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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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