Galvin urges Fidelity to buy back auction-rate securities

William Galvin's letter cited ''grave concern'' about plight of investors. (Dominic Chavez/Globe Staff/File 2007)

Massachusetts Secretary of State William F. Galvin wrote a letter to Fidelity Investments yesterday, urging the Boston firm to buy back any auction-rate securities it sold to customers.

The letter, addressed to the Boston firm's chief executive, Edward C. Johnson III, cited Galvin's "grave concern" about the plight of investors who have been unable to sell auction-rate securities since February. A number of Fidelity's customers have complained to the state Securities Division, which is part of a national regulatory probe of the $330 billion auction-rate market.

Galvin wrote, "It is my hope that Fidelity will follow the industry trend and promptly repurchase these securities." Five major Wall Street firms, including UBS Financial Services Inc., and Citigroup, have agreed to $42 billion in settlements with state and federal regulators, and have said they will buy back auction-rate securities they sold to clients without disclosing the risks.

Fidelity said it had not yet received Galvin's letter. The firm said it did not actively market auction-rate securities and said it had an "extremely small" number of customers who brought them. Spokeswoman Anne Crowley said "we believe the underwriters should stand behind their securities."

Auction-rate securities are debt issued by nonprofits, municipalities, and certain investment funds. They were sold by Wall Street firms to ordinary investors and others as alternatives to money markets - safe, cash-like vehicles. But the auction-rate market shut down on Feb. 13, as demand for the bonds dropped off and the brokerage firms stopped supporting trading. Investors have continued to receive interest payments, in most cases, but they have been unable to sell the investments.

Galvin's demand that Fidelity buy back outstanding auction-rate securities marks a shift from Monday. He previously suggested that Fidelity might have to go to the brokerage firms involved in the multibillion-dollar settlements to get funds back for Fidelity customers. Unlike those firms, Fidelity is a discount brokerage and does not provide investment advice; it mainly places buy and sell orders on behalf of customers.

Unlike firms such as UBS, Fidelity did not underwrite auction-rate securities and then sell them to investors. Fidelity has said it has allowed customers to buy these investments online since 2006; before that, customers bought them after talking to a Fidelity representative.

Fidelity and Charles Schwab Corp. both have received inquiry letters from New York Attorney General Andrew M. Cuomo, whose office is investigating auction-rate fraud at several major firms. Both firms have said they are cooperating with the inquiry.

Galvin's office filed a fraud suit against UBS and is still investigating Merrill Lynch & Co., and Bank of America Corp.

In his letter yesterday, Galvin said, "I am sure that Fidelity understands the seriousness of this situation to its customers. Therefore, I request that Fidelity take immediate steps to resolve this matter on behalf of those customers."

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