Oppenheimer & Co. denies Galvin's fraud charges

Oppenheimer & Co. this afternoon denied fraud charges leveled by Massachusetts Secretary of State William F. Galvin.

Earlier in the day, Galvin alleged in an administrative complaint that Oppenheimer & Col engaged in fraud and unethical conduct in the sale of auction rate securities. According to Galvin, the sales left Oppenheimer & Co. customers in Massachusetts unable to get access to almost $56 million of their money when the auction market froze last February.

In an e-mail, an Oppenheimer & Co. spokesman wrote, “Oppenheimer & Co. denies that the allegations made by Massachusetts Securities Division have any basis in fact or law and intends to vigorously defend itself."

Oppenheimer & Co. is a brokerage headquartered in Toronto. (Oppenheimer Funds Inc. is not affiliated with Oppenheimer & Co. Oppenheimer Funds is a member of the MassMutual Financial Group.)

Auction-rate securities are primarily the debt of nonprofits and municipalities. The bonds paid money-market-like rates and traded every week or month, until the turmoil in the credit markets took over and demand for the securities dried up. As of early October, nearly a dozen major firms had agreed to settle auction-rate cases with regulators.

According to Galvin (right), today’s administrative complaint is the first action brought by a securities regulator against a “downstream” firm in the fallout from the collapse of the auction rate securities market. By Galvin's definition, a downstream firm is one that may not have participated directly in the auctions, but sold the securities involved to their own customers.

Please click here to read Galvin's complaint.

The complaint seeks to censure Oppenheimer & Co. and require the firm to return to their auction-rate securities customers the money those customers had put into the now-frozen instruments, and Galvin's securities division also wants to revoke the broker-dealer agent registration of Oppenheimer & Co. chief executive Albert Lowenthal, Galvin's office said in a press release.

That press release continued: "Lowenthal and other Oppenheimer executives who face possible fines sold their ARS holdings as they discovered the market was collapsing, but failed to inform their clients, the complaint charged."

Galvin said in a statement: “Oppenheimer executives betrayed the trust of their clients by continuing to market these auction rate securities as safe cash equivalents when they knew this was not the case. They kept their clients, and their own advisors to those clients, in the dark, even as they, themselves, got out of that tottering market.”

In denying Galvin's charges, the Oppenheimer & Co. spokesman wrote in an e-mail, “While there were sales by executives of auction rate securities, there were also executive purchases during this period, and these same executives continue to hold millions of dollars of auction rate securities (a fact oddly omitted from the complaint)."

That e-mail also said: “Oppenheimer sold auction rate securities in the same manner as the entire brokerage industry – as a cash management tool similar to a money market fund. Oppenheimer and its executives, like dozens of other 'downstream'brokerages nationwide, had no knowledge of the conduct of the major institutions which caused the entire auction rate securities market to collapse."

The e-mail concluded, “Oppenheimer continues to work with regulators and financing sources to try to find a means for its clients to find liquidity from their auction rate holdings.”

To read other Globe stories about the auction-rate securities market, please click here.
(By Chris Reidy and Beth Healy, Globe staff)