Auction-rate securities – representing corporate debt – were sold to investors by Raymond James as 'same as cash.' In settlement with regulators, the firm agreed to buy back $280 million worth of the auction-rate securities.
TALLAHASSEE, Fla. – Raymond James Financial Inc. agreed to buy back at least $280 million in auction rate securities from investors in a settlement with regulators from seven states and the federal government that was announced Wednesday.
The St. Petersburg-based firm agreed to pay 100 percent of what investors paid for the securities, but it neither admitted nor denied allegations of dishonest or unethical conduct.
"The findings related to Raymond James had to do with inaccurate comparisons between auction rate securities and other investments," said Frank Widmann, securities director of the Florida Office of Financial Regulation.
The Securities and Exchange Commission said the payout could be up to $350 million while the states put the figure at approximately $300 million. Raymond James said its records show clients holding $280 million in securities as of Wednesday morning.
Two of the company's subsidiaries, Raymond James & Associates Inc. and Raymond James Financial Services Inc., were accused in part of falsely describing the investments as "cash equivalents," ''the same as cash" and "highly liquid." They were none of those, Widmann said.
Florida and Texas led a three-year, seven-state investigation of Raymond James. The settlement is part of a wider-ranging, multi-state investigation of auction rate securities involving several financial firms that is continuing. It has so far returned $61 billion to investors since 2008, Widmann said.
Raymond James also agreed to pay $1.75 million in fines to regulators in the seven states as well as $250,000 in investigative costs to Florida. The SEC, though, has not imposed a fine.
"I am pleased we are able to resolve this issue and provide liquidity to clients who continue to hold ARS in their portfolios," Raymond James CEO Paul Reilly said in a statement.
In auction-rate securities markets, investors trade what resembles corporate debt, but with interest rates reset at frequent auctions. Investors can sell the securities at auction, but if there are not enough buyers, holders may be stuck, unable to cash out.
Raymond James blamed the international credit crisis for the inability of investors to sell the securities but said it has reduced its clients' ARS holdings from $2.1 billion to $280 million since February 2008.
Florida regulators also found Raymond James failed to disclose risks associated with the auction process by which the securities were sold nor did it adequately or completely disclose risks in the event of a failed auction. One of those risks is that the securities could become illiquid, freezing investors' money for an indeterminate time.
Under the agreement, investors who sold their securities at a discount after the auction market failed will be reimbursed for their losses.
Certain investors also will be reimbursed for the cost of loans they obtained from Raymond James because their securities were frozen.
Raymond James serves 1.9 million accounts in the United States and internationally with assets of about $282 billion.