Banking & Capital Markets

Wachovia Joins ARS Settlement Bandwagon

It is the fifth big bank in eight days to agree to buy back securities from investors it allegedly misled.
Stephen TaubAugust 15, 2008

Wachovia is the latest bank to settle charges over its sales of auction-rate securities (ARS), according to simultaneous announcements by New York Attorney General Andrew Cuomo and the Securities and Exchange Commission.

The bank’s Wachovia Securities and Wachovia Capital Markets units will return more than $8.5 billion to investors, under an agreement with Cuomo.

Wachovia will offer to buy back, no later than November 28, about $5.7 billion in illiquid ARS from retail customers, charities, and small businesses. Then, starting June 10, 2009, and concluding June 30, the bank will offer to purchase the roughly $3.1 billion of ARS held by all other Wachovia investors. According to Cuomo, Wachovia will also pay damages to investors who sold securities for a loss.

In addition, Wachovia agreed to pay New York State and North American Securities Administrators Association (NASAA) civil penalties totaling $50 million.

“Wachovia marketed and sold auction rate securities as safe, cash-equivalent products, when in fact they faced increasing liquidity risk,” stated a press release from Cuomo’s office.

“We continue to work with state regulators and others to bring real relief to investors who were not given the forthright information they needed in the process of purchasing auction rate securities,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement.

In a separate statement, Karen Tyler, president of the NASAA, noted that the settlement followed an investigation led by the Office of the Missouri Secretary of State into investors’ complaints that Wachovia misled them by portraying ARS as cash equivalents.

“This settlement is yet another important step in our ongoing effort to make sure that investors across the country quickly regain access to their funds that were placed in auction rate securities,” said Tyler. “Missouri Secretary of State Robin Carnahan and her staff in the Securities Division deserve enormous credit for spearheading the investigation and leading the negotiations that resulted in an excellent settlement.”

Within the past eight days, Cuomo has finalized agreements restoring nearly $35 billion of liquidity to thousands of investors nationwide. Other financial institutions to settle include JPMorgan, Morgan Stanley, UBS, and Citigroup.

The SEC noted that Wachovia faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. As to the amount of the penalty, if any, the determinations will take into account, among other things, an assessment of whether Wachovia has satisfactorily completed its obligations under the settlement, and the costs incurred by the bank in meeting those obligations, including other penalties incurred and the cost of remediation.