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SEC Finalizes ARS Settlements With Bank of America, RBC and Deutsche Bank, Providing Over $6 Billion in Liquidity to Investors

The Securities and Exchange Commission announced that it has filed complaints in the United States District Court for the Southern District of New York against Banc of America Securities LLC and Banc of America Investment Services, Inc. (collectively, Bank of America), RBC Capital Markets Corporation (RBC), and Deutsche Bank Securities Inc. (Deutsche Bank) alleging that the firms misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed or sold. Without admitting or denying the Commission’s allegations, the firms consented to settle the actions. These settlements, combined, will provide or already have provided nearly $6.7 billion to approximately 9,600 customers who invested in auction rate securities before the market for those securities froze in February 2008.

According to the Commission’s complaints, Bank of America, RBC and Deutsche Bank misrepresented to certain customers that ARS were safe, highly liquid investments that were comparable to money markets. According to the complaints, in late 2007 and early 2008, the firms knew that the ARS market was deteriorating, causing the firms to have to purchase additional inventory to prevent failed auctions. At the same time, however, the firms knew that their ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed the firms’ balance sheets. The complaints allege that Bank of America, RBC and Deutsche Bank failed to make their customers aware of these risks. In mid-February 2008, according to the complaints, Bank of America, RBC and Deutsche Bank decided to stop supporting the ARS market, leaving Bank of America, RBC and Deutsche Bank customers holding billions in illiquid ARS.

The settlements, which are subject to court approval, will restore approximately $4.5 billion in liquidity to Bank of America customers, $800 million in liquidity to RBC customers and $1.3 billion in liquidity to Deutsche Bank customers. Previously, on October 8, 2008, the Commission’s Division of Enforcement announced preliminary settlements with Bank of America and RBC.