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Saturday, June 15, 2024 | Back issues
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Wachovia Settles With SEC for $7 Billion

CHICAGO (CN) - Wachovia will spend more than $7 billion to buy back auction rate securities from customers to whom it sold the paper before the market collapsed a year ago, in part because Wachovia stopped supporting it, the SEC said Thursday in announcing a settled complaint.

According to the federal complaint:

"Wachovia misled its customers about the fundamental nature and increasing risks associated with auction rate securities ('ARS') that it underwrote, marketed and sold. Wachovia and A.G. Edwards & Sons, Inc. ('A.G. Edwards'), whose broker-dealer operations were consolidated into Wachovia, misrepresented to its customers that ARS were safe, highly liquid investments comparable to cash or money market instruments. As a result, numerous customers purchased ARS using funds that they needed to remain available on a short-term basis.

"Wachovia reinforced the perception of liquidity by committing it own capital to support ARS auctions for which it served as sole or lead broker-dealer to ensure that those auctions did not fail. Wachovia also routinely purchased ARS from A.G. Edwards' customers between auctions, a service it referred to as par daily liquidity. Wachovia's sales personnel, or Financial Advisors ('FAs'), did not, however, adequately disclose that: (1) auctions could fail, rendering customers' ARS holdings illiquid, (2) an auction's success may depend on a broker-dealer, such as Wachovia, placing support bids in an auction, and (3) the par daily liquidity service offered to A.G. Edwards' customers could be withdrawn at any time.

"In late 2007 and early 2008, Wachovia became aware of mounting evidence that the firm and its customers could no longer rely on the historical stability of the ARS market. Investor concerns about the creditworthiness of monoline insurance companies (who insured certain ARS), higher than normal ARS inventory levels at A.G. Edwards, and auction failures in certain segments of the ARS market indicated that the risk of auction failures had materially increased. Wachovia's FAs, nevertheless, continued to market ARS to its customers as highly liquid investments.

"On February 13, 2008, the day after a significant number of auctions failed, Wachovia stopped providing par daily liquidity. On February 14, Wachovia followed the lead of other broker-dealers and stopped supporting auctions. Without broker-dealer support, ARS auctions failed and Wachovia's customers were left holding over $14 billion in illiquid ARS, without any practical means of redeeming, selling or deriving value from them.

"By engaging in the conduct described in the Complaint, Wachovia violated Section 15(c) of the Securities Exchange Act of 1934 ('Exchange Act') [15 U.S.C. §78o(c)]. Accordingly, the Commission seeks: (a) entry of a permanent injunction prohibiting Wachovia from further violations of the relevant provision of the Exchange Act; (b) the imposition of a civil penalty against Wachovia; and (c) any other relief this Court deems necessary and appropriate under the circumstances."

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