U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21066 / June 3, 2009
Securities and Exchange Commission v. Banc of America Securities LLC and Banc of America Investment Services, Inc., Civil Action No. 09-CIV-5170 (S.D.N.Y. June 3, 2009); Securities and Exchange Commission v. RBC Capital Markets Corporation, Civil Action No. 09-CIV-5172 (S.D.N.Y. June 3, 2009); and Securities and Exchange Commission v. Deutsche Bank Securities Inc., Civil Action No. 09-CIV-5174 (S.D.N.Y. June 3, 2009)
SEC Finalizes ARS Settlements With Bank of America, RBC and Deutsche Bank, Providing Over $6 Billion in Liquidity to Investors
The Securities and Exchange Commission announced that it has filed complaints in the United States District Court for the Southern District of New York against Banc of America Securities LLC and Banc of America Investment Services, Inc. (collectively, Bank of America), RBC Capital Markets Corporation (RBC), and Deutsche Bank Securities Inc. (Deutsche Bank) alleging that the firms misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed or sold. Without admitting or denying the Commission's allegations, the firms consented to settle the actions. These settlements, combined, will provide or already have provided nearly $6.7 billion to approximately 9,600 customers who invested in auction rate securities before the market for those securities froze in February 2008.
According to the Commission's complaints, Bank of America, RBC and Deutsche Bank misrepresented to certain customers that ARS were safe, highly liquid investments that were comparable to money markets. According to the complaints, in late 2007 and early 2008, the firms knew that the ARS market was deteriorating, causing the firms to have to purchase additional inventory to prevent failed auctions. At the same time, however, the firms knew that their ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed the firms' balance sheets. The complaints allege that Bank of America, RBC and Deutsche Bank failed to make their customers aware of these risks. In mid-February 2008, according to the complaints, Bank of America, RBC and Deutsche Bank decided to stop supporting the ARS market, leaving Bank of America, RBC and Deutsche Bank customers holding billions in illiquid ARS.
The settlements, which are subject to court approval, will restore approximately $4.5 billion in liquidity to Bank of America customers, $800 million in liquidity to RBC customers and $1.3 billion in liquidity to Deutsche Bank customers. Previously, on October 8, 2008, the Commission's Division of Enforcement announced preliminary settlements with Bank of America and RBC.
Bank of America, RBC and Deutsche Bank agreed to be permanently enjoined from violations of the broker-dealer fraud provisions and to comply with a number of undertakings, some of which are set forth below.
The Bank of America, RBC and Deutsche Bank settlements provide, among other things, that:
- Each firm will offer to purchase ARS at par from individuals, charities, and small or medium businesses that purchased those ARS from the firm, even if those customers moved their accounts.
- Each firm will use its best efforts to provide liquidity solutions for institutional and other customers, including, but not limited to, facilitating issuer redemptions, restructurings, and other reasonable means, and will not take advantage of liquidity solutions for its own inventory before making those solutions available to these customers.
- Each firm will pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.
The Commission wishes to alert investors that, in most instances, they have received or will receive correspondence from Bank of America, RBC and Deutsche Bank, and that they must advise the respective firm that they elect to participate in these settlements, or they could lose their rights to sell their ARS. Further, if eligible customers incurred consequential damages because of the illiquidity of their ARS, they may participate in special FINRA arbitrations.
Bank of America, RBC and Deutsche Bank will also be permanently enjoined from violating the provisions of Section 15(c) of the Exchange Act of 1934, which prohibit the use of manipulative or deceptive devices by broker-dealers. The Commission reserves the right to seek a financial penalty against the firms.
The Commission notes the assistance and cooperation from the New York Attorney General, the Financial Industry Regulatory Authority (FINRA), the Massachusetts Securities Division, the Texas State Securities Board, the North American Securities Administrators Association (NASAA) and the New Jersey Attorney General.
The Commission's investigation of the auction rate securities market is continuing.
SEC Complaints in this matter: