WASHINGTON — State securities regulators reached settlements in principle with Wells Fargo & Co. under which the firm will pay $1.9 million in penalties and buy back about $1.4 billion of illiquid auction-rate securities primarily held by its subsidiaries’ retail customers since early 2008 when the ARS market collapsed.
The settlements end litigation filed in April by California Attorney General Jerry Brown and a probe led by the securities division of the Washington State Department of Financial Institutions on behalf of the North American Securities Administrators Association into allegations that San Francisco-based Wells Fargo misled clients by falsely assuring them that ARS were a safe, liquid alternative to cash, certificates of deposit or money market funds.
“Today’s settlement demonstrates the value of states working in concert to benefit investors nationwide,” said NASAA president Denise Voigt Crawford, who is also the Texas Securities Commissioner. “State securities regulators continue to lead the effort to ensure that investors receive redemptions for their frozen auction-rate securities, which were marketed as safe and liquid investments, and we will continue to seek much needed relief for investors who have suffered from the collapse of the ARS markets.”
Under the terms of the settlements, the firm must buy back at par value by April 18, 2010, all ARS purchased through its brokerage unit by investors before Feb. 13, 2008.
The settlements also require Wells Fargo to fully reimburse certain investors who sold their ARS at a discount after the market collapsed and consent to a special, public arbitration procedure to resolve claims of “consequential damages” suffered by investors that were unable to access their funds.
The firm also must pay the states monetary penalties of $1.9 million.
For their part, state regulators — which have investigated firms’ ARS sales practices as part of a coordinated task force — agreed to terminate their probe of Wells Fargo’s marketing and sale of ARS to investors.
Wells Fargo customers held $2.95 billion of auction-rate securities across 5,692 accounts when the market collapsed in February, 2008, according to the Washington state settlement.
In addition to the Washington state securities regulator, Crawford said the probe and settlement negotiations with regard to Wells Fargo also involved state regulators in California, Georgia, Missouri, Oregon, Texas, and Utah.
A larger task force, made up of securities regulators from 12 states, was announced in April 2008, in response to hundreds of complaints from investors.
State and federal securities regulators have secured settlements calling for firms to repurchase from investors more than $61 million in ARS, which they contend is the largest return of funds to investors in history.
NASAA said that the investigations are “ongoing,” but provided no additional details.
Several state regulators continue to pursue litigation against so-called downstream brokerages that did not underwrite ARS but sold them to their customers. An administrative hearing is scheduled Dec. 8 in a legal action brought by Massachusetts Secretary of State William Galvin against Oppenheimer & Co.
A Wells Fargo spokeswoman did not immediately comment on the settlements.