Brokerage is charged with fraud

Oppenheimer & Co. denies Galvin's claim it misled on securities

Secretary of State William F. Galvin charged brokerage Oppenheimer & Co. yesterday with fraud and unethical conduct in the sales of auction-rate securities, which trapped $56 million of Massachusetts customers' funds this year.

The state alleged Oppenheimer misrepresented the securities, by describing them as cash equivalents and failing to disclose that they traded only at auctions that could fail. Top executives of the company, including chief executive Albert "Bud" Lowenthal, sold $3 million of their own holdings before the auction-rate market collapsed in February, the state alleged in its complaint, yet allowed brokers to continue selling the investments to clients.

"That shows the callous disregard for their customers that they had," Galvin said in an interview. "That kind of conduct is just something we cannot tolerate in the financial services industry."

A spokesman for New York-based Oppenheimer, a unit of Toronto's Oppenheimer Holdings Inc., said the company "denies that the allegations made by [the] Massachusetts Securities Division have any basis in fact or law and intends to vigorously defend itself."

The state is looking for Oppenheimer to buy back the investments that customers cannot sell. It also plans to revoke Lowenthal's Massachusetts securities license and to impose fines on him, the firm, and other senior executives. Oppenheimer would still be able to do business here if Lowenthal lost his license, Galvin said. Lowenthal declined to comment through a spokesman.

Oppenheimer & Co. is unrelated to the Oppenheimer mutual funds owned by Massachusetts Mutual Life Insurance Co.

Numerous investors who do business with Oppenheimer's Boston office have assets tied up in these frozen securities, according to Globe interviews with customers and a former employee. Those people include a 90-year-old widow and a 75-year-old retiree, among others, as well as a longtime Oppenheimer broker, who declined to be interviewed, for fear of being punished by the firm.

The case against Oppenheimer is the latest in a flurry of regulatory actions involving auction-rate securities this year. State and federal regulators have secured settlements worth more than $60 billion with about two dozen firms, in which the firms pledged to buy back the investments.

Most of those settlements involved firms like UBS and Citigroup, which were underwriters of auction-rate securities - often the debt of municipalities and nonprofits such as student lenders. The debt was inexpensive for the issuers and was attractive to investors because it paid interest slightly better than money markets and was sold as if it were just as safe.

That pitch turned out not to be true when the broader credit markets ran into trouble and every firm on Wall Street decided to stop trading auction-rate securities on the same day last February.

Oppenheimer customers are mainly in a different kind of auction-rate securities, the preferred stock of certain investment funds. Firms like Evergreen, Gabelli, and Eaton Vance issued this debt as leverage for various closed-end funds; Oppenheimer brokers sold the securities to their customers. Here too, they were sold as money-market-like vehicles.

One Oppenheimer investor, Marvin Fox, 75, of Newton, expressed relief yesterday that regulators were pressing Oppenheimer to buy back the securities. He originally had $250,000 tied up in these investments, which he says he was told were like money market investments. Some of those have been repurchased, with assistance from the underlying investment firms. But he still has $75,000 tied up, he said.

"It was my understanding that these were things that rolled over every week. I was very surprised when they didn't" in February, Fox said. He is fortunate that he hasn't needed the money so far, he said. But, "I would like to know that I could have the money."

The state's complaint alleges that, two weeks before the auctions failed in February, Lowenthal and three other executives together sold nearly $3 million in personal auction-rate holdings. The company said those same executives continued to hold "significant positions" in the investments, however, and had "no knowledge" the major Wall Street firms were about to halt all trading in the securities.

Galvin said Oppenheimer has shirked its responsibility to its customers during this period: "Oppenheimer has done absolutely nothing to help these people. They haven't made any effort at all."

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

Clarification: A story in yesterday's Business section about Oppenheimer & Co. should have specified that Evergreen Investments' closed-end funds do not invest principally in municipal bonds.