Under a settlement with the State of New Jersey, Bank of America has agreed to repurchase approximately $386 million in auction rate securities from investors in the state.
The agreement settles allegations that the firm's securities dealers failed to disclose risks of the ARS market, which caused investors to suffer steep losses.
"New Jersey investors became victims through no fault of their own when their auction rate securities at Bank of America were frozen," New Jersey Acting Attorney General Paula Dow said. "This settlement fully protects these investors and holds Bank of America accountable for how it marketed the auction rate securities."
Although often marketed and sold to investors as safe, liquid, and cash-like investments, ARS are 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.
The order also requires Bank of America to pay $1,268,393 in civil penalties to the state. The fine amount represents the state's pro-rata share of a settlement negotiated by a multi-state task force of state regulators formed by the North American Securities Administrators Association (NASAA).
During the investigation, state regulators discovered that Banc of America Securities LLC was among other lead broker-dealers who used "support bids" to artificially prop up auctions and create the illusion of a normal, functioning, and liquid auction market.
Further, Dow said Bank of America inappropriately marketed and sold ARS without adequately informing their customers of the increased risks of illiquidity associated with the product for the time period August 1, 2007, through February 11, 2008.
The investigation into Bank of America's role in the marketing of auction rate 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 the nation's prominent Wall Street firms had systematically misled investors when placing them in auction rate securities.
