Morgan Stanley Auction-Rate Offer Doesn't Satisfy N.Y.'s Cuomo

By Christine Harper and Karen Freifeld
Enlarge Image/Details

Aug. 12 (Bloomberg) -- Morgan Stanley's offer to repurchase about $4.5 billion in auction-rate securities from its retail clients failed to mollify New York Attorney General Andrew Cuomo, who called the proposal ``too little, too late.''

Morgan Stanley, the second-biggest U.S. securities firm by market value, will begin to repurchase notes at par value no later than Sept. 30, the New York-based firm said yesterday. The statement was issued just hours after Cuomo called on Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp. to begin ``immediate'' settlement talks to resolve probes into how the securities were sold.

``This is too little, too late, and our investigation into Morgan Stanley continues,'' Alex Detrick, a spokesman for Cuomo, said in an e-mail response to the Morgan Stanley proposal.

Regulators have been investigating how banks and Wall Street firms sold auction-rate securities before the $330 billion market collapsed in February. The investments have been frozen in customer accounts since firms backed away from the market, leading to claims by customers and investigations by the U.S. Securities and Exchange Commission, the states of New York and Massachusetts, and a nationwide task force of state securities regulators.

Morgan Stanley is following Merrill Lynch & Co. in trying to pre-empt a regulatory settlement by volunteering to buy back the securities. Merrill Lynch last week proposed that it would buy back about $10 billion in auction-rate securities.

`Positive First Step'

Morgan Stanley said it notified Cuomo's office, as well as the Securities and Exchange Commission and the state regulator in Illinois, about the details of its plan.

``It's a positive first step in resolving the issues,'' said James Nix, senior attorney in the Illinois Secretary of State, Securities Department, which is negotiating on behalf of state securities officials. He wouldn't comment on the status of Morgan Stanley negotiations.

``Major investment banks are trying to protect their business reputations and their credibility by offering these kinds of settlements without regulatory action,'' said William J. Leone, a partner at Faegre & Benson LLP in Denver who is a former U.S. Attorney for Colorado. ``There's a lot of pressure on industry players to follow suit.''

When banks have settled with regulators, they agreed to pay a fine as well as to buy back the securities. Citigroup Inc. will pay a $100 million fine and repurchase about $7.3 billion of the debt under a settlement last week with U.S. and state regulators. UBS AG, Switzerland's biggest bank, is paying a $150 million fine and will buy back $18.6 billion.

Massachusetts

Last week, Morgan Stanley agreed to buy back $1.5 million in auction-rate securities from two municipalities in Massachusetts to settle claims there of improper sales.

Cuomo is demanding that banks create auction-rate securities buyback programs for retail customers, reimburse consumers forced to sell securities at ``below-par'' prices and institute a claims- resolution mechanism.

The offer, which will be extended until Nov. 30, applies to so-called retail clients -- defined as individuals, charities and small- and medium-sized businesses with accounts of $10 million or less -- who bought the securities before Feb. 13.

The firm will reimburse any losses sustained by retail clients from selling auction-rate securities, the firm said in the statement. Morgan Stanley will also provide no-cost loans to clients until the securities are repurchased and will reimburse interest costs incurred under prior loan programs that the firm provided to auction-rate securities holders.

Punishment

Cuomo wants to mete out further punishment, said Richard Bove, an analyst at Ladenburg Thalmann & Co. in Lutz, Florida, who recommends selling shares of Morgan Stanley, Merrill and other brokerage firms.

``If he was looking for equity for the holders of auction- rate securities, he got it,'' Bove said. But ``Cuomo wants another major press conference in which he can say, `We fined this company.'''

``Getting money back into the pockets of investors has been a prime focus throughout SEC's auction-rate securities investigations,'' SEC spokesman John Nester said in an e-mail. He declined to discuss any specific investigation.

Wachovia, the fourth-largest U.S. bank, said yesterday that its second-quarter loss was bigger than reported in July because of costs to settle a probe of auction-rate securities sales. The Charlotte, North Carolina-based bank revised the loss to $9.11 billion, or $4.31 a share, from $8.86 billion, or $4.20, according to a regulatory filing.

``Morgan Stanley is acting responsibly,'' regardless of the status of negotiations with regulators, said attorney Thomas Curran, a partner at Ganfer & Shore in New York. ``It's taking proactive measures and acting to reassure the market generally.''

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Karen Freifeld in New York State Supreme Court in Manhattan at kfreifeld@bloomberg.net.