Further to last weekends’ excitement (see prior post “Cuomo takes action against Citigroup, while ABCP buyers wait in vain” August 2-08), the U.S. enforcement world has moved swiftly once again. And even the SEC is getting into the game with a $100 million fine for Citigroup (C) for selling auction-rate securities “as though they were liquid,” when they most certainly were not, according to one SEC prosecutor during Thursday’s news conference.

Although institutional holders won’t get cashed out by Citigroup on their $12B of paper, they are certainly doing all they can for 40,000 individual investors.

Soon after this settlement hit the wire, Merrill Lynch (MER) announced that it would buy back $10 billion of auction-rate securities at par from the widows and orphans in January 2009.

UBS (UBS) and Bank of America (BAC) are next on the list.

Many Canadian financial institutions have already provided a similar “cash out” for the smaller investors who owned up to C$1 - C$2 million of their ABCP holdings. However, there has, shall I say, been a distinct dearth of announcements regarding regulatory investigations or fines when it comes to the role that Canadian FIs played in the C$36 billion asset backed commercial paper fiasco, now in its second year.

Last winter, the CSA called these credit and liquidity issues “a global phenomenon." Interestingly, there are two definitions of a phenomenon:

1. An occurrence, circumstance, or fact that is perceptible by the senses.

2. pl. phe·nom·e·nons
a. An unusual, significant, or unaccountable fact or occurrence; a marvel.

 

Apparently, the SEC felt this ARS illiquidity event was “perceptible by the senses” and deserving of fines, while the CSA had concluded that the liquidity crunch that has befallen the ABCP market was an “unaccountable fact or occurrence.” Obviously, if the event was unaccountable, then no one can be held accountable for it.

However, on Thursday, the OSC announced that it had temporarily suspended the limited market dealer license of New Life Capital Corp., a small group that plays in the “life settlement” business. (New Life has nothing to do with Citigroup, the SEC or ARS fines). Who has time for the big fish when you have all of these three person LMDs to keep an eye on?

According to the temporary order,

 

OSC Staff have identified apparent deficiencies in New Life’s registration, sales and governance practices.

 

All trading of their securities by the three New Life staff shall cease immediately.

ABCP holders will be gratified at the speed with which the OSC has attended to whatever was going on at New Life, even if the ABCP Elephant remains, unattended, in the room and eats all of the furniture, knocks over the lamps and whizzes on the carpets.

But don’t lose heart. The Investment Dealers Association is looking into the matter. So, stay tuned.

Disclosure: None

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Mark McQueen

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