The Template For Settlement In The Auction Rate Securities Market

Two settlements in the auction rate securities market announced by New York Attorney General Andrew Cuomo last week appear to be the template for the resolution of investigations into this market. The first was with Citigroup Global Markets, announced on Thursday (a related settlement in principle with the SEC is discussed here). The second, with UBS, was announced by the New York AG on Friday. In reaching these settlements the New York Attorney General’s office once again seems to be taking the lead over the SEC.

Under the terms of the UBS agreement, investors in the auction rate securities markets after the crash on February 13, 2008 will be made whole by the securities firm. Specifically, the settlement calls for UBS to repurchase all auction rate securities sold to retail customers, charities and small and medium size business by January 2, 2009. This represents about 40,000 customers and $11 billion in securities. The smallest customers – those with less than $1 million on deposit – will be taken out of the market no later than October 31, 2008. Institutional customers will also have their securities repurchased. Under the settlement, any investor who sold auction rate securities at a discount after the market crashed will also be made whole.

As part of the resolution UBS agreed to pay a penalty of $75 million to New York and an additional penalty of $75 million to the North American Securities Administration. The SEC, who participated in the settlement, noted in its press release that it was deferring consideration of any fine at this time.

The terms of the Citi settlement were similar. There Citi agreed to pay New York a $50 million penalty and an additional penalty in the same amount to the North American Securities Association. As with the UBS settlement, the SEC’s press release notes that it has deferred consideration of a penalty.

Merrill Lynch announced last week that it has commenced a repurchase of auction rate securities it has purchased. The firm, however, has not resolved investigations into its practices in that market by the New York Attorney General or the SEC.

The Citi and UBS settlements do not, of course, resolve the class actions which are pending against the firms, discussed here last week. Making investors whole however, should go a long way toward minimizing any damage claims in those cases and help speed their resolution.