Historical Regulatory Action Regarding Auction Rate Securities

Brokerage Firms have been under fire from the securities regulators regarding their practices in Auction Rate Securities as recently as 2006. In light of this fact, the fraudulent activity that occurred in connection with the sales of Auction Rate Securities by the brokerage firms is even more egregious.  The firms’ supervisors should have had a heightened awareness and surveillance systems in place to monitor their brokers’ sales practices regarding Auction Rate Securities.   

On May 31, 2006, the U.S. Securities and Exchange Commission (“SEC”) announced that it had settled its investigation of fifteen firms and issued $13 million in penalties.  The firms included Bear, Stearns & Co., Inc., Citigroup Global Markets, Inc., Goldman Sachs & Co., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated/ Morgan Stanley DW Inc., and RBC Dain Rauscher Inc., A.G. Edwards & Sons, Inc., Morgan Keegan & Company, Inc., Piper Jaffray & Co., SunTrust Capital Markets Inc., Wachovia Capital Markets, LLC., and Banc of America Securities LLC.  The SEC investigated the firms regarding their respective practices and procedures in the auction rate securities market. The SEC alleged in the settlement that the firms had managed auctions for auction rate securities in which they participated in ways that were not adequately disclosed or that did not conform to disclosed auction procedures.

In connection with the settlement, Bear, Stearns & Co., Inc., Citigroup Global Markets, Inc., Goldman Sachs & Co., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated/ Morgan Stanley DW Inc., and RBC Dain Rauscher Inc., each agreed to pay a money penalty of $1,500,000.00.  Further, without admitting or denying the SEC’s allegations, agreed to be censured, to cease and desist from violating certain provisions of the securities laws, to provide to customers written descriptions of its material auction practices and procedures, and to implement procedures reasonably designed to detect and prevent any failures to conduct the auction process in accordance with disclosed procedures.

This action will make it more difficult for firms to raise their standard defenses in these types of cases. This is especially true because the SEC settlement took place less than two years ago.  The SEC’s release is below in its entirety.

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