Federal regulators said on Friday that investors who bought risky auction-rate securities from Merrill Lynch & Co before the market for those bonds collapsed will be able to recover up to US$7 billion under a new agreement.
The largest US brokerage will buy back the securities from thousands of investors under a settlement with the Securities and Exchange Commission (SEC), New York Attorney General Andrew Cuomo and other state regulators over its role in selling the high-risk bonds to retail investors.
Under that deal, announced on Thursday, Merrill agreed to hasten its voluntary buyback plan by repurchasing US$10 billion to US$12 billion of the securities from investors by Jan. 2.
Merrill also agreed to pay a US$125 million fine in a separate accord with state regulators.
The US$330 billion market for auction-rate securities collapsed in mid-February.
The SEC’s estimate of a US$7 billion recovery is based on its projection of the eventual amount of the bonds that will be cashed in by the affected investors, who bought them before Feb. 13.
The US$10 billion to US$12 billion is the total amount that Merrill is committing to buy back. The firm has to offer redemptions to all investors, though not all may cash in the securities.
The SEC said that the new agreement would enable retail investors, small businesses and charities who purchased the securities from Merrill “to restore their losses and liquidity.”
New York-based Merrill neither admitted nor denied wrongdoing in agreeing to the federal settlement, which is subject to approval by SEC commissioners.
The firm wasn’t fined under the accord, but the SEC said Merrill “faces the prospect” of a penalty after completing its obligations under the agreement. The amount of the penalty, if any, would take into account the extent of Merrill’s misconduct in marketing and selling auction-rate securities, and an assessment of whether it fulfilled its obligations, the SEC said.
“Merrill Lynch’s conduct harmed tens of thousands of investors who will have the opportunity to get their money back through this agreement,” Linda Thomsen, the agency’s enforcement director, said in a statement. “We will continue to aggressively investigate wrongdoing in the marketing and sale of auction-rate securities.”
Merrill, Goldman Sachs Group Inc and Deutsche Bank on Thursday brought to eight the number of global banks that have settled a five-month investigation into claims they misled customers into believing the securities were safe.
The auction-rate securities market involved investors buying and selling instruments that resembled regular corporate debt, except the interest rates were reset at regular auctions — some as frequently as once a week.
A number of companies and retail clients invested in the securities because, thanks to the regular auctions, they could treat their holdings as liquid, almost like cash.
Major issuers included firms that financed student loans and municipal agencies like the Port Authority of New York and New Jersey.
When big banks ceased backstopping the auctions with supporting bids because of concerns about credit exposure, the bustling market collapsed. That left some issuers paying double-digit interest rates because of the terms under which they issued the securities.
Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.
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