Wells Fargo Fined for Violations

WASHINGTON — Wachovia Bank NA, now Wells Fargo Bank NA, has agreed to pay $148 million to settle securities, tax and other federal and state law violations stemming from fraudulently engaging in secret arrangements with bidding agents to win business from municipalities and profits for itself from the reinvestment of muni proceeds.

The Securities and Exchange Commission charged the bank with generating millions of dollars in illegal gains during eight years by fraudulently rigging at least 58 muni reinvestment transactions in connection with more than $9 billion of bonds sold in 25 states and Puerto Rico.

Wachovia agreed to pay the SEC $46 million, which will be returned to municipalities and conduit borrowers. That settlement is subject to approval by a federal court in New Jersey.

It agreed to pay another $102 million in a global settlement of antitrust, securities fraud, tax and other charges with the Department of Justice, the Office of the Comptroller of the Currency, the Internal Revenue Service and attorneys general from 25 states and the District of Columbia.

Wachovia neither admitted nor denied the allegations in settlements with the SEC, OCC and attorneys general. But as part of its settlement with the DOJ, it acknowledged and accepted responsibility for illegal, anticompetitive conduct by its former employees.

Wells Fargo, which acquired Wachovia in a March 2010 merger, released a statement saying it was “pleased to have fully resolved” the investigation. “The underlying transactions were entered into in a business that existed at Wachovia Bank, which Wells Fargo acquired in 2008, and involved employees who are no longer with the firm,” the statement said.

SEC officials touted the settlement, which is part of their ongoing investigations into corruption in the municipal reinvestment industry.

“Wachovia won bids by playing an elaborate game of 'you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business,” Robert Khuzami, director of the SEC’s enforcement division, said in a statement.

The SEC’s muni enforcement chief echoed his view.

“Wachovia hid its fraudulent practices from municipalities by affirmatively assuring them that they had not engaged in any manipulative conduct,” said Elaine Greenberg, chief of the muni and public pensions unit. “This settlement will result in significant payments to municipalities harmed by Wachovia’s unlawful actions.”

In its complaint against Wachovia, the SEC said the firm, from at least 1997 through at least 2005, engaged in rigging bids for 58 transactions involving guaranteed investment contracts, repurchase agreements and forward purchase agreements in connection with more than $9 billion in underlying muni bonds.

The officials submitted bids that were set up in advance to win the contracts, obtained advance information about competing bids and sometimes deliberately obtained non-winning bids, according to the SEC.

In its documents, the regulator does not name the former Wachovia officials, but said they include members of its muni derivatives group and certain Wachovia marketers, including one who served as director and managing director.

The 58 transactions included winning bids on at least 29 municipal reinvestment instruments and at least 29 non-winning bids, the SEC’s complaint said.

Wachovia falsely certified that the bids were the product of bona fide solicitation, meaning they were competitive and not tainted by undisclosed consultations, agreements or payments and reflected fair-market value for the purchase of the reinvestment instrument, the SEC alleged.

The complaint against Wachovia is noteworthy because it contains the details of two transactions involving UBS Financial Services Inc. and Banc of America Securities that were also described in the SEC’s complaints against those firms in May and December 2010, respectively, as well as the lists of bond deals released in connection with the settlements. The underlying transactions were $823 million of general obligation bonds sold by Massachusetts in October 2001 and $1.8 billion of GOs sold by the commonwealth in June 2002. 

According to the SEC, UBS, which it calls Bidding Agent A, presided over the bidding for a $638.5 million forward-purchase agreement for the $823.8 million bond issue and gave Banc of America, which it calls Provider A, a “last look” at the bids to ensure it would be awarded the contract for the FPA.

Banc of America, in return, paid UBS at least $175,000 in improper, undisclosed payments in early 2002 for services that were never rendered. Wachovia, referred to as Provider B, had also bid on the FPA contract and was upset that it had not won. So UBS told Banc of America that Wachovia would get the next contract.

