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Merrill Lynch, Goldman Sachs Pressured to Settle Claims

By David Mildenberg
Bloomberg News
Saturday, August 16, 2008; D02

New York State Attorney General Andrew M. Cuomo stepped up pressure yesterday on Merrill Lynch and Goldman Sachs to settle claims that they misled investors in auction-rate securities after Wachovia agreed to buy back about $9 billion of the bonds.

Merrill faces an "imminent" lawsuit from New York because the company's offer last week to buy back about $10 billion of the debt isn't satisfactory, Cuomo said during a news conference. New York has subpoenaed about 25 firms involved in sales of auction-rate securities, including five that have already settled, he said.

"The larger the firm, the larger the portfolio, the more intense our effort," Cuomo said. "We have an ongoing investigation with Goldman Sachs. In the course of investigations we're also having discussions."

Cuomo said Merrill's voluntary buyback offer was inadequate the same day that Wachovia joined banks settling a nationwide investigation of how auction-rate securities were marketed. Other firms are still negotiating with regulators about buying back the debt, which was pitched as safe as cash until the $330 billion market broke down.

"We were surprised that New York sent us a letter threatening legal action on auction rate securities," Mark Herr, a Merrill spokesman, said in a statement following Cuomo's news conference. "We have been discussing this issue with New York and other regulators since we announced last week our plan to purchase our retail clients' ARS and we thought we were making progress. We anticipated further talks."

Goldman spokeswoman Andrea Raphael, repeating comments made Thursday, said that the New York-based investment bank was "cooperating fully with all regulators" and "working with clients to address their liquidity needs."

Regulators have sought auction-rate buyback programs for retail customers including individuals, reimbursement for consumers forced to sell securities at prices below face value and relief for institutional investors.

"There are dozens of firms who've been involved in this area," Cuomo said. "We're starting at the top, working our way down."

Auction-rate securities are typically bonds with interest rates reset by periodic bidding. Banks and securities dealers that ran the auctions abandoned their routine role as buyers of last resort in mid-February, causing the market to collapse and leaving holders frozen in the securities.

Wachovia, the fourth-largest U.S. bank, will pay a $50 million fine to settle claims by the Securities and Exchange Commission and states led by Missouri that it misled investors. Under the settlement, Wachovia will repurchase the securities, including roughly $5.7 billion from individuals, charities and small businesses.

"Today's agreement in principle underscores our desire to ensure that clients who purchased ARS at Wachovia receive the liquidity they need," Wachovia chief executive Robert Steel said in a statement. The Wachovia accord covers more than 40,000 investors, Missouri Secretary of State Robin Carnahan said in a statement.

Wachovia will also take a $275 million pre-tax charge because of higher legal costs in the third quarter. The move follows a similar $500 million writedown in the second quarter that was disclosed Aug. 11.

Wachovia "didn't have any choice," said Gary Townsend, a former bank analyst and co-founder of Hill-Townsend Capital in Chevy Chase. "When everyone else is settling, there is no place to hide."

"If it wasn't for the secretary of state in Missouri and others, I don't think we would have gotten anywhere," said Tom Nagel, a St. Louis insurance agent who has more than $750,000 in auction-rate securities with Wachovia. "I dealt with Wachovia people until I was blue in the face and they categorically denied selling this as a money market. But if they don't want to admit they did wrong shame on them."

UBS and Citigroup last week agreed to redeem about $26 billion of the securities and pay fines of a combined $250 million, while Morgan Stanley and J.P. Morgan Chase said Thursday that they would buy back more than $7 billion of the debt and pay a combined $60 million in fines. The firms neither admitted nor denied wrongdoing.