Morgan Stanley & Company Agrees to Repay Massachusetts Municipalities for Auction Rate Securities Investments
Morgan will perform full investment review; New Bedford, Hopkinton to receive $1.5 Million
BOSTON - Attorney General Martha Coakley’s Office has entered into a settlement with Morgan Stanley & Company (Morgan) resolving allegations involving the investment bank’s sale of inappropriate auction rate security investments to Massachusetts municipalities. Morgan allegedly marketed auction rate securities, a risky long term investment vehicle, to municipalities as an appropriate investment when in fact that was not the case.
“We appreciate Morgan’s cooperation and are pleased that it has agreed to perform this thorough review of all its city and town clients in the Commonwealth in order to determine whether additional reimbursements are appropriate,” said Attorney General Coakley. “Cities and towns need every available dollar in their budget, particularly during these stressful economic times.”
Pursuant to an Assurance of Discontinuance, filed late yesterday in Suffolk Superior Court, Morgan will complete a full review of all investment clients and identify any and all Massachusetts towns and cities that have invested in auction rate securities through the investment bank. Morgan will then repay the towns and cities all of their investment monies. Morgan also agreed to cooperate with the Attorney General’s Office in its ongoing review of auction rate securities issues. The Attorney General’s Office began a review of Morgan’s marketing tactics to municipalities in February 2008. Morgan fully cooperated with the Attorney General’s probe, and agreed to reimburse $1.5 million in investment monies to the city of New Bedford and the town of Hopkinton.
An auction rate security is a debt instrument, such as a bond or preferred stock, for which the interest rate or dividend is periodically reset through an auction mechanism. In some instances, towns and cities were persuaded to invest their cash accounts into these auction rate security accounts. Although these securities have long-term maturities of many years, they historically have been offered for sale at weekly or monthly auctions. However, in early 2008, the market for auction rate securities dried up and the auctions through which they were sold experienced widespread failures. When an auction fails, liquidity disappears from the market as it becomes difficult to dispose of such securities at all, let alone at par value. Many such securities have been written down to reflect their reduced market value. Auction rate security investments have been frozen since early this year due to lack of market liquidity, and the value of municipal investments have been written down by investment banks.
This is the third recovery by the Attorney General’s Office against an investment bank regarding auction rate securities. In February, 2008, the Attorney General’s Office obtained a repayment by Merrill Lynch of $13.7 million for the city of Springfield, which allegedly had been misled into purchasing auction rate securities. In May, 2008, the Attorney General’s Office obtained $37 million in recoveries for various towns and cities that had been allegedly misled into investing into risky auction rate securities by agents of investment banking giant UBS. UBS also in July paid an additional $1,000,000 to the Commonwealth related to the sales of these instruments and reimbursed an additional $3.4 million to the remaining UBS municipal clients for their investments.
This matter was handled by Assistant Attorneys Generals Owen Lefkon, Amy Markowitz and Division Chief Glenn Kaplan of Attorney General Coakley’s Insurance and Financial Services Division.