Improper ARS Sale by Financial Services Firm Ends Up in SEC Settlement

Jack Humphrey, Regulatory journalist
July 01, 2011 /

Registered representatives from a financial services firm have settled fraud charges filed by the US Securities and Exchange Commission for falsifying statements in the sale of auction rate securities (ARS) to customers.

Raymond James & Associates Inc. and Raymond James Financial Services Inc. consented to a settlement with the SEC and agreed to allow customers to sell any ARS again to the firm that they bought prior to the collapse of the ARS market in February 2008.

After the SEC’s probe into the ARS market collapse, ARS customers recovered more than $67 billion accumulated from the settlements with Citigroup and UBS, Wachovia, Bank of America, RBC Capital Markets, Deutsche Bank, and TD Ameritrade.

The February 2008 collapse of the ARS market left tens of thousands of investors unable to sell the ARS they held.

Eric Bustillo, Director of the SEC’s Miami Regional Office, said: “Raymond James improperly marketed and sold ARS to customers as safe and highly liquid alternatives to money market accounts and other short-term investments.

“Harmed investors who are covered by this settlement will have the opportunity to get full payment for their illiquid ARS.”

Some financial advisers and registered representatives at Raymond James allegedly told customers “that ARS were safe, liquid alternatives to money market funds and other cash-like investments.”

The SEC’s administrative order ruled that the ARS were in fact “very different types of investments.”

“Among other things, representatives at Raymond James did not provide customers with adequate and complete disclosures regarding the complexity and risks of ARS, including their dependence on successful auctions for liquidity,” the SEC said.

The SEC accused Raymond James of “willfully” violating Section 17(a)(2) of the Securities Act of 1933.

The securities regulator censured Raymond James and ordered the financial services firm to cease and desist from future violations, and reserved the right to seek a financial penalty against the firm.

Raymond James did not admit or deny the SEC’s allegations, but consented to the SEC’s order and agreed to offer to purchase eligible ARS from its eligible current and former customers; provide liquidity solutions to customers who acted as institutional money managers who are not otherwise eligible customers; reimburse excess interest costs to eligible ARS customers who took out loans from Raymond James after February 13, 2008; pay customers who sold their ARS below par by paying the difference between par and the sale price of the ARS, plus reasonable interest.

The financial services firm also agreed to establish a toll-free telephone assistance line and a public Internet page to respond to questions concerning the terms of the settlement.

“Investors should be alerted that, in most instances, they will receive correspondence from Raymond James. Investors must then advise Raymond James that they elect to participate in the settlement. If they do not do so, they could lose their rights to sell their ARS to Raymond James,” the SEC said.

The securities regulator advised investors to review the full text of the SEC’s order, including the terms of the settlement.

 

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