Wells Fargo Agrees to $1.4M Buyback of Auction-Rate Securities

November 18, 2009 (PLANSPONSOR.com) – California Attorney General Edmund G. Brown Jr. announced a $1.4-billion settlement with three Wells Fargo affiliates to pay back investors, charities, and small businesses that purchased auction-rate securities based on "misleading advice."

Under the settlement, Wells Fargo will buy back $1.4 billion in non-liquid auction-rate securities from thousands of retail customers, charities, and small businesses nationwide, including about $700 million to California investors. Wells Fargo will also pay legal costs and future monitoring expenses incurred by Brown’s office, according to the announcement.

In February 2008, nationwide auction markets froze, and investors have been unable to sell their securities.

Earlier this year, Brown filed the suit against three Wells Fargo affiliates – Wells Fargo Investments, LLC; Wells Fargo Brokerage Services, LLC; and Wells Fargo Institutional Securities, LLC – for violating California’s Securities Law. Brown’s suit contended that Wells Fargo routinely misrepresented, marketed, and sold auction-rate securities as safe, liquid, and cash-like investments, omitting material facts. The company was also charged with failing to supervise and train its sales agents, and selling unsuitable investments.

The lawsuit contended that Wells Fargo ignored clear industry and internal warnings about risk and previous auction failure. In March 2005, the Securities and Exchange Commission (SEC), the “Big 4” accounting firms, and the Financial Accounting Standards Board all determined that auction-rate securities should not be considered “cash equivalents,” the announcement said.

Despite these warnings, the suit claimed Wells Fargo continued to  falsely market auction rate securities as safe, liquid, cash-like investments until the nationwide auction markets froze. In  selling these investments, Wells Fargo failed to inform investors about how auction-rate securities or the auction process works, as well as the risks and consequences of auction failure, according to the suit.