Aug. 14 (Bloomberg) -- Morgan Stanley and JPMorgan Chase & Co. agreed to buy back more than $7 billion in auction-rate securities and pay fines totaling $60 million, broadening Wall Street's settlement of claims the debt was fraudulently sold.

The two banks, among the largest underwriters of auction- rate securities, agreed to buy back the debt from individuals, charities and small businesses over the next five months, according to New York State Attorney General Andrew Cuomo, who led settlement talks. The New York-based banks also agreed to find ``liquidity solutions'' for institutional clients that bought the securities, Cuomo said.

``I believe we've crossed the Rubicon and established the premise: the investors will be helped,'' Cuomo said at a press conference in New York announcing the settlements. ``The nightmare will end and they will be made whole.''

The agreements bring to four the number of banks that have settled a nationwide investigation of how auction-rate securities were marketed before the $330 billion market collapsed in February. Investors purchased the long-term debt on the advice of brokers who pitched it as a cash equivalent, regulators said, only to find they couldn't sell the bonds as demand dried up.

UBS AG and Citigroup Inc. last week agreed to redeem about $26 billion of the securities and pay fines of a combined $250 million. Merrill Lynch & Co. also voluntarily offered to repurchase about $10 billion of the securities last week, and is still in talks with regulators, according to Massachusetts Secretary of State William Galvin.

Not Over

Cuomo and other regulators vowed to continue their investigations, and the U.S. Securities and Exchange Commission is also probing the market. ``We will continue to work until we have crafted a solution for all investors,'' said North Dakota Securities Commissioner Karen Tyler, president of the North American Securities Administrators Association, which assembled a task force to coordinate the probes.

UBS, Citigroup and Merrill were among the largest underwriters of auction-rate debt, according to Thomson Reuters. The other main banks in the market included Morgan Stanley, Goldman Sachs Group Inc., JPMorgan, Lehman Brothers Holdings Inc., Toronto-based Royal Bank of Canada, and Wachovia and Bank of America Corp., both based in Charlotte, North Carolina.

`Cooperating Fully'

Goldman has yet to reimburse clients, angering large investors in the securities, the Wall Street Journal reported today.

``We are cooperating fully with all regulators, and it would be inappropriate to say anything further at this time,'' Goldman spokeswoman Andrea Raphael said today. ``The firm has been working with clients to address their liquidity needs.''

For more than two decades, the auction-rate market allowed municipalities, student-loan agencies and closed-end mutual funds to borrow for 20 years or longer at short-term rates. The banks that underwrote the bonds and brokered the periodic bidding abandoned the market in February as demand plummeted, permitting thousands of auctions to fail and stranding the remaining investors.

``We're pleased to have settled this matter,'' said Mark Lake, a spokesman for Morgan Stanley in New York. Joseph Evangelisti, a spokesman for JPMorgan, declined to comment past the firm's press release announcing the accord.

None of the four brokerages, among at least 18 that are being investigated, admitted or denied wrongdoing in their settlements, officials said.

Settlement Framework

Morgan Stanley will redeem $4.5 billion of the securities for about 20,000 of its clients by January and pay a $35 million fine to New York and the other states, regulators said.

JPMorgan will redeem $3 billion for about 10,000 clients by November and pay penalties of $25 million, according to the Cuomo's office. The securities it will repurchase are worth about $400 million less than their face value on a pretax basis, the bank estimated.

Banks may have to write down a total of $4 billion as they buy back auction-rate securities, Bank of America analyst Jeffrey Rosenberg said last week.

The agreements follow a framework established last week between UBS, Citigroup and the states. Morgan Stanley and JPMorgan, for instance, will also reimburse individuals if they sold their auction-rate securities at a loss since the market collapse in February.

Refinancing Fees

The banks all agreed to consent to a special arbitration panel to resolve disputes over additional damages to investors and to reimburse their municipal clients that refinanced auction- rate securities in the last year. Some of the issuers faced penalty rates of 20 percent or higher when auctions started failing earlier this year.

Cuomo said individuals came ahead of institutions in the settlements because they are less sophisticated investors and so were more easily misled by the banks' marketing of the securities as cash equivalents. Citigroup and UBS similarly agreed to buy back securities from individuals and help institutions that want to trade their holdings.

``They are the first priority from my point of view,'' Cuomo said today regarding what he called retail investors. He said the regulators would monitor the banks' efforts to help institutions.

Wachovia Corp., the fourth-largest U.S. bank, is still in talks with regulators, said Ryan Hobart, a spokesman for Missouri Secretary of State Robin Carnahan. Wachovia retail clients held $8.7 billion in auction-rate securities on Aug. 1, the firm said in an Aug. 11 filing.

``They continue to negotiate,'' Hobart said in a telephone interview at 5:30 p.m. New York time today. ``We hope to have a settlement as soon as possible.''

Cuomo's Demands

In an Aug. 1 letter to Citigroup that Cuomo said was a template for any other auction-rate settlements, he demanded that financial firms buy back retail investors' securities at par in the immediate future, reimburse them for damages incurred, undertake immediately to make institutional investors and corporations whole and pay a ``significant'' penalty for alleged misconduct.

UBS faces an additional suit from New Hampshire securities regulators, who claim in a complaint filed today that the bank harmed the state's nonprofit student loan agency by failing to inform it of the impending collapse of the auction-rate market. UBS was the lead banker for the New Hampshire Higher Education Loan Corp., which borrowed $1.5 billion in the market.

Wall Street's costs to end federal and state auction-rate probes may wind up exceeding the sanctions from abuses of mutual funds and analyst research in the past decade.

Past Penalties

The investigation of mutual-fund abuses from 2003 yielded more than $5 billion in penalties and agreements to reduce fees, while Cuomo's predecessor, Eliot Spitzer, and regulators including the U.S. Securities and Exchange Commission won $1.4 billion from 10 firms accused of using tainted research to win investment-banking deals.

Below is a listing of securities firms, their buyback offers and the number of ``retail'' customers affected by the repurchases, according to figures provided by the companies and regulators. These clients include individual investors, small businesses and charities.

Bank Buybacks (in billions) Clients

UBS $18.6 40,000

Merrill 10.0 30,000

Citigroup 7.5 40,000

Morgan Stanley 4.5 20,000

JPMorgan 3.0 10,000

To contact the reporters on this story: Karen Freifeld in New York State Supreme Court in Manhattan at kfreifeld@bloomberg.net; Michael McDonald in Boston at mmcdonald10@bloomberg.net.

Last Updated: August 14, 2008 18:05 EDT