Washington, D.C., Oct. 8, 2008 (LAWFUEL) – The Securities and Exchange Commission’s Division of Enforcement today announced a preliminary settlement in principle with Banc of America Securities LLC and Banc of America Investment Services, Inc. (collectively, Bank of America) that would provide 5,500 individual investors, small businesses, and small charities the opportunity to sell back to Bank of America up to $4.7 billion in auction rate securities (ARS) they purchased before the ARS market collapsed in February 2008.
The agreement also would require Bank of America to use its best efforts to provide up to $5 billion in liquidity to other businesses, charities, and institutional investors. The terms of the settlement are subject to finalization, review, and approval by the Commission.
The proposed settlement would include charges alleging that Bank of America made misrepresentations to thousands of its customers when it told them that ARS were safe and highly liquid cash and money market alternative investments. The liquidity of these securities, however, was premised on Bank of America providing support bids for auctions when there was not enough customer demand, and Bank of America did not adequately disclose this support to customers. Bank of America continued to market ARS as cash and money market alternatives despite its awareness of the escalating liquidity risks in the weeks and months preceding the collapse of the ARS market. When Bank of America stopped supporting auctions in February 2008, there were widespread auction failures for Bank of America customers.
“Throughout the auction rate securities market freeze, the Division’s primary objective has been to restore liquidity to the investors most in need of access to their funds,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “The Division’s settlement in principle with Bank of America will quickly restore billions of dollars in liquidity to thousands of Bank of America investors.”
Under the terms of the agreement in principle:
Starting as soon as practicable after today, Bank of America will offer to liquidate at par all ARS from individual investors, small business investors with account values up to $15 million, and charitable investors with account values up to $25 million, who purchased ARS from Bank of America prior to the collapse of the ARS market in mid-February 2008. The offer will remain open until Dec. 1, 2009, and investors may accept it at any time during that period.
Bank of America will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934 and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
Starting as soon as practicable after today, Bank of America will make whole any losses sustained by any of the investors described above who purchased ARS before Feb. 13, 2008 and sold them after that date at a loss.
Until Bank of America actually provides for the liquidation of the securities on the schedule set forth above, Bank of America will offer customers no-net-cost loans that will remain outstanding until the ARS are repurchased or until an investor declines Bank of America’s offer to repurchase the securities at par.
To the extent that any of the individual investors, small business investors, and charitable investors described above has incurred consequential damages beyond the loss of liquidity in the customer’s holdings of ARS (which should be restored pursuant to the settlement terms above), Bank of America will participate in a special arbitration process that the customer may elect, and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby Bank of America will not contest liability for its misrepresentations and omissions concerning the sale of ARS, but may challenge the existence or amount of any consequential damages. At the customer’s election, the arbitration claim may be heard by a single, non-industry arbitrator.
This arbitration process will be voluntary on the part of the customer, and if a customer elects not to take advantage of these special procedures, a customer may pursue all other legal or equitable remedies available through any other administrative or judicial process available to the customer.
Bank of America will use its best efforts to provide liquidity to its ARS institutional customers and business customers with accounts valued at $15 million or more, and charities with accounts valued at $25 million or more by the end of 2009.
Bank of America will not liquidate its own inventory of a particular ARS before it liquidates its institutional customers’ holdings in that security.
Bank of America will provide notice of the settlement terms to all customers who purchased ARS before the collapse of the ARS market in February 2008.
Bank of America will establish a toll-free telephone assistance line, with appropriate staffing, to respond to questions from customers concerning the terms of the settlement.
Bank of America faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether Bank of America has satisfactorily completed its obligations under the settlement, the costs incurred by Bank of America in meeting those obligations, including penalties imposed by other regulators and the cost of remediation, and the extent of Bank of America’s cooperation with the Commission’s investigation.
The Commission notes the substantial assistance and cooperation from the New York Attorney General’s Office, the North American Securities Administrators Association, the Massachusetts Secretary of State, Securities Division, and FINRA.
The Commission’s investigation is continuing as to individuals and other entities that participate in the auction rate securities market.