Commissioner William P. White of the DC Department of Insurance, Securities and Banking (DISB) recently signed a final Consent Order* requiring Morgan Stanley & Co. LLC (Morgan Stanley) to complete or confirm to DISB its repurchase of auction-rate securities (ARS) from District of Columbia clients to settle allegations that the firm’s securities dealers misled investors about the safety of the ARS market.
“DISB is holding Morgan Stanley accountable for engaging in unethical behavior by selling auction rate securities to District of Columbia investors without full disclosure of the risks involved,” said Commissioner White, who signed the Consent Order on June 5, 2012. “This action sends a strong message that states will not tolerate unethical and unlawful behavior in the securities markets.”
Although marketed and sold to investors as safe, liquid, and cash-like investments, ARS are actually long-term investments subject to complex auction processes that failed in early 2008, leading to illiquidity for investors.
“From the day these auctions first failed, DISB has been seeking much needed relief and liquidity for investors stuck with auction rate securities,” the Commissioner added. “I am pleased that Morgan Stanley has agreed to do what’s right by repurchasing clients’ positions, and I expect other firms that sold these securities in the District of Columbia to do the same.”
The order also requires Morgan Stanley to pay a $285,648.87 fine to the District of Columbia. The fine amount represents the District’s pro-rata share of a $35,000,000.00 settlement negotiated by a multistate task force of state regulators formed by the North American Securities Administrators Association. Early in 2008, state offices began receiving complaints regarding ARS from investors throughout the country. During the investigation, regulators discovered that Morgan Stanley’s securities dealers failed to adequately inform customers and train employees on the risks associated with buying ARS.
The Consent Order is the final step in the District’s ARS case against Morgan Stanley, which was tentatively settled October 2009. DISB has entered into settlements with 11 other Wall Street firms, which involved nationwide sales of ARS totaling $827,938,989.25. Those settlements have resulted in the payment to the District of $3,606,679.33 in fines. DISB is actively negotiating similar settlements with other firms regarding ARS sold in the District of Columbia.