Investment firms fined by Delaware officials

By Nick Rees | Apr 9, 2009

WILMINGTON, Del. (Legal Newsline) - Misleading investors about the safety of the auction rate securities market has lead to fines of more than $309,000 for two investment firms in Delaware.

Wachovia Securities, LLC and Wachovia Capital Markets, LLC sold more than $60 million in auction rate securities in Delaware, while Citigroup Global Markets Inc. sold more than $92 million.

The securities were marketed as cash alternatives by Wachovia and investors were told that they would be provided with one-day or same-day liquidity for redeeming the securities. In February 2008, however, when the securities market crashed, Wachovia stopped abiding by its offer.

"These agreements send a clear message to investment firms that we will hold them accountable for misleading investors about the sale of these supposedly safe and liquid investment products," said Delaware Securities Commissioner James Ropp.

Auction rate securities, which are long-term financial instruments with interest rates that reset through weekly or monthly auctions, can be bought and sold on a regular basis when the auctions are run properly.

There were not enough buyers for the securities being sold by the companies, however, causing the auctions to fail and forcing investors to hold onto their auction rate securities until the next successful auction. The majority of these auctions have failed since early 2008, causing investors to be unable to sell their frozen holdings.

A multistate investigation into the failure of the auction rate securities market lead to a settlement in November between state and federal securities regulators and 11 investment firms offering the securities for sale.

The firms agreed to repurchase more than $60 billion of auction rate securities from investors nationwide. The firms also agreed to notify investors of the repurchase offer.

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