JPMorgan Chase & Co and Morgan Stanley will spend more than $7bn (£3.8bn) buying buy back auction-rate securities in a settlement announced on Thursday by New York state attorney general Andrew Cuomo and Securities & Exchange Commission (SEC) enforcement division director Linda Thomsen, writes The American Lawyer.

The deal ends investigations by the SEC and several states' attorney generals into false claims made by the two banks in marketing auction-rate securities. At issue was the banks' continuing effort to bill the securities as a safe investment even after the unravelling credit markets made them risky, less easily liquidated bets.

Lawyers representing Morgan Stanley include David Meister and John Carroll of Clifford Chance (CC). The firm has previously advised Morgan Stanley in connection with other credit matters. Before working at CC, Meister had been a member of the Securities and Commodities Fraud Task Force in the US Attorney's Office for the Southern District of New York, of which Carroll had once served as chief.

Simpson Thacher & Bartlett partners Thomas Rice, Peter Bresnan, and Jonathan Youngwood represented JPMorgan. Bresnan, who had worked in the SEC's Division of Enforcement, is in the Washington DC office's government and internal investigations practice, while Rice and Youngwood are in the New York litigation practice. Rice has served as ongoing counsel for JPMorgan in securities matters.

JPMorgan will spend $3bn (£1.6bn) to recover the securities it sold to retail clients prior to 13 February, 2008, as well as those sold by Bear Stearns. It will pay a $25m (£13.4m) penalty for misrepresenting the value of these securities, which will be distributed throughout the country based on the extent of the investments made by buyers in each state.

Morgan Stanley has agreed to repurchase approximately $4.5bn (£2.4bn) in auction-rate securities. The bank will also will pay a $35m (£18.8m) penalty and reimburse all retail investors who sold their auction-rate securities at a loss after the market for the financial instruments collapsed last February.

"The industry is taking responsibility for correcting a problem they helped create," said Cuomo. "The fundamental goal has been to return money into the hands of investors."

The attorney general settled similar investigations against Citi and UBS last week.

The American Lawyer is a US sister title of Legal Week.