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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Thursday, August 14, 2008

JP Morgan Chase and Morgan Stanley Agree to Buy Back ARSs in Settlement with New York AG

New York Attorney General Andrew M. Cuomo today announced another series of agreements to provide liquidity to consumers who purchased auction rate securities.  Under the agreements, JP Morgan Chase & Co. (“JP Morgan”) and Morgan Stanley will collectively return over $7 billion to investors across New York State and the nation. The agreements settle allegations that JP Morgan and Morgan Stanley made misrepresentations in their marketing and sales of auction rate securities, representing that they were safe, cash-equivalent products, when in fact they faced increasing liquidity risk.

JP Morgan and Morgan Stanley have agreed to buy back, no later than November 12, 2008, and December 11, 2008, respectively, all illiquid auction rate securities from all JP Morgan and Morgan Stanley retail customers, charities, and small to mid-sized businesses. Firms will also pay damages to investors who sold securities for a loss. JP Morgan and Morgan Stanley will also pay New York State and the North American Securities Administrators Association (“NASAA”) civil penalties in the amount of $25 million and $35 million, respectively, which will be distributed pro rata by states’ investment dollar totals. 

Today’s agreements with JP Morgan and Morgan Stanley come less than a week after Cuomo settled similar allegations against Citigroup and UBS.  The four settlements together provide relief to thousands of investors who were left holding $27 billion worth of securities they could not sell after the widespread failure of the auction rate securities market this past February. Citigroup, UBS, JP Morgan and Morgan Stanley are four of the larger participants in the auction rate securities market, and among them are responsible for more than half of all auction rate securities owned by investors. 

JP Morgan and Morgan Stanley will also:

• Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed;
• Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds;
• Undertake to expeditiously provide liquidity solutions to all other institutional investors;
• Reimburse all refinancing fees to any New York State municipal issuers who issued auction rate securities through JP Morgan and Morgan Stanley since August 1, 2007.

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