- Agreements will Return $7 Billion to Investors by Year’s End
- Morgan Stanley to Pay $35 Million Penalty and JP Morgan to Pay $25 Million Penalty
- Total Auction Rate Securities Settlements to Date: Approximately 30 Billion Dollars to More than One Hundred Thousand Investors
Attorney General Andrew M. Cuomo today announced another series of agreements to provide liquidity to consumers who purchased auction rate securities. Under the agreements, JP Morgan Chase & Co. (“JP Morgan”) and Morgan Stanley will collectively return over $7 billion to investors across New York State and the nation. The agreements settle allegations that JP Morgan and Morgan Stanley made misrepresentations in their marketing and sales of auction rate securities. JP Morgan and Morgan Stanley marketed and sold auction rate securities as safe, cash-equivalent products, when in fact they faced increasing liquidity risk.
Within the past week, Cuomo has signed agreements restoring over $27 billion of liquidity to thousands of investors nationwide.
Under Cuomo’s settlements, JP Morgan and Morgan Stanley have agreed to buy back, no later than November 12, 2008, and December 11, 2008, respectively, all illiquid auction rate securities from all JP Morgan and Morgan Stanley retail customers, charities, and small to mid-sized businesses. Firms will also pay damages to investors who sold securities for a loss. JP Morgan and Morgan Stanley will also pay New York State and the North American Securities Administrators Association (“NASAA”) civil penalties in the amount of $25 million and $35 million, respectively, which will be distributed pro rata by states’ investment dollar totals.
“Returning billions of dollars back to investors not only protects their interests but also increases confidence in the entire market,” said Attorney General Andrew Cuomo. “Today’s multi-billion dollar agreements are the latest victories for investors seeking relief from the collapse of the auction rate securities market, which has left a stranglehold on billions of dollars. The industry is taking responsibility for correcting a problem they helped create, and that’s a good thing. The fundamental goal has been to return money into the hands of investors, and that’s what these deals do.”
Today’s agreements with JP Morgan and Morgan Stanley come less than a week after Cuomo settled similar allegations against Citigroup and UBS. The four settlements together provide relief to thousands of investors who were left holding $27 billion worth of securities they could not sell after the widespread failure of the auction rate securities market this past February.
From the beginning of his investigation into the auction rate market, the Attorney General’s objective has been to bring relief to investors stuck with illiquid auction rate securities. Citigroup, UBS, JP Morgan and Morgan Stanley are four of the larger participants in the auction rate securities market, and among them are responsible for more than half of all auction rate securities owned by investors. The settlements with Citigroup, UBS, JP Morgan and Morgan Stanley accomplish precisely the kind of relief investors have demanded, and deserve.
JP Morgan and Morgan Stanley will also:
• Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed;
• Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds;
• Undertake to expeditiously provide liquidity solutions to all other institutional investors;
• Reimburse all refinancing fees to any New York State municipal issuers who issued auction rate securities through JP Morgan and Morgan Stanley since August 1, 2007.
The Attorney General thanked NASAA and its multi-state ARS Task Force, who joined the Attorney General in announcing the agreements, for their efforts in achieving today’s settlements. He also thanked specifically Illinois and Florida, which were the lead states in today’s investigations. In addition, the Attorney General thanked the enforcement staff of the Securities and Exchange Commission for their cooperation in their auction rate securities investigations which are ongoing.
SEC Enforcement Division Director Linda Thomsen said, "For several months, the SEC has worked very closely with the states as we have investigated these cases. We will continue to coordinate our efforts with the states. Our investigations are ongoing, and include both potential corporate and individual violations of the federal securities laws. In the event that any such violations are established, the terms of today's settlements would be taken into account in any Enforcement Division recommendation to the Commission."
Assistant Attorneys General Vicki Andreadis, Peter Dean, Pamela Mahon, Armen Morian, Christopher Mulvihill and Ethan Zlotchew, conducted the JP Morgan Chase and Morgan Stanley investigations along with Kitty Kay Chan, Economist for the Division of Economic Justice, all under the supervision of David A. Markowitz, Chief of the Investor Protection Bureau, and Eric Corngold, Executive Deputy Attorney General for Economic Justice.
