Morgan Stanley and JPMorgan Chase & Co. have agreed to pay fines and buy back auction-rate securities that state and federal regulators said were fraudulently sold to investors. The New York-based banks, among the largest underwriters of the securities, will pay fines totaling $60 million and redeem at face value auction-rate debt sold to clients, under a settlement with New York State Attorney General Andrew Cuomo and a group of other state regulators. The settlement was announced on August 14th.
The agreements are the latest arising from a nationwide investigation of how auction-rate securities were marketed before the $330 billion market collapsed in February. Investors purchased the debt on the advice of bankers who pitched it as a cash equivalent, regulators said, only to find they couldn’t sell the bonds as demand dried up. UBS AG and Citigroup Inc. agreed earlier in the month to buy about $26 billion of the debt and pay fines of a combined $250 million. Merrill Lynch & Co. also voluntarily offered to repurchase about $10 billion of the securities, a type of long-term debt whose interest costs are set through auctions run by dealers every week or month.
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