Deal excludes Fidelity clients

They'll have to fight for part of auction-rate pie

Secretary of State William F. Galvin said investors who bought auction-rate securities from Fidelity Investments may have to count on the Boston brokerage to help them get a slice of Wall Street's multibillion-dollar settlements.

Fidelity and Charles Schwab Corp. - discount brokers that take orders from investors rather than give advice - have received inquiries from New York Attorney General Andrew M. Cuomo in the widening investigation into the auction-rate market. Regulators are probing whether firms misled investors into buying bonds they thought were as safe as cash. The auction-rate market has been frozen since February, leaving investors unable to sell their holdings.

The $42 billion in settlements signed so far by Galvin and Cuomo, along with federal regulators, are for investors who bought the securities directly from Wall Street brokers that helped issue the debt and run the auctions. Investors who bought the securities on the secondary market, from a middleman like Fidelity, are not included in the settlements.

"The concerns we have about their customers are real," Galvin said yesterday. But discount brokers' customers are not first in line. He said firms like Fidelity should go to the brokers that issued the auction-rate securities, like UBS Financial Services Inc. and Citigroup, to get customers' money back for them.

"These are powerful institutions that can negotiate from a position of strength," he said.

Unlike Wall Street brokers, Fidelity and Schwab were not investment bankers or issuers of auction-rate securities. The discount brokers mainly place buy or sell orders at the request of customers.

"We don't proactively market auction-rate securities, nor do we maintain an inventory," said Anne Crowley, a spokeswoman for Fidelity. "We have no reason to believe any customer who was purchasing auction-rate securities in April lacked information about the securities."

Similarly, Schwab said it did not maintain an auction-rate inventory and simply acted as an agent "as an accommodation when clients asked for them. A significant portion were simply transferred in from other firms where they were originally purchased."

Both Fidelity and Schwab said they have a small number of customers in auction-rate securities. Crowley declined to comment on Galvin's suggestion that Fidelity help its customers get their money back.

Cuomo's office said the question is how much the discount brokers knew and what they told customers. One Massachusetts customer of Fidelity, who asked not to be named for fear of reprisal, said he bought $50,000 of auction-rate bonds in a New Jersey student lender in April of this year, after the market had shut down. He knew there were problems in the market, he said, but didn't realize he would not be able to sell the bonds - and now feels that Fidelity should have warned him.

Fidelity said it has listed auction-rate securities in the bond section of its website, with disclosures about their risks, since it started offering them in 2006. The firm said it has always posted warnings about the possibility of failed auctions. Most investors who bought these investments through full-service Wall Street brokers received no such warnings.

Fidelity said that after the market collapsed, it provided information and warnings about the securities to its customer representatives.

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