Banks, SEC Settle Claims of Investor Fraud in Sale of Auction Rate Securities

Bank of America, RBC Capital Markets, and Deutsche Bank will pay about $6.7 billion to settle Securities and Exchange Commission charges accusing the financial firms of lying to investors about the risks of auction rate securities.

Under the terms of the settlement finalized today, the three firms will pay nearly $6.7 billion to about 9,600 customers who invested in the high-risk securities before the auction rate securities market froze in February 2008. A tentative agreement on the settlement was reached in October 2008, but the terms of the deal were just finalized, officials said.

Auction rate securities are bonds with adjustable interest rates determined at weekly or monthly auctions. In many cases, the securities were packaged as municipal bonds, corporate bonds, or preferred stocks issued by cities, towns, and other municipalities or tax-exempt institutions. Investors who may not have understood the risks of the complicated investments were misled by eager securities brokers who earned high commissions for selling the instruments.

According to the SEC, Bank of America, RBC, and Deutsche Bank told prospective investors that auction rate securities were highly liquid investments and just as safe as cash. In late 2007 and 2008, with the worldwide market for the securities crumbling, the banks continued to push the investments on clients who did not know the status of the market, the SEC said.

The banks also were accused of failing to inform their clients of the risks before leaving them high and dry when the auction rate securities market froze.

Other Terms of Settlement

The settlement calls for Bank of America to pay $4.5 billion, Deutsche Bank to pay $1.3 billion, and RBC to pay $800 million to former clients who lost money in the investments. Also under the settlement:

• Each firm will offer to purchase auction rate securities at par from individuals, charities, and small or medium businesses that purchased the securities from the firm, even if those customers later moved their accounts to another firm.

• Each firm will use its best efforts to provide liquidity solutions for institutional and other customers and will not take advantage of liquidity solutions for its own inventory before making those solutions available to these customers.

• Each firm will pay eligible customers who sold their auction rate securities below par the difference between par and the sale price of the securities.

Further, investors who incurred other financial damages as a result of investing in auction rate securities may qualify for additional compensation through the Financial Industry Regulatory Authority (FINRA), which provides relief for defrauded investors.

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