certainly suggests something more than regulatory curiosity."

Bloomberg: Auction Bond Collapse Spawns Nine-State Task Force

Nine state regulators formed a task force to investigate the auction-rate securities market and whether laws were broken when they were sold to investors, the North American Securities Administrators Association said.

Regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington are probing whether brokers misrepresented the securities in their marketing to individuals, the Washington-based group said today in a news release.

"We're all getting complaints on a daily basis from retail investors and they all have the same the story: they were told by their brokers these were safe as cash and they're not," said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin and head of the task force.


"If the product was represented as a cash equivalent going in, it must be treated as a cash equivalent coming out," Karen Tyler, the securities commissioner in North Dakota and president of the North American Securities Administrators Association, said in a statement.

Reuters: State officials probing auction-rate market

I'm only being semi-facetious when I suggest that investment firms were using far more "magic" than even Harry Potter ever aspired to.

We still haven't seen any congressional hearings yet, but I would surmise that it is only a matter of time.

The message to Wall Street is simple: Feel the heat.

-- Jack Krupansky


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