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Credit Suisse pays penalty over ARS securities

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Switzerland's second-largest bank - Credit Suisse - has settled an investigation in the United States into the sale of risky investments to retail investors.

This content was published on September 17, 2008 - 12:06

It has offered to buy back about $550 million (SFr615.7 million) in so-called auction rate securities (ARS) and pay a $15 million fine.

The agreement is with the New York state attorney general Andrew Cuomo and the North American Securities Administrators Association (NASAA) - the oldest international organisation devoted to investor protection.

Credit Suisse is the latest financial institution to settle a series of state and federal investigations in the $330 billion market that collapsed in February.

Under the terms of the settlement, the bank has agreed to buy back the securities from individuals, charities and small businesses with accounts valued up to $10 million.

In consideration of the settlement, American states will agree to terminate their investigation of Credit Suisse's marketing and sale of such securities to individual investors.

The ARS market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions, some as frequently as every seven days.

Market meltdown

They were sold as being as safe as cash but the market fell apart amid the downturn in credit markets.

Investigators have been trying to work out who was responsible and whether banks knowingly misrepresented the safety of the securities when selling them to investors.

In a statement from New York, the Zurich-based bank noted: "Credit Suisse neither admits nor denies allegations of wrongdoing."

Eligible individual investors must have bought their ARS through Credit Suisse before February 14, it added.

The bank joins a growing list of major financial institutions - including Switzerland's largest bank UBS - to reach settlements, with more than $51 billion targeted for repurchase, and state and federal penalties totalling an estimated $537 million.

"The industry is taking responsibility for correcting a problem they helped create, and that's a good thing," Cuomo commented in a statement.

"Return money"

"The fundamental goal has been to return money into the hands of investors, and that's what these deals do."

NASAA President Karen Tyler was also satisfied with the Credit Suisse settlement.

She described it as "another step on the road to recovery for thousands of Main Street investors who have been trapped in the auction rate securities meltdown".

UBS last month announced a comprehensive settlement, in principle, for all clients holding auction rate securities at an estimated cost to the bank of $900 million.

It pledged to buy a total of $8.3 billion of ARS at face value from most private clients during two years from January 1, 2009. However, private clients and charities holding less than $1 million in household assets would be able to obtain this relief from October 31.

It said it would also provide solutions to institutional investors and agreed to buy all or any of the remaining $10.3 billion at face value from its institutional clients from June 30, 2010.

In July, UBS announced its intention to buy back up to $3.5 billion in auction-rate securities in the face of a lawsuit by Massachusetts' authorities.

swissinfo with agencies

Credit Suisse

The bank, which has its headquarters in Zurich, was founded in 1856.

Its business areas are private banking, investment banking and asset management.
It reported net profit of SFr7.76 billion for 2007, 31.49% down on the previous year.

The registered shares of the Credit Suisse Group are listed in Switzerland (SWX) and as American Depositary Shares in New York (NYSE).

It has a staff of about 49,000.

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Auction Rate Securities

These are long-term bonds that act like short-term debt.

They can be municipal bonds, corporate bonds, and preferred stocks that can be issued by municipalities (cities, towns or other districts), tax-exempt institutions, and mutual funds.

Auction rate securities are known as variable rate debt; their interest rates are periodically reset via Dutch auctions. These are auctions at which the auctioneer starts with a high asking price that is lowered until someone buys in.

In ARS auctions, interested bidders offer bids to buy a certain number of shares at a proposed interest rate.

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