Auction-Rate Probe Grows Over Clarity From Brokers
Federal prosecutors, ramping up criminal probes stemming from the credit crunch, are investigating whether two former Credit Suisse Group brokers lied to investors about how they placed their money into short-term securities, according to people familiar with the matter.</br></br>At issue is the $330 billion market for "auction rate" securities, which allow issuers such as municipalities and student loan companies, closed-end mutual funds or financial institutions to borrow money for the long term but at short-term, or lower, interest rates.</br></br>Weekly or monthly auctions conducted by Wall Street firms reset those rates, but the market seized last February. When the auctions failed, investors were left without the ability to sell such securities.</br></br>The investigation, by the Justice Department's U.S. attorney's office for New York's Eastern District, represents the first known criminal matter stemming from the crumbling auction-rate securities market. The rout in this market has punished thousands of U.S. investors, who are now stuck paying high penalty rates, and it has raised questions about whether Wall Street firms adequately disclosed the risks in such auctions.</br></br>Until now, the fallout largely has been a civil-litigation headache for Wall Street firms and others, who have been hit with lawsuits seeking class-action status and more than 80 individual arbitration claims, according to the Financial Industry Regulatory Authority, a Wall Street self-regulatory organization.