Risk & Compliance

Cuomo Settles JP Morgan, Morgan Stanley ARS Claims

The giant financial firms collectively agree to return $7b-plus, adding to earlier Citi and UBS deals with NY.
Stephen TaubAugust 14, 2008

JP Morgan Chase & Co. and Morgan Stanley have collectively agreed to return over $7 billion to investors who purchased auction rate securities under a settlement announced by New York State Attorney General Andrew M. Cuomo.

The agreements settle allegations that JP Morgan and Morgan Stanley made misrepresentations in their marketing and sales of auction rate securities. “JP Morgan and Morgan Stanley marketed and sold auction rate securities as safe, cash-equivalent products, when in fact they faced increasing liquidity risk,” according to a press release issued by the AG.

The JP Morgan and Morgan Stanley agreements with come less than a week after Cuomo settled similar allegations against Citigroup and UBS. The four settlements together provide relief to thousands of investors who held $27 billion worth of securities they could not sell after the widespread failure of the auction rate securities market this past February.

Earlier, Raymond James Financial said in a regulatory filing earlier this week that, in connection with auction rate securities, that company’s primary broker dealers have been subject to ongoing examinations by both the New York AG’s office and the Securities and Exchange Commission.

However, the Wall Street Journal Thursday reported that Goldman, Sachs, the No. 5 underwriter of ARS by dollar amount between 2003 and 2007, has not said whether it plans to buy back clients’ paper.

Under the settlements announced Thursday, JP Morgan and Morgan Stanley agreed to buy back all illiquid auction rate securities from their retail customers, charities, and small to mid-sized businesses, before the end of the year. The two firms will also pay damages to investors who sold securities for a loss. JP Morgan and Morgan Stanley will also pay New York State and the North American Securities Administrators Association civil penalties of $25 million and $35 million, respectively.

“Returning billions of dollars back to investors not only protects their interests but also increases confidence in the entire market,” Cuomo said. “The industry is taking responsibility for correcting a problem they helped create, and that’s a good thing. The fundamental goal has been to return money into the hands of investors, and that’s what these deals do.”

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