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JPMorgan and Morgan Stanley Settle Auction-Rate Securities Probes
The American Lawyer
August 15, 2008
JPMorgan Chase & Co. and Morgan Stanley will spend more than $7 billion to buy back auction-rate securities in a settlement announced Thursday by New York state Attorney General Andrew M. Cuomo and SEC Enforcement Division Director Linda Thomsen.
The deal ends investigations by the SEC and several states' attorneys general into false claims made by the two firms in marketing auction-rate securities. At issue was the firms' continuing effort to bill the securities as a safe investment even after the unraveling credit markets made them risky, less easily liquidated bets.
Lawyers representing Morgan Stanley include David Meister and John Carroll of Clifford Chance. The firm previously advised Morgan Stanley in connection with other credit matters. Before working at Clifford Chance, Meister had been a a member of the Securities and Commodities Fraud Task Force in the United States Attorney's Office for the Southern District of New York, of which Carroll had once served as chief.
Simpson Thacher & Bartlett partners Thomas Rice, Peter H. Bresnan, and Jonathan Youngwood represented JPMorgan. Bresnan, who had worked in the SEC's Division of Enforcement, is in the Washington, D.C., office's government and internal investigations practice, while Rice and Youngwood are in the New York litigation practice. Rice has served as ongoing counsel for JPMorgan Chase & Co. in securities matters.
Under the terms announced Thursday, JPMorgan will spend $3 billion to recover the securities it sold to retail clients prior to Feb. 13, 2008, as well as those sold by Bear, Stearns & Co. Inc. It will pay a $25 million penalty for misrepresenting the value of these securities, which will be distributed throughout the country based on the extent of the investments made by buyers in each state.
In a statement Monday, Morgan Stanley agreed to repurchase approximately $4.5 billion in auction-rate securities, which the AG formally approved Thursday. The investment firm also will pay a $35 million penalty and reimburse all retail investors who sold their auction-rate securities at a loss after the market for the financial instruments -- previously considered a reliable alternative to money-market funds -- collapsed last February. "The industry is taking responsibility for correcting a problem they helped create," said Cuomo in a statement. "The fundamental goal has been to return money into the hands of investors."
The attorney general settled similar investigations against Citigroup Inc. and UBS AG last week. Citigroup agreed Aug. 7 to buy back more than $7 billion in securities and pay $100 million in civil penalties; UBS announced the next day that it would pay $20 billion to buy auction-rate securities back rom investors.
Investigations into the activities of other banks continue, with Wachovia Corp. said to be nearing a settlement.
"[The SEC's] investigations are ongoing, and include both potential corporate and individual violations of the federal securities laws," said Thomsen in a statement.
David A. Markowitz, chief of the AG's investor-protection bureau, and Eric Corngold, executive deputy attorney general for economic justice, led New York's auction-rate securities inquiries, with help from Assistant Attorney Generals Vicki Andreadis, Peter Dean, Pamela Mahon, Armen Morian, Christopher Mulvihill and Ethan Zlotchew, and Division of Economic Justice economist, Kitty Kay Chan.
The investigation was carried out in collaboration from the North American Securities Administrators Association, the Illinois Secretary of State's securities department and Florida’s Office of Financial Regulation.
