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Paula T. Dow,
Attorney General

Division of Consumer Affairs
Thomas R. Calcagni, Acting Director

 

Bureau of Securities
Amy Kopleton, Acting Chief

For Immediate Release:
April 21, 2011

For Further Information Contact:
Jeff Lamm, 973-504-6327

 

Division of Consumer Affairs Announces Settlement:
Morgan Stanley and TD Ameritrade Agree to Repurchase
Over $338 Million in Auction Rate Securities from
N.J. Investors

View Morgan Stanley Consent Order; View TD Ameritrade Consent Order

NEWARK – The New Jersey Division of Consumer Affairs, through its Bureau of Securities, has signed final Consent Orders requiring Morgan Stanley and TD Ameritrade to repurchase auction-rate securities (ARS) from New Jersey clients to settle allegations that the firms sold ARS without disclosing known risks of the ARS market.

Although marketed and sold to investors as safe, liquid, and cash-like investments, the ARS were actually long-term investments subject to a complex auction process that failed in early 2008, revealing illiquidity and lower interest rates than investors were promised.

Under the terms of the settlements, Morgan Stanley, an underwriter of ARS, has agreed to offer the repurchase of $322.7 million in ARS sold to retail investors in New Jersey. Morgan Stanley also will pay $1.56 million in civil penalties to the State, under terms of the Consent Order. As part of its findings, the Bureau determined that Morgan Stanley failed to adequately train all of its brokers and financial advisers about the potential illiquidity of ARS and never disclosed increasing risks of owning or purchasing ARS to its customers even as the firm became aware of increasing strains in the ARS market.

TD Ameritrade, a distributing or “downstream” broker-dealer who sold ARS, has repurchased $16.1 million of the ARS it sold to retail investors in the state. The Bureau found, among other things, that TD Ameritrade’s registered representatives failed to provide customers with adequate and complete disclosures regarding the complexity of the auction process and the risks associated with ARS.

“Investors in auction rate securities suffered because firms failed to disclose known risks,” Attorney General Paula T. Dow said. “Disclosure of material facts to the investing public is required by law because consumers must be fully informed as they make decisions about investing their hard-earned money.”

These two Consent Orders represent the ninth and tenth settlements that the Division has reached with firms that sold ARS to New Jersey investors.

“When we find deception or concealment in the marketplace, we take action – as we’ve done in matters involving the marketing and sale of auction-rate securities,” said Thomas R. Calcagni, Acting Director of the Division of Consumer Affairs. “Through our efforts, more than $2.8 billion of these assets have been repurchased or offered to be repurchased by firms, and we’re not done yet.”

The investigation into Morgan Stanley’s and TD Ameritrade’s roles in the sale of these securities is part of a larger state-led effort to address problems in connection with ARS investments. Early in 2008, state offices began receiving complaints from investors throughout the country. As a result, 12 states, including New Jersey, formed a task force to investigate whether certain Wall Street firms had systematically misled investors when placing them in auction rate securities.

“The multitude of investments available to investors can be confusing, and those offering products are obligated to fully disclose all relevant terms and conditions to potential investors,” said Amy Kopleton, Acting Bureau Chief. “State securities regulators continue to work together to protect investors stuck with ARS and to hold the responsible firms accountable for violating state investor protection laws.”

Bureau of Securities Investigating Attorney Peter C. Cole led New Jersey’s efforts in securing these settlements and protecting Garden State investors.

The Bureau of Securities can be contacted toll-free within New Jersey at 1-866-I-INVEST (1-866-446-8378) or from outside New Jersey at 973-504-3600. The Bureau's web site is located at www.njsecurities.gov.

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