Following Merrill Lynch, Citigroup, UBS, and Wachovia it is now BofA, Deutsche Bank and RBC’s turn to settle their potentially huge Auction Rate Securities settlements with the SEC as they did on June 3rd. The SEC claims that more than $50 billion in liquidity are being made available to customers of those organizations who have invested in auction rate securities. The SEC is taking action due to the false promises made by these three financial groups regarding the viability of Auction Rate Securities as a form of investment. These groups quickly stopped supporting the market in early 2008, which left these securities completely illiquid. These settlements, supposedly made in the interest of wronged investors, “will restore approximately $4.5 billion in liquidity to Bank of America customers, $800 million in liquidity to RBC customers, and $1.3 billion in liquidity to Deutsche Bank customers.” In order to avoid getting caught up in significant broker-dealer fraud problems with the SEC, these entities have agreed to:
- Each firm will offer to purchase ARS at par from individuals, charities, and small or medium businesses that purchased those ARS from the firm, even if those customers moved their accounts.
- Each firm will use its best efforts to provide liquidity solutions for institutional and other customers and will not take advantage of liquidity solutions for its own inventory before making those solutions available to these customers.
- Each firm will pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.
The SEC is clearly trying to do its job by increasing accountability especially in these difficult financial times. But as the economic outlook looks brighter for the coming years, the propensity of fraud is only going to increase.
It is an unfortunate set of circumstances that permitted these ARS ‘markets’ to exist for such a long time when at any point the broker/dealers that sustained the markets could back away causing exactly what happened. If perhaps the SEC had had the true authority and legislative/executive mandate in years past they could have intervened to create a more ordered dismantling of the
Quotations/information on this event was obtained from the SEC’s website, linked here.