Cuomo's ARS Probe Broadens

August 11, 2008 ( - New York state Attorney General Andrew Cuomo revealed Monday that his ongoing probe into the sale of auction-rate securities (ARS) has now broadened to encompass JPMorgan Chase & Co., Morgan Stanley, and Wachovia Corp.

An Associated Press news report said Cuomo sent letters to JPMorgan, Morgan Stanley, and Wachovia telling the firms that his office is reviewing their behavior in the auction-rate securities area to determine whether the banks knowingly misrepresented the safety of the securities when selling them to investors as has been alleged.

“We’ve had conversations with these banks,” Cuomo said. “We think the banks are eager to resolve the matter.” Cuomo said meetings have been ongoing for “weeks, if not months.”

According to the news report, Morgan Stanley spokesman Mark Lake said the New York-based investment bank has “been and continues to cooperate fully with the regulators and (has) been working with clients since February to provide liquidity on a case-by-case basis.” A Wachovia spokeswoman said the Charlotte, N.C.-based bank is meeting with regulators. JPMorgan declined to comment.

“This is an industrywide problem,” Cuomo said in an interview, according to the news report. “This is not about one or two institutions. We are now working with the other players in the industry.”

Last week, Cuomo’s office and the Securities and Exchange Commission reached settlements that forced Swiss bank UBS to repurchase $18.6 billion in the securities, while Citigroup agreed to buy back $7 billion of the securities (See UBS Auction-Rate Securities Bill Grows ). UBS will also pay a fine of $150 million, while Citigroup will pay a $100 million fine.

The $330 billion auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, except the interest rates were reset at regular auctions, some as frequently as once a week.