US banks give clients $7bn refund

Morgan Stanley and JP Morgan Chase have agreed to buy back more than $7bn of securities and pay fines to settle allegations that they misled investors.

The deals were with the New York Attorney General and other regulators.

The Wall Street banks were accused of marketing debt products, called auction-rate securities, as much safer than they were.

Other financial firms are also being investigated for misstating the risk of these investments.

Under the deal with New York Attorney General Andrew Cuomo, Morgan Stanley will buy back about $4.5bn worth of auction-rate securities at face value by 11 December.

JP Morgan Chase has agreed to redeem about $3bn of auction-rate debt it sold to customers, which include retail customers, charities and small-to-medium sized businesses by 12 November.

Its settlement also covers debt sold by Bear Stearns, which it bought earlier this year.

Neither bank admitted or denied wrongdoing.

US authorities are investigating how auction-rate securities were marketed throughout the industry before the $330bn market collapsed in February as trouble in the credit markets due to the US sub-prime crisis spooked investors.

Last week, the New York Attorney and the Securities and Exchange Commission (SEC) reached settlements with Citigroup and Swiss banking giant UBS that required the pair to repurchase in total $26bn of the securities.

“Today’s multi-billion dollar agreements are the latest victories for investors seeking relief from the collapse of the auction rate securities market, which has left a stranglehold on billions of dollars,” said Mr Cuomo.

“The fundamental goal has been to return money into the hands of investors, and that’s what these deals do.”

JP Morgan Chase and Morgan Stanley will also reimburse customers who have sold their auction-rate debt at a loss.

JP Morgan Chase will pay a $25m penalty to New York State and the investor protection group the North American Securities Administrators Association, while Morgan Stanley will pay a fine of $35m.

Separately, New Hampshire securities regulators have sued UBS for misleading the state’s student-loan agency about auction-rate debt and so resulting in less money available to offer students loans.

Student-loan agencies and municipalities were frequent users of auction-rate securities because they were seen as highly liquid investments, almost equivalent to cash but offering a higher return because their rates were reset at weekly or monthly auctions.