WASHINGTON - Wachovia Securities LLC and Wachovia Capital Markets LLC agreed to buy back at par $8.8 billion of auction-rate securities from retail and other investors under a preliminary settlement agreement with state and federal regulators announced Friday.
The 10th-largest ARS underwriter according to Thomson Reuters, Wachovia joins four other firms that have entered into ARS settlement agreements: JP Morgan Chase & Co. and Morgan Stanley, which settled with state regulators Thursday; and Citigroup Global Markets Inc. and UBS AG, which settled with state and federal regulators the previous week.
The Wachovia settlement is different in that, while the other firms agreed to buy back ARS from retail customers and provide "liquidity solutions" for institutional customers, Wachovia agreed to buy back ARS from all of its customers. Citi and UBS agreed to offer their "best efforts" to provide liquidity for their institutional investors. JPMorgan and Morgan Stanley did not make any such offers under their settlements.
The Wachovia settlement was announced by Missouri Secretary of State Robin Carnahan,New York Attorney General Andrew Cuomo, the North American Securities Administrators Association, and the Securities and Exchange Commission. Missouri was the lead state investigating Wachovia as part of the NASAA coalition of states investigating allegations of questionable ARS sales practices. New York State opted out of the coalition to pursue the firms on its own.
Carnahan said in a statement Friday that her office received "hundreds of calls" from investors in Missouri and other states with unredeemable ARS they needed to pay medical bills and business costs.
"I am pleased that six months of uncertainty and worry is over and that these investors will soon get their money back," she said.
Under the settlement, Wachovia will buy back at par $5.7 billion from retail investors - individuals, small and medium businesses, charities, and religious organizations with accounts of $10 million or less of assets - between Nov. 10 and Nov. 28.
It also will repurchase at par $3.1 billion of ARS from all of its other investors - including institutional investors with accounts of more than $10 million in assets - between June 10, 2009 and June 30, 2009.
The other conditions of Wachovia's settlement follow the blueprint established by the other settlement agreements. The firm will reimburse the losses of investors who sold their ARS below par between Feb. 13 and the date of the settlement. It will provide no-net loans for customers needing immediate capital until their ARS can be repurchased. Wachovia will participate in an arbitration process, overseen by the Financial Industry Regulatory Authority, for investors seeking consequential damages beyond the loss of liquidity. It will not contest the results of the arbitration.
Wachovia also will refund refinancing fees to municipal issuers that issued ARS between Aug. 1, 2007, and Feb. 13 and subsequently refinanced those securities after Feb. 13 to obtain relief from high interest payments.
In addition, the firm will pay a fine of $50 million to the states that participated in the investigation. Wachovia's fine is significantly higher than the $25 million and $35 million that JP Morgan and Morgan Stanley agreed to pay, respectively, because it was based in part on its ARS portfolio size and behavior, said Laura Egerdal, a spokesperson in Carnahan's office.
Under its settlement with the SEC, Wachovia will be enjoined from engaging in any further violations of laws and rules that prohibit manipulative or deceptive sales practices by broker-dealers. Also, the firm may face additional fines from the SEC after its settlement agreement is completed, the commission said in a statement. The SEC has not reached a settlement agreement with JP Morgan and Morgan Stanley.
Linda Chatman Thomsen, director of the SEC's division of enforcement, applauded the work of state regulators. "This agreement in principle with Wachovia, if approved by the Commission, will permit tens of thousands of Wachovia investors to get their money back," she said in a statement.
Wachovia neither admitted nor denied any wrongdoing.
Robert K. Steel, president and chief executive officer of Wachovia, said in a statement the company is "pleased" to have resolved this issue with investors and regulators.
Officials from Carnahan's office and five other states conducted an on-site investigation at Wachovia Securities' St. Louis headquarters in July after alleging that the firm had not cooperated with their ARS investigation.
Wachovia was "absolutely dragging its feet," before the regulators visited the firm, Egerdal said.
Carnahan's office began its investigation in April and has been engaged in lengthy negotiations with Wachovia executives since Aug. 8 to reach a settlement.
Wachovia is based in Charlotte, N.C., but its securities division became headquartered in St. Louis after the bank acquired A.G. Edwards & Sons Inc. in October 2007.