States ramp up probes of auction-rate debt mess

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Good news for investors trapped in so-called auction-rate securities: State regulators are feeling your pain.

The North American Securities Administrators Assn. today said regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington were coordinating their probes of the $330-billion market. And late in the day New York Atty. Gen. Andrew Cuomo was reported to have subpoenaed 18 banks and brokerages about their involvement in the securities.

Auction-rate securities are a form of debt issued by many municipalities and closed-end mutual funds in recent years. They are, in effect, long-term bonds masquerading as short-term debt. The interest rate they pay typically is reset at weekly or monthly auctions.

Brokers often pitched the securities as equivalent to money market funds, but with higher yields. As the credit crunch worsened this year, however, many investors have pulled back from complex debt issues. As auction-rate issues have failed to attract new buyers at their weekly or monthly rate resets, most current owners of the securities have been told they’re stuck with them.

That has left thousands of investors unable to get their cash back, because brokerages have refused to buy the securities from their clients, and only a small number of municipal and fund issuers of the debt so far have been willing or able to retire the securities via refinancing. To say investors are infuriated is putting it mildly.

NASAA said the state probes centered on sales practices and supervisory issues related to auction-rate issues. ‘Our focus is to determine what conduct took place at the point of sale -- what was potentially misrepresented and omitted -- and our goal is securing for investors access to their cash as requested,’ said Karen Tyler, NASAA president and securities commissioner of North Dakota.

‘If the product was represented to be a cash equivalent going in, it must be treated as a cash equivalent coming out,’ she said.