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State finalizes auction-rate securities settlements

April 29, 2010

The Indiana Securities Division has finalized the last of a dozen settlements with national securities firms accused of misleading Hoosier investors, Secretary of State Todd Rokita said Thursday afternoon.

The 12 investment firms have agreed to repurchase more than $370 million in auction rate securities from Indiana clients and to pay fines totaling more than $3.5 million.

Goldman Sachs & Co. on Thursday signed the last settlement, which included a $284,818 fine, Rokita said.

Rokita’s office accused Goldman Sachs and 11 other large securities firms of misleading investors about the safety of the auction rate securities market. Besides Goldman Sachs, the firms that settled are: Banc of America, Citigroup, Credit Suisse, Deutschebank, JP Morgan, Merrill Lynch, Morgan Stanley, RBC, Stifel Nicolaus & Co., UBS and Wachovia.

“We are holding these companies accountable for the unethical behavior of selling auction rate securities to Indiana investors without fully disclosing the risks involved,” Rokita said in a prepared statement. “This action sends a strong message that states will not tolerate such unethical and unlawful activity.”

Auction-rate securities are bonds whose interest rates are meant to be reset regularly at daily, weekly or monthly auctions. Many financial firms marketed them as safe, liquid and cash-like investments. But when credit markets seized up as the recession deepened, auctions began to fail, freezing the $200 billion global market and leaving investors unable to access their money.

Because only a handful of previous auctions ever had failed, many investors considered the securities a safe form of temporary financing—essentially a better-yielding alternative to money market accounts.

Of the $3.5 million collected in fines, $2 million will help fund the newly created Securities Restitution Fund, a program that will help victims of investment fraud in Indiana recover some of their losses.
 

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