New York AG probes auction rate markets: sources

Democratic Attorney General Andrew Cuomo points to a reflection of his father former New York State Governor Mario Cuomo during his speech at the New York State midterm election night celebration in New York November 7, 2006. (REUTERS/Shannon Stapleton)

NEW YORK (Reuters) - New York Attorney General Andrew Cuomo this week launched a sweeping investigation of the $330 billion auction rate securities market, sending subpoenas to 18 banks and brokerages, people familiar with the investigation said on Thursday.

The institutions receiving subpoenas on Monday and Tuesday were UBS <UBSN.VX>, Merrill Lynch <MER.N>, Goldman Sachs Group <GS.N>, Citigroup Inc <C.N>, Raymond James Financial <RJF.N>, First Albany, Wachovia Corp <WB.N>, Morgan Keegan, Piper Jaffray <PJC.N>, AG Edwards, Deutsche Bank <DBKGn.DE>, TD Ameritrade <AMTD.O>, Lehman Brothers Holdings <LEH.N>, RBC Dain Rauscher <RY.TO>, Bank of America <BAC.N>, JPMorgan Chase & Co <JPM.N>, Morgan Stanley <MS.N> and E*Trade Financial <ETFC.O>, the sources said.

Officials from the banks could not be reached immediately for comment.

Auction-rate securities are long-term bonds that behave like short-term debt, with interest rates that reset frequently. They have long been popular with conservative investors because some securities are tax-exempt.

Cuomo's office is looking into every part of the auction-rate securities business, the sources said. The securities were long touted as cash-like investments until the credit crunch led to a breakdown in these markets.

Cuomo's subpoenas seek information about what towns, public agencies and other issuers were told about the securities they sold as financing. The state will look to see whether investors were told they were buying safe, highly liquid securities that they now cannot sell.

The state's concerns extend to all levels of the market, not just closed end funds, the sources said, and the probe potentially will stretch nationwide.

Tens of billions of investor dollars have been frozen since the auction rate market largely collapsed in February. Many dealers chose to stop supporting auctions with their own bids.

A few weeks ago, Massachusetts' top securities regulator sent subpoenas to UBS, Merrill and Bank of America to determine whether they told investors about these investments. Last month, two clients filed lawsuits against Citi, complaining that the bank did not fully disclose the risks.

(Reporting by Joseph A. Giannone; Editing by Dan Grebler)

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