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Morgan Stanley Agrees to ARS Buy-Back Deal, Fines (Aug. 14, 2008)

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New York Attorney General Andrew M. Cuomo has announced another series of agreements to provide liquidity to consumers who purchased auction rate securities. Under the latest agreements, Morgan Stanley and JP Morgan Chase & Co. will collectively return over $7 billion to investors across New York State and the nation, according to his office. The agreements settle allegations that the two firms “misrepresented” auction rate securities in their sales and marketing, Cuomo’s office says.

Within the past week, Cuomo has signed agreements restoring over $27 billion of liquidity to thousands of investors nationwide.

As part of the deal, Morgan Stanley agreed to buy back, no later than December 11, 2008, all illiquid auction rate securities from retail customers, charities, and small to mid-sized businesses. It will also pay damages to investors who sold securities for a loss. Morgan Stanley will also pay New York State and the North American Securities Administrators Association (“NASAA”) civil penalties of $35 million, respectively, which will be distributed pro rata by states’ investment dollar totals.

“Returning billions of dollars back to investors not only protects their interests but also increases confidence in the entire market,” says Cuomo. These agreements come less than a week after Cuomo settled similar allegations against Citigroup and UBS. The four settlements together provide relief to thousands of investors who were left holding $27 billion worth of securities they could not sell after the widespread failure of the auction rate securities market this past February, according to Cuomo.

Morgan Stanley said on August 11 it planned to repurchase at par auction rate securities (ARS) held by its retail accounts and purchased through the firm prior to February 13, 2008. The firm expects the buy-back program will result in repurchases from retail clients of approximately $4.5 billion. It will “make whole” any losses sustained by retail clients who purchased ARS through Morgan Stanley before Feb. 12, 2008, and sold such securities at a loss between that date and August 11, it says.

In the latest quarter, Morgan Stanley said it has 8,350 financial advisors.

According to equity analyst Richard Bove of Ladenburg Thalmann, “Surprisingly, given the state of the equity markets, Morgan’s retail business seems to be doing well. The efforts to rebuild the business [led by James Gorman] are working. Plus, one benefit from the fall in the markets is that recruiting is easier and much cheaper.”

Reach Research managing and web editor Janet Levaux at [email protected]