The next deal involved a $1.465 billion FPA bid in connection with the $1.8 billion of GOs Massachusetts sold in June 2002. UBS provided details of the potential investment as early as February, 2002.

On the morning of the bid, representatives of Banc of America and Wachovia discussed their plans to bid. Banc of America, however, submitted a very competitive bid, surprising the Wachovia rep and causing him to call the B of A rep and talk him into providing a less competitive bid. UBS also obtained so-called courtesy bids, which were very noncompetitive from two other firms, telling them they would be “safely back” and unlikely to win. Wachovia won the bid and then falsely certified that it had not consulted with, or reviewed offers from, other providers.

In each case, firms falsely certified, for tax law purposes, that there were bona fide solicitations for bids and that the prices for the FPAs were determined in arm’s length transactions.  

An attorney for Wells Fargo, Christopher Viapiano of Sullivan & Cromwell in Washington, declined to comment. Wachovia terminated its participation in the marketing and sale of guaranteed investment contractss in May 2008, according to the OCC, which entered into a stipulation and consent order with Wells Fargo.

Since April 2010, Wachovia has taken steps to enhance and strengthen its internal policies, procedures and controls governing muni derivatives marketing and trading, the OCC said. The OCC’s agreement with Wells Fargo stipulates that the bank shall provide a detailed written plan that ensures appropriate control and oversight of competitively bid transactions conducted in connection with muni derivatives marketing and trading.

“The plan will be designed to detect and prevent potential collusion, bid-rigging, price fixing or other improper anticompetitive activity,” the OCC said. Noting the bank terminated its participation in the marketing and sale of certain competitively bid derivative financial products to state and local governments, the OCC agreement states that the bank must not reengage in these activities without notifying the OCC in writing and providing the regulator with its detailed plans for complying with all requirements.

The bank is also required to provide a written description of its compliance and training programs to the OCC, as well as a formal assessment identifying all of its business lines that engage in activities involving competitive bidding.

In a related action, the SEC charged Dean Pinard, 42, a former vice president and marketer at Banc of America Securities LLC, now Bank of America Merrill Lynch, for his role in various improper bid-rigging practices.

Pinard, a resident of Charlotte, is covered by the grant of conditional amnesty from criminal prosecution that the Justice Department provided to Banc of America’s parent corporation in 2007 because it was the first firm to voluntarily self-report the anticompetitive bidding practices.

Pinard, who cooperated with the investigation, agreed to pay more than $40,000 to settle the SEC’s case, without admitting or denying the findings. The commission barred him from associating with any broker, dealer, investment advisor or muni advisor, but he will have an opportunity to reapply. He must disgorge $32,489 of ill-gotten gains, plus prejudgment interest of $9,294.

The SEC’s cease and desist order against Pinard says his involvement in certain improper bidding processes began in 1999, at Banc of America Securities. From April 1999 through December 2003, Pinard served as a dual officer of Banc of America Securities and Bank of America NA and worked in the municipal reinvestment and risk management group, which he headed beginning in January 2003.

Pinard and others on Banc of America’s muni desk, a marketing group with four to nine members, participated in and condoned improper practices in connection with bidding reinvestment instruments, according to the SEC.

In March and April 2002, the SEC alleges, Pinard helped the then-head of the desk, who is not identified, win bids for two separate instruments in which $65.23 million of bond proceeds would be invested. The head of the desk, Pinard’s supervisor, recommended the hiring of a bidding agent for the deal, the SEC says.

Pinard gave the bidding agent his desk’s pricing indications for the bids, allowing the bidding agent to advise other prospective bidders they should not bid, according to the SEC.

The desk paid the bidding agent brokerage fees and an additional $50,000 as purported fees for a market pricing letter in another transaction. That payment was for “the favored treatment that the bidding agent showed the desk in steering these bids in favor of the desk,” the SEC said.

Pinard’s attorney, Arthur Greenspan at Richards, Kibbe & Orbe LLP in New York, did not respond to a request for comment.

A Bank of America spokesperson also declined to comment.


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