New York Attorney General Andrew Cuomo has subpoenaed records from St. Petersburg's Raymond James & Associates and 17 other banks and brokerage firms as part of an investigation of the auction rate securities market, according to reports from Reuters and Bloomberg news services.
Other companies cited in the inquiry include Merrill Lynch, Citigroup, Bank of America, UBS and Wachovia Corp.
The New York investigation is one of several under way. Florida is part of a task force of state securities regulators looking into the way the investments were sold.
Auction rate securities take their name from the fact that their interest rates reset at regular intervals through auctions, most commonly every seven to 49 days. Some are long-term bonds and some are perpetual debts with no maturity date.
Because of the frequent auctions, many brokers and investors regarded the securities as short-term investments that could be easily sold. Some investors used them as a higher-yielding alternative to money-market funds. Issuers include local governments, student loan agencies and closed-end mutual funds.
However, problems with mortgage-backed securities led to widespread concerns about other types of debt. Many auctions for auction-rate securities have failed for lack of buyers. When that happens, a maximum rate applies, based on the current rate for similar quality debt or a rate benchmark.
The problem is that investors who own the securities in their brokerage accounts can't sell them. Bloomberg reported that 60 percent of the auctions held in the last two months have failed.
"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," North Dakota Securities Commissioner Karen Tyler told Dow Jones News. "If the product was represented to be a cash equivalent going in, it must be treated as a cash equivalent coming out."
Some investors have filed class action lawsuits over the issue. Raymond James is a defendant in one such suit, which the company said should be dismissed because it contains no specific factual allegations related to Raymond James.
The company had no comment Monday on the report of the New York subpoenas.