Wachovia Settles Auction Rate Securities Charges

August 15, 2008 (PLANSPONSOR.com) - The Securities and Exchange Commission has announced that Wachovia has agreed to a preliminary settlement that would offer approximately $9 billion to investors of auction rate securities (ARS).

According to the SEC announcement, under terms of the agreement:

  • Wachovia agrees to repurchase ARS from all investors who purchased ARS from Wachovia Securities, LLC and Wachovia Capital Markets, LLC prior to the collapse of the market in mid-February 2008. In the wake of the market collapse, Wachovia investors are currently unable to liquidate approximately $8.8 billion in ARS holdings. Under the proposed settlement, Wachovia will offer to purchase roughly $5.7 billion of ARS held by individual investors, small businesses, and charitable organizations. The buyback will begin no later than November 10, 2008, and conclude by November 28, 2008. Wachovia also will offer to purchase the roughly $3.1 billion of ARS held by all other Wachovia investors in a buyback that will begin no later than June 10, 2009, and conclude by June 30, 2009.
  • Wachovia Securities, LLC will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
  • Until Wachovia actually provides for the liquidation of the ARS, Wachovia will provide customers no net loans that will remain outstanding until the ARS are repurchased.
  • To the extent customers have incurred consequential damages beyond the loss of liquidity in the customer’s holdings of ARS, Wachovia will participate in a special arbitration process that the customer may elect and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby Wachovia will not contest liability for its misrepresentations or omissions concerning ARS.

The SEC charged that Wachovia marketed ARS to investors as cash alternatives, and represented that it would provide one-day or same-day liquidity by purchasing customers’ ARS. However, the SEC said Wachovia failed to adequately disclose that the liquidity of these securities was premised on Wachovia providing support bids for auctions it managed when there was not enough customer demand, and that its offer to provide one-day liquidity could be withdrawn at any time.

The announcement said the commission’s investigation into individuals and other entities that participate in the ARS market is continuing.

On Thursday, JPMorgan and Morgan Stanley settled ARS charges, while UBS was slapped with another one from New Hampshire regulators (See New UBS Lawsuit Sprouts).