August 15, 2008 / 3:01 PM / 12 years ago

Wachovia settles auction-rate securities probe

KANSAS CITY, Missouri (Reuters) - Wachovia Corp WB.N will buy back nearly $9 billion in auction-rate debt to settle complaints that it misled investors in the latest of a series of regulatory crackdowns aimed at stabilizing the debt market.

A woman walks out of a branch of Wachovia bank in Santa Monica, California, April 14, 2008. REUTERS/Lucy Nicholson

So far this month, federal and state regulators have negotiated settlements requiring banking companies to repurchase more than $40 billion in auction-rate securities.

Probes were continuing against Merrill Lynch & Co MER.N, mutual fund giant Fidelity and discount brokerage Charles Schwab Corp SCHW.O, officials said on Friday.

In the latest settlement, Wachovia, the fourth-largest U.S. bank, agreed to repurchase auction-rate securities totaling $8.8 billion, including $5.7 billion in securities held by over 40,000 individual investors, charities and small businesses.

The $330 billion auction-rate market normally allows issuers to borrow money for the long term at low, short-term rates. But demand at the daily auctions for the securities faded earlier this year amid a broader flight from risky investments, leaving owners unable to redeem them for cash.

Regulators said they have been flooded with complaints, and alleged Wachovia’s Missouri-based securities arm, along with other banks, misled investors into believing auction-rate debt, which has rates reset periodically, was a cash equivalent.

“They marketed things to investors making specific representation about liquidity but failing to disclose to them that there were potential risks out there in the marketplace that might affect their ability to actually provide the liquidity they claimed was available,” said Merri Jo Gillette, director for the Securities and Exchange Commission regional office in Chicago.

Wachovia CEO Robert Steel blamed “unprecedented market conditions” for the problems and said the company was happy to resolve the matter.

On Thursday, Morgan Stanley (MS.N) agreed to buy back $4.5 billion in debt and pay a $35 million fine, and JPMorgan Chase & Co (JPM.N) agreed to buy back $3 billion and pay a $25 million fine.

That followed deals last week in which Citigroup Inc (C.N) and UBS AG UBSN.VX agreed to buy back a combined $26 billion of the debt, and pay $250 million in fines.


Merrill has offered to buy back as much as $12 billion of the debt but has not agreed to a larger settlement with regulators. New York Attorney General Andrew Cuomo said on Friday his state plans to take legal action to force a deal.

“We have started with the largest firms and we are working our way down the list,” Cuomo said on a conference call. “No doubt you have many retail brokerage firms who sold securities. Our belief is those firms are also liable to the investors.”

Wachovia’s initial buyback is slated for November 10 through November 28. Wachovia will offer to repurchase $3.1 billion between June 10 and June 30, 2009, according to securities regulators.

Wachovia will pay a $50 million fine and make no-interest loans available immediately for investors who need liquidity before the buyouts are completed, said Missouri Secretary of State Robin Carnahan, who led the probe into Wachovia.

Wachovia also agreed to participate in a special arbitration process for investors who suffered a loss or damages due to an inability to access their money. It also pledged to reimburse investors who sold their auction-rate securities for an amount below par after the meltdown.

The auction-rate securities were sold through Wachovia Capital Markets LLC and Wachovia Securities LLC, known as A.G. Edwards Inc before Wachovia acquired it in October 2007. Wachovia owns 62 percent of Wachovia Securities, while Prudential Financial Inc (PRU.N) holds the rest.

SEC officials said Wachovia could face additional penalties depending on its settlement performance.

Wachovia shares fell 24 cents, or 1.5 percent, to $15.57 on the New York Stock Exchange.

Among the discount brokers now under regulatory review for the sale of auction-rate securities to clients, Schwab and TD Ameritrade Holding Corp (AMTD.O) told Reuters they are cooperating with requests for information. Both said they did not underwrite any of the securities.

A spokeswoman for TD Ameritrade said the company was working individually with clients, but would not say whether it would offer reimbursements on the auction-rate debt.

Additional reporting by Grant McCool and Jonathan Spicer; Editing by Gary Hill and Braden Reddall

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