Bank of America Seeks to Settle Auction-Rate Accords

By David Mildenberg and Karen Freifeld

Sept. 5 (Bloomberg) -- Bank of America Corp., the nation's second-largest bank, said it wants to settle state and federal regulatory probes into how it marketed auction-rate securities on terms similar to agreements with other major banks.

``We understood that we had reached such an agreement in principle nearly two weeks ago,'' spokeswoman Shirley Norton said in statement yesterday. The bank negotiated for almost a month with the U.S. Securities and Exchange Commission and regulators in New York and Massachusetts for a deal that would provide liquidity relief to customers, the statement said.

Citigroup Inc., UBS AG and Goldman Sachs Group Inc. and five other banks settled claims in recent weeks stemming from a nationwide probe into firms that allegedly marketed the securities as about as safe as cash. The brokerages that managed the auctions abandoned the $330 billion market, stranding thousands of investors who could no longer sell the securities at weekly and monthly biddings held to set interest rates.

Bank of America, based in Charlotte, North Carolina, must strike an accord with regulators in Massachusetts or face legal action, Secretary of State William Galvin said Sept. 3. New York Attorney General Andrew Cuomo subpoenaed eight Bank of America executives this week, a person familiar with negotiations said yesterday. The bank fell 7.2 percent yesterday in New York trading.

``I think the underwriters have all recognized they have to settle these cases,'' John Coffee, a securities law professor at Columbia Law School in New York, said in a telephone interview yesterday. ``I don't see many people holding out.''

Investigation Continuing

Coffee said it was unclear whether high-level executives or brokers were targeted by Cuomo's subpoenas.

``It is possible regulators think some individuals should be responsible,'' he said, noting the two Credit Suisse Group AG brokers who were criminally charged Sept. 3. ``That may ratchet up the pressure.''

Alex Detrick, a spokesman for Cuomo, said yesterday the Bank of America investigation was continuing. State and federal regulators have investigated the auction-rate market since it fell apart in February.

``We are still seeking answers to certain questions that have arisen as a result of our initial inquiries,'' Detrick said in an e-mail after Bank of America's statement yesterday that an agreement was worked out in principle. ``Hopefully, a settlement will be in reach once we have obtained all the relevant information we are seeking, but we do have an obligation to follow all the evidentiary trails.''

Individual Conduct

Galvin, the 57-year-old Boston-based securities regulator who is leading a 12-state task force investigating Bank of America, said progress has been made.

``Getting everyone into a final agreement is a problem,'' he said in an interview Sept. 3. ``I'm not sure it's all Bank of America's fault.''

SEC spokesman John Nester declined to comment.

The eight banks that settled agreed to buy back a total of at least $44 billion of the securities from individuals, nonprofits and small businesses and to help their institutional clients find markets for the debt. They also agreed to pay fines totaling more than $520 million to state and federal regulators.

Aside from UBS, Citigroup and Goldman Sachs, settlements were reached with Morgan Stanley, Wachovia Corp., Merrill Lynch & Co., JPMorgan Chase & Co. and Deutsche Bank AG.

Cuomo said last month that the settlements with the banks didn't cover conduct by individual executives.

Credit Suisse Brokers

Two former Credit Suisse Group AG brokers were charged Sept. 3 with violating securities laws by fraudulently selling corporate clients subprime mortgages linked to auction-rate securities.

Julian Tzolov, 35, and Eric Butler, 36, falsely told clients the products were backed by federally guaranteed student loans and were a safe alternative to bank deposits or money market funds, according to their indictment.

Butler pleaded not guilty to the charges, while Tzolov was said by U.S. Attorney Benton Campbell to be out of the country, though not a fugitive. Tzolov's lawyer declined to comment.

Coffee said he didn't think major underwriters would ``live or die'' on whether one of their brokers gets indicted.

``If it's the chief financial officer,'' he said, ``there's certainly pressure there.''

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Karen Freifeld in New York state Supreme Court at kfreifeld@bloomberg.net.