Cuomo: Fidelity to settle auction-rate probe

Fidelity is the first so-called "downstream" distributor — rather than an underwriter — to settle an auction-rate securities probe, even though Fidelity didn't conduct auctions, New York Attorney General Andrew Cuomo said.

State and federal settlements have so far ordered brokerages to pay $522 million in penalties.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions, some as frequently as once a week.

The market for them collapsed in February amid the downturn in the broader credit markets. Regulators have been investigating the collapse to determine who was responsible and whether banks knowingly misrepresented the safety of the securities when selling them to investors.

Fidelity has agreed to buy back the securities from any of its customers including individuals, businesses and charities. The securities were marketed as being as safe as cash until the market froze up. The securities will be bought by the end of the year.

Fidelity President Rodger Lawson wrote one of the regulators involved, Massachusetts Secretary of State William Galvin, that his company differed from firms that played more direct roles in the auction-rate market.

"We had no conflict of interest in making auction rate securities available to our customers and we did not support the auctions or influence the rate at which they cleared," Lawson wrote.

"We also did not proactively advertise, market or promote the sale of auction rate securities."

Lawson said Fidelity "could not have foreseen" the market's failure, and he called Fidelity's offer to settle the matter "extraordinary."

"We are only taking these steps because of the unique situation in which a limited number of investors find themselves due to unprecedented events," Lawson wrote.

Regulators have reached settlements with Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank over their roles in selling auction-rate securities.

Merrill Lynch was hit with a $125 million fine and ordered to buy back more than $10 billion in the securities, Deutsche Bank must buy back $1 billion and pay a fine of $15 million, and Goldman Sachs has to buy $22.5 billion back and pay a $1.5 billion fine.

The Fidelity agreement could lead regulators to press cases against other so-called downstream distributors, said Kevin O'Connor, a managing director with Restricted Stock Partners, the New York-based operator of a secondary auction-rate securities market called the Restricted Securities Trading Network.

"It opens the door for Mr. Cuomo and other attorneys general to seek settlements with other broker-dealers," O'Connor said.

Cuomo led an investigation into how major Wall Street investment banks and smaller financial companies pitched auction-rate securities to customers.

"Fidelity has stepped up and shown itself to be a market leader and a company that wants to do right by its customers who have been stuck holding these securities," Cuomo said.