Two major players in financial services have agreed to repurchase $26.9 million in auction rate securities from investors.
The consent order from the New Jersey Division of Consumer Affairs requires the repurchase of the securities from New Jersey clients in order to settle allegations that the firms sold Auction Rate Securities (ARS) without fully disclosing the risks.
The securities were marketed and sold to investors as safe, liquid, cash-like investments, but Auction Rate Securities are actually long-term investments subject to a complex auction process that failed in early 2008, subjecting investors to illiquidity and lower interest rates than they were promised.
An Auction Rate Security in general is a bond with a long-term maturity, where the interest rate is reset regularly through a Dutch Auction. In 2008, the bulk of the auctions failed and since then the market has been frozen, leaving investors unable to dump the securities.
Under the terms of the agreement, Goldman Sachs has repurchased $25.5 million of the securities and will pay a civil fine of nearly $1 million to the state.
As part of its findings, the Bureau of Securities found “…Goldman Sachs failed to adequately train and supervise its salespeople to ensure that all of the firm’s clients were aware of the auction market’s mechanics and the potential illiquidity of ARS. Further, Goldman Sachs never disclosed increasing risks of owning or purchasing ARS to its customers even as the firm became aware of increasing strains in the ARS market.”
Wells Fargo Investments has repurchased $1.37 million in ARS sold to New Jersey clients. The bureau found the company failed to adequately train and supervise the sales force that marketed the securities.
“The failure of these firms to disclose known risks ultimately harmed investors who purchased auction rate securities,” Attorney General Paula Dow said. “State law requires disclosure of all material facts to investors, particularly when their hard-earned money is on the line.”
The settlements with the two firms represent the 11th and 12th reached by the Bureau of Securities over the sale of ARS to New Jersey clients.
To date, the bureau has forced the repurchase of more than $2.8 billion of ARS.
The investigation into the securities began in 2008, after state offices began receiving complaints from investors throughout the country. As a result, 12 states, including New Jersey, formed a task force to investigate whether Wall Street firms had systematically misled investors on the risks of ARS.