July 17, 2008 / 3:32 PM / 12 years ago

Wachovia Securities hit with inspection in probe

KANSAS CITY, Missouri (Reuters) - Securities regulators from six U.S. states mounted a surprise inspection Thursday of the headquarters of Wachovia Corp’s WB.N brokerage affiliate, as part of a probe into the firm’s sales of auction-rate debt.

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

The office of Missouri Secretary of State Robin Carnahan said a team of 10 regulators went to the St. Louis headquarters of Wachovia Securities, seeking information about sales practices, internal evaluations of the auction-rate securities market and marketing strategies.

The move came after Wachovia Securities failed to comply with information requests from Missouri securities regulators, state officials said. More than a dozen subpoenas were also issued, according to the state.

The $330 billion auction-rate securities market normally allows issuers such as municipalities to borrow money for the long term, but at lower, short-term rates.

Roughly half of the market remains frozen after a February meltdown in which brokerages abandoned their role as buyers of last resort. Investors flooded dealers with paper backed by bond insurers whose credit ratings were in question, forcing many issuers to pay uncommonly high interest rates.

“Hundreds of Missouri investors have called my office because of inability to access their money,” Carnahan said in a statement. “They were told these investments were safe and easy to cash in, but now they cannot run their business, make medical payments, or pay school tuition.”

Missouri said it subpoenaed more than a dozen Wachovia Securities agents and executives after receiving more than 70 complaints over four months, concerning in excess of $40 million in frozen investments.

Wachovia spokeswoman Christy Phillips-Brown said most securities firms are responding to regulatory inquiries into the auction-rate securities industry, and Thursday’s events were part of that process.


Thursday’s inspection provides a fresh headache for new Wachovia Chief Executive Robert Steel, who is trying to preserve capital and slash costs as a $121 billion portfolio of “option” adjustable-rate mortgages deteriorates rapidly.

The fourth-largest U.S. bank has said it expects to report a $2.6 billion to $2.8 billion second-quarter loss on July 22, and several analysts have said it might need to lower its dividend for a second time this year.

Wachovia owns 62 percent of Wachovia Securities. Prudential Financial Inc (PRU.N) owns the remainder. The St. Louis headquarters were known as A.G. Edwards Inc before Wachovia acquired it last October 1.

“What’s scary is this is one more piece of evidence that Wachovia may have ignored the best interest of its customers, although this could have gone on before Wachovia bought A.G. Edwards,” said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. “It erodes the company’s reputational capital even more in the eyes of its customers. It’s more news the company doesn’t need.”

In May, Wachovia said it had received inquiries and subpoenas from federal and state regulators, including the U.S. Securities and Exchange Commission, into underwriting and sales of auction-rate securities.


Regulators from Missouri, Illinois, Massachusetts, New Jersey, Pennsylvania and a sixth state that asked not to be identified were part of the team entering Wachovia Securities’ headquarters, Missouri officials said.

The Missouri Securities Division is also reviewing Massachusetts’ fraud complaint against UBS AG UBSN.VX affiliate UBS Securities last month. It is examining auction-rate complaints involving other financial firms as well.

Steel joined Wachovia last week from the U.S. Treasury Department, where he was deputy under secretary for domestic finance.

He replaced Ken Thompson, whom Wachovia ousted in early June following several financial and legal setbacks, including a $24.2 billion purchase in 2006 of Golden West Financial Corp that saddled the bank with the adjustable-rate mortgages.

Wachovia shares traded up $1.84, or 17.4 percent, at $12.38 in afternoon trading on the New York Stock Exchange, as financial stocks advanced broadly. Through Wednesday, Wachovia shares had fallen 80 percent from their 52-week high of $53.10 set last September 19.

Additional reporting by Jonathan Stempel and Dan Wilchins; editing by Gerald E. McCormick and Andre Grenon

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