BL: SEC Seeks Customer Names in Auction-Rate Bond Inquiry (Update2)
By David Scheer and Jesse Westbrook
April 18 (Bloomberg) -- The U.S. Securities and Exchange Commission asked brokerages to hand over more details about auction-rate bond sales, as regulators examine whether firms improperly steered clients into securities they can't sell.
The SEC's inspections office sent letters to the biggest sellers of auction-rate securities this month seeking the names of customers who purchased the notes and the identities of brokers who sold them. Inspectors want lists of bonds that clients bought, showing their values on different dates, a copy of a letter obtained by Bloomberg News shows.
``We are looking at representations made to investors when they purchased auction-rate securities in coordination with Finra,'' Lori Richards, head of the SEC's Office of Compliance Inspections and Examinations, said in an interview, referring to the Financial Industry Regulatory Authority. She declined to discuss specific firms or investors.
The move comes as regulators expand investigations into the collapse of the $330 billion market for the notes. New York Attorney General Andrew Cuomo has subpoenaed 18 banks and securities firms, including UBS AG and Merrill Lynch & Co., in a probe that may result in criminal charges, a person familiar with the effort said yesterday.
Seeking Names
The SEC's ``granular'' request, seeking details on specific accounts, shows the agency is trying to ``find out what was said and what was not said,'' when brokers spoke with clients, said Brian Rubin, a partner at Sutherland Asbill & Brennan LLP in Washington who previously served as deputy chief counsel at Finra's predecessor, NASD.
The SEC asked the firms for spreadsheets that list auction- rate bond holdings for individual customers, including the assets' total values at the end of December and February. It also asks the companies to disclose the total value of the same securities in their own inventory, suggesting that the SEC is looking for discrepancies in valuations.
Finra, which oversees about 5,100 brokerages, has pressed firms about their marketing of auction-rate bonds to retail, wealthy and institutional investors, a person familiar with that review said on April 8. A questionnaire from the Washington-based regulator also asks how firms classified the investments.
Separately, nine state regulators have formed a task force to investigate whether brokers misrepresented the securities.
Firms including Merrill Lynch, UBS and Morgan Stanley face lawsuits brought by clients who say they were inappropriately sold auction-rate bonds and told they were as safe as cash.
Merrill and Morgan Stanley have denied the allegations. UBS spokesman Kristopher Kagel declined to comment.
Goldman's Disclosure
Goldman Sachs Group Inc., the biggest U.S. securities firm by market value, said April 9 it had received requests for information from ``various governmental agencies and self- regulatory organizations.'' The New York-based firm said it's cooperating.
Bond-auction failures occur when too few investors bid. More than 60 percent of public auctions held each day since Feb. 13 have failed, according to Bloomberg data. When auctions fail, investors who wanted to sell are left holding the securities, and rates are reset at a level spelled out in bond documents.
Investors have grown skittish in the past year about purchasing notes backed by insurers whose own creditworthiness is under pressure from subprime-mortgage losses. As buyers backed away, dealers who ran auctions refused to buy unwanted securities as they had in the past, resulting in thousands of failures since mid-February.
To contact the reporters on this story: David Scheer in Washington at dscheer@bloomberg.net; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.
Last Updated: April 18, 2008 14:31 EDT
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