The Securities and Exchange Commission has finalized settlements with Bank of America, RBC Capital Markets, and Deutsche Bank to resolve SEC charges that the firms misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed, or sold.
The finalized settlements with Bank of America and RBC as well as Deutsche Bank provide nearly USD6.7 billion to approximately 9,600 customers who invested in ARS before the market for those securities froze in February 2008.
According to the SEC’s complaints, filed in federal court in New York City, Bank of America, RBC and Deutsche Bank misrepresented to certain customers that ARS were safe, highly liquid investments that were comparable to money markets. The SEC alleges that in late 2007 and early 2008, the firms knew that the ARS market was deteriorating, causing the firms to purchase additional inventory to prevent failed auctions. At the same time, however, the firms knew that their ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed the firms’ balance sheets.
The SEC’s complaints allege that Bank of America, RBC, and Deutsche Bank failed to make their customers aware of these risks. In mid-February 2008, Bank of America, RBC, and Deutsche Bank decided to stop supporting the ARS market, leaving their customers holding billions in illiquid ARS.
The settlements, which are subject to court approval, will restore approximately USD4.5 billion in liquidity to Bank of America customers, USD800 million in liquidity to RBC customers, and USD1.3 billion in liquidity to Deutsche Bank customers.
Without admitting or denying the SEC’s allegations, Bank of America, RBC and Deutsche Bank agreed to be permanently enjoined from violations of the broker-dealer fraud provisions and to comply with a number of undertakings, some of which are set forth below:
-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.
Through these latest settlements and prior ARS settlements with other firms entered into by the Commission, more than USD50 billion in liquidity is being made available to tens of thousands of customers so they can get back all of the money they invested in auction rate securities,” says Scott Friestad, deputy director, Division of Enforcement, SEC.
L.D.