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State Regulators and Attorney General Probe Banks and Brokers in Auction-Rate Securities Debacle.

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New York, NYNew York State Attorney General Andrew Cuomo has launched a probe into the failure of the auction rate securities market. The industry-wide investigation has slapped subpoenas on 18 banks and securities firms that underwrote and brokered the investments. Under the gun is the marketing of the securities and how the decision was made to stop the bidding on them in mid-February.

Business InvestigatingThe initiative brings the first sliver of hope that there will be some measure of accountability for the drying up of the $330 billion auction-rate securities (ARS) market. Many shocked small investors only learned of the sudden illiquidity of their investments through their March statements from their broker. One victim, who deposited a complaint on the Lawyers and Settlements site, expressed tentative hope upon hearing the news of the probe. At first considering a lawsuit, he decided to wait for the outcome of Cuomo's investigation before taking further action. He, like most victims, had been assured days before the collapse that ARS were good as cash and had never failed.

A forum commenter adds, "Most of us were never even told that our money was going into auction rate securities. We were told that they were going into a cash alternative called floaters, or seven day paper that was totally safe and liquid."

Auction rate securities are long-term bonds, masquerading as short-term debt, and sold by municipalities, student loan corporations, nonprofits and closed-end funds to raise capital. Some are especially attractive to conservative investors for their tax-exempt status and the fact that their interest rates are reset every seven, 28 or 35 days during auctions and paid regularly. No prospectus is distributed with ARS, however, leaving purchasers in the dark as to the very real risk of illiquidity. In the recent credit crunch, banks have refused to bid on the bonds when there aren't enough bidders, leaving investors unable to sell or access their frozen notes.

A major focal point of the Cuomo investigation questions how the banks decided to stop bidding, considering dealers had regularly bought unwanted bonds at auction since auction-rate securities were introduced in 1985. Having to explain their actions will be some of Wall Street's biggest banks, including Merrill Lynch & Co., UBS-AG, Citigroup Inc., J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., according to a person familiar with the investigation.

The probe is issued under the Martin Act that allows the state investigators to file for criminal charges.

Meanwhile, according to the North American Securities Administrators Association (NASAA), the states of Massachusetts, Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington have coordinated their own ARS Task Force. Spearheading the investigation is William Galvin, Massachusetts' secretary of the commonwealth, who has subpoenaed UBS-AG, Merrill Lynch & Co. and Bank of America Corp. In a statement he stresses that the inquiry intends to determine whether investors were properly informed of the risk that their investment may become inaccessible.

Bryan Lantagne, the securities division director for Galvin, told Bloomberg that they were receiving complaints on a daily basis from young homeowners, retirees, small business owners, and small investors who have been negatively impacted because their supposedly safe-harbored money is tied up in a frozen market.

Also involved, the federal Securities and Exchange Commission has launched a nationwide call for written complaints and has sent letters to the major sellers of ARS, requesting the names of customers who bought the notes and the brokers who sold them.

Karen Tyler, NASAA President and North Dakota Securities Commissioner, said in a press release that if violations are uncovered, state regulators will seek a strong commitment from Wall Street to provide retail clients an acceptable solution. "Our goal is securing for investors access to their cash as requested," Tyler said. "If the product was represented to be a cash equivalent going in, it must be treated as a cash equivalent coming out."

While waiting for the results of the investigations and their consequences on recovering frozen funds, it is still advisable to consult a lawyer.



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