Investor ire rises against Fidelity

Firm's clients say auction-rate bonds were new to them

Some Fidelity Investments customers who bought auction-rate securities say they didn't know such investments existed until they were told about them by a Fidelity representative.

"I didn't have a clue what an auction-rate security was,'' said Bert Davidson, a Lexington businessman who has had a large account with Fidelity for several years. But after a Fidelity representative described the securities as safe and cash-like, Davidson said, he decided to invest about $900,000 in them.

Now he can't access his money. Auction-rate securities nationwide have been frozen since February, when virtually all trading in the market shut down following a steep drop in investor demand.

And like thousands of others who bought auction-rate securities through brokerages across the country, Davidson's frustration level is mounting.

State and federal regulators have pressed eight major Wall Street firms to agree to buy back more than $50 billion of the securities from customers, but the deals don't cover investors like Davidson. So far, only those who bought the securities directly from a Wall street brokerage that also underwrote them -- firms like UBS Financial Services Inc. and Merrill Lynch & Co. -- are in line to get their money back.

Fidelity declined to comment on particular customers' complaints. But the Boston-based brokerage maintains it did not proactively sell auction-rate securities to clients and is not responsible for a buyback. As a discount broker, Fidelity mainly executes orders placed by customers, rather than advising them for a fee as full-service Wall Street brokers do. The company says its customers should be reimbursed by Wall Street underwriters.

"There was no financial incentive for any Fidelity representative to mention auction-rate securities, nor was there any financial incentive for Fidelity as an institution to promote auction-rate securities,'' Fidelity spokeswoman Anne Crowley said.

Nonetheless, regulators are investigating Fidelity and similar firms. Yesterday, New York Attorney General Andrew M. Cuomo said he understands Fidelity's argument that it's different from the brokers that also underwrote securities: Those firms had much to gain by pressing their brokers to sell the investments to customers. But his office continues to investigate the sales practices of Fidelity, Charles Schwab Corp., and other firms to determine whether they misled customers about the risks of auction-rate securities.

"It's going to depend on their circumstances and on the particular facts of each situation,'' Cuomo said during a press conference.

Massachusetts Secretary of State William F. Galvin has called on Fidelity to buy back its customers' auction-rate securities in any manner necessary.

Crowley said Fidelity earns less commission on an auction-rate security sale than on one of the firm's own money market funds. The company has said it has few customers who own auction-rate securities, which it calls "municipal re-sets.''

But those stuck in them are angry. For instance, a 58-year-old Phoenix retiree said he put the bulk of his life savings into auction-rate securities -- in the form of student loan bonds -- after a Fidelity representative described them as a safe alternative to other debt.

The investor, who asked not to be named because he is in arbitration with Fidelity over the matter, placed a six-figure sum into auction-rate bonds of College Loan Corp. on Jan. 23. Less than a month later, all trading in the bonds stopped. The investor wrote to Fidelity to complain and ask the firm to buy back his securities, a request that was denied in a March 17 letter.

Fidelity's letter, a copy of which was obtained by the Globe, said the firm had "reviewed the discussions'' between the customer and his Fidelity representative. It concluded that no recommendation was made "that was not suitable based on your financial objective and customer information.''

Further, Fidelity cited the agreement that its customers sign when they open an account. It says the customer will take full responsibility for "all investment decisions and trading orders.''

Fidelity said it investigates all customer complaints and reimburses customers if it finds internal wrongdoing.

Beth Healy can be reached at bhealy@globe.com.