The game of chicken between hard-charging New York Attorney General Andrew Cuomo and a trio of investment banks caught up in his auction-rate securities probe ended yesterday with a settlement that will keep the firms out of court.
The banks – Merrill Lynch, Deutsche Bank and Goldman Sachs – had been among a contingent of high-profile financial institutions that had not yet reached a deal with state and federal regulators over the sale of the securities.
Merrill also reached a separate agreement with Massachusetts Secretary of State William Galvin, who had sued the investment bank in July over peddling auction-rate securities to investors without explaining the risks involved.
Both states’ agreements cover investors who live outside of both jurisdictions, as well as residents of the states.
Merrill’s agreement with Cuomo takes off the table his threat to take the beleaguered bank to court if it didn’t reach a settlement in his probe by today. Cuomo, along with other state regulators and the Securities and Exchange Commission, has aggressively gone after Wall Street firms for allegedly duping investors into thinking auction-rate securities were as safe and liquid as cash.
Cuomo said Merrill chief John Thain understood that his firm had to “step up to the plate” to do the right thing. Thain said in a statement, “After meeting personally today with Attorney General Cuomo . . . I am pleased to report that we have reached an amicable resolution and global settlement of this matter.”
As part of the pact with Cuomo, Merrill will pay a fine of $125 million and starting Oct. 15 will buy back securities from all investors whose net worth is under $4 million. About $12 billion in securities are involved. The bank agreed to complete the buyback by Jan. 2.
Goldman, meanwhile, will pay a $22.5 million fine and buy back about $1.5 billion in auction-rate notes. Deutsche Bank will pay a $15 million penalty and buy back about $1 billion in securities.
Cuomo’s probe has centered on whether Wall Street masked the risks involved in investing in the auction-rate securities market by billing the instruments as being as liquid and safe as cash.
These short-term securities, which offer interest payments that reset as often as once every week, were attractive for wealthy investors and corporations because they offered a liquid market and an alluring interest rate, until things collapsed. mark.decambre@nypost.com