ARS settlement worth $338M

by Bryan Cohen |
Apr. 21, 2011, 6:00am


NEWARK, N.J. (Legal Newsline) - New Jersey Attorney General Paula Dow announced on Thursday that the state has signed final consent orders with two investment firms to repurchase over $338 million in auction rate securities.

The New Jersey Division of Consumer Affairs, acting through its Bureau of Securities, alleged that Morgan Stanley and TD Ameritrade sold ARS to New Jersey clients without disclosing the known risks of the ARS market.

"Investors in auction rate securities suffered because firms failed to disclose known risks," Dow said. "Disclosure of material facts to the investing public is required by law because consumers must be fully informed as they make decisions about investing their hard-earned money."

The bureau alleged that Morgan Stanley and TD Ameritrade marketed and sold the ARS to investors as safe, liquid and cash-like investments even though they were actually long-term investments subject to a complex auction process that failed in early 2008. This revealed illiquidity and lower interested rates than the investors were promised, Dow says.

Under the terms of the settlement, Morgan Stanley, an underwriter of ARS, agreed to offer the repurchase of $322.7 million in ARS that were sold in New Jersey to retail investors. The firm will also pay $1.56 million in civil penalties to the state.

The bureau alleges that Morgan Stanley failed to adequately train its financial advisers and brokers about the possible illiquidity of ARS and never disclosed the increasing risk of purchasing or owning ARS to its customers as the market became increasingly strained.

TD Ameritrade, a distributing or "downstream" broker dealer who sold ARS, has repurchased $16.1 million of the ARS sold to state retail investors as part of the consent order. The bureau alleged that TD Ameritrade's registered representatives failed to provide customers with adequate and complete disclosures regarding how complex the auction process and risks associated with ARS were.

The consent orders are the ninth and 10th settlements the division has reached with firms that sold ARS to New Jersey investors.

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