Capital Markets

SEC Fines 15 over Auction-rate Practices

The commission had charged that firms intervened in auctions and provided certain clients with additional information at the expense of other custo...
Stephen TaubMay 31, 2006

The Securities and Exchange Commission has fined 15 major broker-dealers a total of $13 million, stemming from their practices in the auction-rate securities market. The firms, which neither admitted nor denied the findings, also consented to the entry of an SEC cease-and-desist order.

Auction rate securities are municipal bonds, corporate bonds, or preferred stocks with interest rates or dividend yields that are periodically reset through Dutch auctions. The SEC had alleged that some of the firms’ practices favored certain customers over others, and some favored the issuer of the securities over customers, or vice versa.

According to the commission, between January 2003 and June 2004, each firm engaged in one or more practices that were not adequately disclosed to investors, which constituted violations of the securities laws. Those practices included allowing customers to place open or market orders in auctions; intervening in auctions by bidding for a firm’s proprietary account or asking customers to make or change orders; and providing certain customers with information that gave them an advantage over other customers in determining what rate to bid.

The firms that will pay the largest fine, $1.5 million, include Bear Stearns; Citigroup; Goldman Sachs; J.P. Morgan; Lehman Brothers; Merrill Lynch; Morgan Stanley; and RBC Dain Rauscher.

The SEC added that when determining the structure of the settlement and the size of the penalties, it considered the firms’ cooperation during the investigation and their voluntary disclosure of their practices to the SEC staff, which allowed the commission to conserve resources.

“This matter highlights both the industrywide violations that existed in the auction-rate securities market and the benefits to firms that cooperate with the SEC to quickly address problems,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, in a statement. “This case signals that the commission is willing to take measured sanctions when broker-dealers are cooperative with the SEC in curing industry-wide violations and there is relatively modest investor harm.”

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