BNY Mellon Settles N.Y. Probe Involving Insurer’s Debt Security Sale

December 27, 2011

The Bank of New York Mellon Corp. will pay $1.3 million to three states to settle an investigation into manipulative trading of auction rate securities facilitated by employees at one of the company’s subsidiaries, the New York attorney general’s office announced last Thursday.

Under the agreement, BNY Mellon agreed to cease any further violations of New York’s Martin Act, which prohibits deception in offering securities. The deal ends a joint investigation with the Texas State Securities Board and the Florida Office of Financial Regulation. The $1.3 million is for penalties, fees and costs to the three states.

“Today’s announcement sends a clear message that the manipulative trading of auction rate securities in New York will not be tolerated under any circumstances,” New York Attorney General Eric Schneiderman said. “My office will continue to protect the integrity of New York’s global financial markets at all costs.”

Ron Sommer, spokesman for BNY Mellon Capital Markets, successor to Mellon Financial Markets LLC that was investigated, said the company was pleased to resolve the matter, “which centered on the isolated conduct of three individuals who are no longer with the company.”

According to the agreement, in early 2008, Mellon Financial Markets acting as an intermediary broker on behalf of Citizens Property Insurance Corp. enabled the Florida insurer to buy its own auction rate securities by placing bids as though they were from an independent third-party buyer. The bids at below-market rates resulted in the auctions clearing at rates significantly lower than would have resulted otherwise.

“During the relevant period, Citizens’ bids through MFM reduced the clearing rate by over 520 basis points on average. Ultimately, this resulted in investors that held Citizens ARS earning approximately $6.7 million less in interest than they would have if Citizens had not bid in its own auctions,” according to the settlement agreement. It said the conduct violated the Martin Act.

The trading continued until the company’s compliance staff discovered and stopped it, the agreement noted. Mellon Financial Markets earned about $300,000 in fees from that conduct. The company hired outside counsel to do an internal investigation and disclosed the results to the attorney general’s office, which had begun its investigation in late 2008.

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