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BANC OF AMERICA * * * * * * * * * * * * * * * * * |
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CONSENT ORDER DOCKET NO. CO-10-7787-S |
I. PRELIMINARY STATEMENT
II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS
WHEREAS, the Respondents, through their execution of this Consent Order, each voluntarily waive the following rights:
1. |
To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut; |
2. |
To present evidence and argument and to otherwise avail themselves of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut; |
3. | To present their respective positions in a hearing in which each is represented by counsel; |
4. | To have a written record of the hearing made and a written decision issued by a hearing officer; and |
5. | To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order; |
NOW THEREFORE, the Commissioner, as administrator of the Act, hereby enters this Consent Order.
III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER
The Respondents admit the jurisdiction of the Commissioner, neither admit nor deny the Findings of Fact and Conclusions of Law contained in this Consent Order that relate to their respective conduct, and consent to the entry of this Consent Order by the Commissioner. |
IV. FINDINGS OF FACT
1. | Beginning in March 2008, the task force began its investigation of the underwriting, marketing, and sale of ARS by BAS and BAI. |
2. |
In or about August and September 2007, some ARS auctions experienced failures. These failures were primarily based on credit quality concerns related to the ARS at issue, which often involved underlying assets of collateralized debt obligations. |
3. |
During the fall of 2007 and into the beginning months of 2008, as the default rates on subprime mortgages soared and the market in general began experiencing significant credit tightening, monoline insurers that insured many issuances of ARS were also becoming distressed and were at risk of ratings downgrades. |
4. | The result of the overall market conditions in the fall of 2007 and into the beginning of 2008 resulted in increasing concerns regarding market liquidity, as well as a declining demand for ARS. |
5. | The task force concluded that BAS and BAI should have had knowledge that, during the fall of 2007 and winter of 2008, the auction markets were not functioning properly and were at increased risk for failure. |
6. | During that time period, significant numbers of buyers had been exiting the market and the continued success of the auctions was reliant upon the lead broker-dealers, such as BAS, making increased support bids. These support bids had the effect of artificially propping up the market and creating the illusion that the auction rate market was functioning as normal. |
7. | However, during that time, BAS and BAI continued to market and sell ARS without informing customers of the heightened risks associated with holding these securities. |
8. |
Instead, BAS and BAI engaged in a concerted effort to market ARS underwritten by BAS towards its large retail customer accounts without advising the retail customers of any of the potential risks associated with a failed auction or market illiquidity. |
9. | On or about February 11, 2008, without notifying any of its customers, BAS stopped broadly supporting the auctions for which BAS was lead broker-dealer. |
10. | The decision left thousands of BAS and BAI customers holding illiquid ARS. |
11. | On or about September 10, 2008, BAS, BAI, Bank of America Corporation (“BAC”), and Blue Ridge Investments, L.L.C. (“Blue Ridge”) agreed, in principle, that BAC would cause Blue Ridge to buy back, at par plus accrued but unpaid interest or dividends, ARS for which auctions were in failed mode from “Eligible Investors,” which included all individual investors, all charitable organizations with account values up to Twenty-five Million Dollars ($25,000,000) and small and medium sized businesses with account values up to Ten Million Dollars ($10,000,000) who purchased ARS from BAS and BAI. |
V. CONDITIONS PRECEDENT TO ENTRY OF CONSENT ORDER
Definitions.
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Conditions Precedent
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VI. CONCLUSIONS OF LAW
1. |
The Commissioner has jurisdiction over this matter pursuant to the Act. |
2. |
As described in the Findings of Fact, BAS and BAI, in violation of Section 36b-31-6f(b) of the Regulations, failed reasonably to supervise their agents with respect to the marketing and sale of ARS from October 1, 2007 to February 11, 2008. Such conduct constitutes a basis for 1) revocation proceedings under Section 36b-15(a)(2)(K) of the Act; and 2) the entry of a cease and desist order and the imposition of an administrative fine under subsections (a) and (d) of Section 36b-27 of the Act. |
3. | As described in the Findings of Fact, BAS and BAI inappropriately marketed and sold ARS without adequately informing their customers of the increased risks of illiquidity associated with the product for the time period August 1, 2007 through February 11, 2008. Such conduct constitutes a dishonest and unethical practice within the meaning of Sections 36b-4 and 36b-15(a)(2)(H) of the Act. Such conduct constitutes a basis for 1) revocation proceedings under Section 36b-15(a)(2)(H) of the Act; and 2) initiating administrative proceedings under subsections (a) and (d) of Section 36b-27 of the Act. |
4. | The Commissioner finds that this Consent Order and the relief described herein are appropriate, in the public interest, and consistent with the purposes fairly intended by the policies and provisions of the Act. |
VII. CONSENT ORDER
On the basis of the Findings of Fact, Conclusions of Law, and Respondents’ consent to the entry of this Consent Order,
IT IS HEREBY ORDERED THAT:
1. |
This Consent Order concludes the investigation by the Division and any other action that the Division could commence under the Act on behalf of Connecticut as it relates to Respondents’ underwriting, marketing, and/or sales of auction rate securities as described herein, provided however, that excluded from and not covered by this paragraph 1 are any claims by the Commissioner arising from or relating to the Consent Order provisions contained herein. |
2. |
This Consent Order is entered into solely for the purpose of resolving the referenced multistate investigation, and is not intended to be used for any other purpose. |
3. |
Respondents shall CEASE AND DESIST from violating the Act or any regulation or order under the Act, and shall comply with the Act, its regulations and any order under the Act. |
4. |
Within ten (10) days after the entry of this Consent Order by the Commissioner, BAS and BAI shall jointly and severally pay the total sum of Eight Hundred Sixty-five Thousand Two Hundred Ninety and 80/100 Dollars ($865,290.80) to the “Treasurer, State of Connecticut” by electronic funds transfer or wire transfer as a fine. |
5. |
In the event another state securities regulator determines not to accept the state settlement offer relating to Respondents in connection with the multistate investigation referenced herein, the total amount of the Connecticut payment shall not be affected, and shall remain at the amounts set forth in paragraph 4 above. |
6. |
To the extent that either BAS or BAI agrees to any subsequent settlement with any NASAA jurisdiction arising out of the above referenced coordinated investigations by the multistate task force pertaining to BAS or BAI’s respective marketing and sale of Eligible ARS to Eligible Investors as described herein, which includes a term or terms analogous to the terms herein which are more favorable to Eligible Investors in such NASAA jurisdiction than those terms identified herein, the subsequent more favorable settlement term or terms shall, upon the Commissioner’s request, be incorporated by reference into this Consent Order and become equally applicable to Eligible Investors in Connecticut. |
7. | If payment is not made by one or more of the Respondents as required in this Consent Order, or if one or more of the Respondents defaults in any of its other obligations set forth in this Consent Order, the Commissioner may vacate this Consent Order as to the defaulting Respondent, in the Commissioner’s sole discretion, upon ten (10) days notice to the defaulting Respondent, and without opportunity for administrative hearing, and/or may pursue appropriate enforcement measures against the defaulting Respondent under the Act. |
8. | This Consent Order as entered by the Commissioner waives any disqualifications contained in the Act or the Regulations thereunder, including any disqualifications from relying upon the registration exemptions or safe harbor provisions to which Respondents or any of their affiliates may be subject as a result of the findings contained in this Consent Order. This Consent Order also is not intended to subject Respondents or any of their affiliates to any disqualifications contained in the federal securities laws, the rules and regulations thereunder, the rules and regulations of self regulatory organizations or various states’ or U.S. Territories’ securities laws, including, without limitation, any disqualifications from relying upon the registration exemptions or safe harbor provisions under those laws. In addition, this Consent Order is not intended to form the basis for any such disqualifications. |
9. | For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against the Respondents, including, without limitation, the use of any e-mails or other documents of Respondents or of others for auction rate securities sales practices, limit or create liability of the Respondents, or limit or create defenses of or for the Respondents to any claims. |
10. | Nothing herein shall preclude the State of Connecticut, its departments, agencies, boards, commissions, authorities, political subdivisions and corporations (collectively “State Entities”), other than the Commissioner in his administration of the Act and then only to the extent set forth in paragraph 1 above, and the officers, agents or employees of the State Entities from asserting any claims, causes of action, or applications for compensatory, nominal and/or punitive damages, administrative, civil, criminal, or injunctive relief against the Respondents in connection with the Respondents’ auction rate securities sales practices. |
11. | This Consent Order and any dispute related thereto shall be construed and enforced in accordance with, and governed by, the laws of Connecticut without regard to any choice of law principles. |
12. | This Consent Order shall be binding upon Respondents and each of their successors and assigns with respect to all conduct subject to the provisions above and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events, and conditions. |
NOW THEREFORE, the Commissioner enters the following:
1. | The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered; |
2. | Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against a Respondent or its successors in interest based upon that Respondent’s violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by the affected Respondent and set forth herein are subsequently discovered to be untrue; and |
3. | This Consent Order shall become final when entered. |
So ordered at Hartford, Connecticut | _______/s/_________ | |
this 9th day of July 2010. | Howard F. Pitkin | |
Banking Commissioner |
CONSENT TO ENTRY OF ORDER
I, Steve Chaiken, state on behalf of Banc of America Securities LLC, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Banc of America Securities LLC; that Banc of America Securities LLC agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Banc of America Securities LLC voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. Banc of America Securities LLC further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that Banc of America Securities LLC shall pay pursuant to the foregoing Consent Order.
BANC OF AMERICA SECURITIES LLC | |
By: | __________ /s/__________________ |
Name: Steve Chaiken | |
Title: Managing Director |
County of: Nassau
On this the 1st day of July, 2010, before me, Elizabeth M. Coppolo, the undersigned officer, personally appeared Steve Chaiken, who acknowledged himself/herself to be the Managing Director of Banc of America Securities LLC, a limited liability company, and that he/she, as such Managing Director, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the limited liability company by himself/herself as Managing Director.
______/s/____________________________
Notary Public
Date Commission Expires: Oct. 12, 2013
CONSENT TO ENTRY OF ORDER
I, David Futterman, state on behalf of Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) as successor by merger to Banc of America Investment Services, Inc. (“BAI”), that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Merrill Lynch as successor by merger to BAI; that Merrill Lynch, as successor by merger to BAI, agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Merrill Lynch, as successor by merger to BAI, voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. Merrill Lynch, as successor by merger to BAI further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that Merrill Lynch shall pay, as successor by merger to BAI, pursuant to the foregoing Consent Order.
MERRILL LYNCH, PIERCE, FENNER | |
& SMITH INCORPORATED | |
as successor by merger to | |
BANC OF AMERICA INVESTMENT SERVICES, INC. | |
By: | ______/s/__________________ |
Name: David Futterman | |
Title: Assoc. General Counsel |
County of: Nassau
On this the 6th day of July, 2010, before me, Elizabeth M. Coppolo, the undersigned officer, personally appeared David Futterman, who acknowledged himself/herself to be the Associate General Counsel of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a corporation, and that he/she, as such Associate General Counsel, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself/herself as Associate General Counsel.
_____/s/__________________________
Notary Public
Date Commission Expires: Oct. 12, 2013