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Raymond James to Pay $300 Million in Auction-Rate Settlement

Raymond James Financial Inc. will pay $300 million to clients who bought auction-rate securities, moving to resolve regulators’ claims that the firm misled investors about risk before the market froze three years ago.

Raymond James agreed to repurchase securities from customers whose holdings have been unavailable since the $330 billion market collapsed in February 2008, the U.S. Securities and Exchange Commission and the North American Securities Administrators Association said today in separate releases. The firm will also reimburse interest costs for some clients who took loans from the firm, the regulators said.

“Raymond James improperly marketed and sold ARS to customers as safe and highly liquid alternatives to money market accounts and other short-term investments,” Eric Bustillo, director of the SEC’s regional office in Miami, said in a statement.

Federal and state regulators have sanctioned banks including Citigroup Inc., UBS AG, Bank of America Corp. and Deutsche Bank AG for selling them as safe, cash-like investments before credit markets froze. Auction-rate securities are typically municipal bonds, corporate bonds and preferred stocks whose rates of return are reset periodically through auctions.

More than $67 billion has been returned to investors as a result of those settlements, the SEC said.

SEC Claim Rejected

A U.S. judge rejected yesterday claims by the SEC that Regions Financial Corp.’s Morgan Keegan brokerage unit misled investors about $2.2 billion in ARS before the market froze.

The SEC entered the fray last week in a private lawsuit against Merrill Lynch & Co. Inc., now part of Bank of America, alleging that the firm manipulated the ARS market. In a brief filed at the U.S. Court of Appeals for the Second Circuit, the SEC said Merrill’s disclosures failed to inform the plaintiff of its alleged role in “propping up” the ARS market. Citigroup in March won the dismissal of five consolidated lawsuits filed by investors who claimed the bank manipulated ARS prices.

St. Petersburg, Florida-based Raymond James, which resolved the claims without admitting or denying wrongdoing, agreed to pay a $1.75 million fine to state regulators. The SEC didn’t impose a monetary penalty.

“I am pleased we are able to resolve this issue and provide liquidity to clients who continue to hold ARS in their portfolios,” Raymond James Chief Executive Officer Paul Reilly said in a statement.

Other Steps

Raymond James agreed to provide liquidity solutions to customers who may not be eligible for the repurchases, to compensate customers who sold their ARS below par value and to participate in a special arbitration process with customers who claim additional damages, the SEC said.

Raymond James said in a statement that client holdings of ARS were reduced to $280 million this month from about $2.1 billion in February 2008. It provided clients with no-cost loans after the market froze, according to the statement.

The firm announced a pretax charge of about $50 million for the quarter ending tomorrow. Current fair value of the securities to be repurchased is less than par value.

“We expect that our ultimate realized loss will be substantially less as issuers refinance or redeem these securities, interest rates rise, and/or collateral values improve,” the company said.

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