WASHINGTON (Legal Newsline)-Long before Congress began considering a rescue plan for the U.S. financial markets, a small group of state attorneys general were decrying what they called unscrupulous activities by some Wall Street firms.

New York Attorney General Andrew Cuomo and fellow Democrat Massachusetts Attorney General Martha Coakley were taking aim at such financial giants as Citigroup, Bank of America, Swiss bank UBS, Morgan Stanley and Merrill Lynch.

For its part, California Attorney General Jerry Brown's office this month settled a lawsuit with Edward Jones, a Missouri-based brokerage firm.

The company was accused of failing to adequately disclose its sharing of revenue with mutual fund companies when it sold their funds to customers before 2005.

The bulk of the attorneys general efforts targeted subprime mortgage lenders, including Countrywide Financial Corp., and the marketing of auction-rate securities.

A handful of banks and investment firms have been accused of illegally misrepresenting to clients the risks of investing in auction-rate securities for which the interest rate or dividend is reset periodically through an auction mechanism.

The market for auction-rate securities collapsed earlier this year, leaving local governments and pension funds with securities they could not liquidate.

Announcing a settlement in which Merrill Lynch & Co. agreed to buy back auction rate securities last month, Cuomo said the settlement was "a win for investors and a win for the market," as Legal Newsline reported at the time.

"At the heart of this investigation is improving confidence for the investor and for the market, and today we've taken another giant step forward towards fulfilling this goal," Cuomo said.

Now, as Congress and the Bush administration try to shore up the markets with a cash infusion, Cuomo is probing whether credit default swaps were manipulated by short sellers through the use of false rumors about financial companies such as Lehman Brothers, Goldman Sachs Group Inc. and Morgan Stanley.

The Bailout

On Sunday, congressional leaders and White House officials hammered out a compromise that would provide for the biggest bailout in U.S. history, one first proposed by the Bush administration.

The plan calls for the U.S. Treasury Department to have the authority to buy billions of dollars worth of devalued mortgage-related assets held by struggling financial firms.

Under the plan, the Treasury would get $250 billion to buy bad debt once the legislation is enacted, $100 billion more if the president certified it was necessary, and the last $350 billion with a separate certification.

In a statement Sunday, President George W. Bush said without a rescue plan the consequences for the American economy would be catastrophic.

"Without this rescue plan, the costs to the American economy could be disastrous," Bush said in a statement.

Both major party presidential candidates offered their support for a bailout. Appearing on Sunday morning talk shows, Democrat Barack Obama and Republican John McCain offered their qualified support for a Wall Street rescue.

Appearing on CBS's "Face the Nation" program, Obama said his "inclination" is to support a plan, while McCain said on ABC's "This Week" program that "This is something that all of us will swallow hard and go forward with."

From Legal Newsline: Reach reporter Chris Rizo at chrisrizo@legalnewsline.com.