States order return of $14.1 billion to investors: NASAA

By Suzanne Barlyn

The surge was largely due to settlements between state regulators and many brokerage firms that required the repurchase of auction rate securities from customers, said the North American Securities Administrators Association, or NASAA on Wednesday. More than $12 billion of the $14.1 billion total was returned to investors in 2010.

Auction rate securities were sold as highly liquid short-term instruments similar to money-market funds, but with slightly higher returns. When the $330 billion auction-rate market failed in 2008, as large investment banks that ran the auctions ran into liquidity crunches, thousands of investors were left with securities that could not be sold.

A total of 45 state regulators responded to the survey.

Findings also revealed that enforcement cases by state securities regulators rose by 51 percent in 2010, an increase fueled largely by frauds involving unregistered securities.

State securities regulators handled a total of 3,475 enforcement cases in 2010, up from 2,294 in 2009. Private placements, a type of unregistered security, and real estate investments, were the two most common products involved in those cases, NASAA said.

Private placements, or Reg D offerings, have long been a problem for investors, but there has been a "remarkable increase" in the number of offerings during recent years, said James Eccleston, a Chicago-based securities lawyer.

The securities, which can provide a way for small companies to raise capital, don't have to be registered with regulators and are supposed to be sold only to investors who meet certain income and net worth standards. Those deals, however, "largely avoid any kind of scrutiny," Eccleston said.

Declining real estate values also have sparked more interest in various real estate investments, Eccleston said. They include real estate investment trusts or REITs, securities that represent fractional interests in properties such as strip malls and office buildings.

More than 1,000 of the enforcement cases by state regulators in 2010 involved fraud, which was carried out mostly by people who weren't licensed to sell securities, NASAA said.

About 350 enforcement cases involved "dishonest or unethical activity" by licensed securities firms or professionals. Other violations among state regulators' 2010 cases include failing to supervise employees, selling unsuitable investments to customers, and making excessive trades in their accounts to earn extra commissions.

(Reporting by Suzanne Barlyn; editing by Walden Siew)