N.Y. subpoenas 18 banks, firms
Probe centers on auction-rate bonds
New York Attorney General Andrew Cuomo's office issued subpoenas to 18 banks and securities firms as part of a criminal probe into the marketing of auction-rate bonds to investors and issuers, a person familiar with the investigation said.
The subpoenas were issued under the Martin Act, which gives New York investigators broad powers. John Milgram, a spokesman for Cuomo's office, declined to comment.
Securities regulators in nine other states led by Massachusetts yesterday said they formed a task force as they investigate the auction market.
"We're all getting complaints on a daily basis from retail investors and they all have the same story: They were told by their brokers these were safe as cash and they're not," said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin, and head of the task force.
Regulatory scrutiny of Wall Street has been growing since the $330 billion auction-rate market collapsed in February, leaving some issuers paying higher penalty rates and investors unable to sell their securities.
The Securities and Exchange Commission last week said it is working with the Financial Industry Regulatory Authority, which oversees brokerages, to examine firms' disclosures to clients who purchased the bonds.
The Massachusetts Secretary of State's office said on March 28 it subpoenaed information from UBS AG, Merrill Lynch & Co., and Bank of America Corp. regarding the sale of the securities to investors in the state. A number of individuals have also filed lawsuits against Wall Street banks that sold the bonds.
Auction-rate securities are long-term bonds sold by municipalities, student loan corporations, and closed-end funds with interest rates that are reset on a weekly or monthly basis. Much of the debt was guaranteed by bond insurance companies that also backed subprime mortgage-related securities.
Demand for the debt fell earlier this year after AAA-rated bond insurers were downgraded because of their subprime guarantees.
Wall Street banks running the auctions stopped stepping in to buy the bonds in February when there weren't enough bidders, permitting thousands of failures that triggered rates as high as 22 percent.
Cuomo is also asking for information about how bankers persuaded borrowers to issue the bonds and how the banks came to decide when to stop bidding in mid-February, the person familiar with the probe said. The banks Cuomo subpoenaed include Merrill Lynch & Co., UBS, and JPMorgan Chase & Co., the source said.
