Securities Law Prof Blog

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

Wednesday, December 28, 2011

Bank of New York Mellon Settles Charges of ARS Manipulation

The Bank of New York Mellon Corp. (BNYM) recently settled a joint  investigation into manipulative trading of auction rate securities as facilitated by employees of Mellon Financial Markets LLC (MFM), a subsidiary of BNYM by the New York Attorney General, the Texas State Securities Board and the Florida Office of Financial Regulation. Under the agreement, BNYM will pay $1,300,000 in penalties, fees and costs to the States of New York, Texas and Florida.

According to the allegations, from January 22, 2008 through February 22, 2008, MFM, acting as an intermediary broker on behalf of the Citizens Property Insurance Corporation (CPIC), enabled CPIC to purchase large quantities of its own auction rate securities by placing CPIC’s bids in CPIC’s own auctions as though they were the bids of an independent third-party buyer.  CPIC knew that underwriter broker-dealers managing CPIC’s auction rate securities would have rejected CPIC’s bids on its own auctions as self-dealing transactions, and solicited MFM's assistance to overcome this problem.  MFM agreed to submit CPIC trades into the auctions in order to help CPIC avoid detection, thus facilitating CPIC’s trading by helping CPIC conceal its identity from the underwriter broker-dealers.  CPIC’s bids were at below-market rates and resulted in CPIC’s auctions clearing at rates significantly lower than would have resulted had CPIC not intervened in those auctions with its own bids.

The MFM traders and their managers understood that CPIC’s bidding would set clearing rates lower than they would have been in the absence of such bidding, and that this would be both detrimental and objectionable to other investors bidding on or holding CPIC’s auction rate securities.  Some MFM employees even expressed doubts about whether such trading was legal.  Yet no one at MFM sought legal advice about the propriety of the trading in advance, or brought the proposed trading to the attention of compliance staff at MFM or BNYM.

The trading continued until BNYM’s compliance staff discovered it and ultimately ordered it to stop.  MFM earned approximately $300,000 in fees from this conduct.

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