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SEC Cites Wachovia Bid Deals

WASHINGTON — A federal court in New Jersey has approved a $46 million settlement between Wachovia Bank NA, now Wells Fargo Bank NA, and the Securities and Exchange Commission over bid-rigging of municipal-bond related contracts as well as the amounts of restitution that are to go to each of the almost 60 state and local issuers that were defrauded.

Judge William Martini of the U.S. District Court for the District of New Jersey in Newark on Thursday signed a final judgment.

It is part of a $148 million global settlement Wachovia entered into with the SEC, the Internal Revenue Service, the Justice Department, the Office of the Comptroller of the Currency and attorneys general from 25 states and the District of Columbia.

Wachovia, which was acquired by Wells Fargo in a March 2010 merger, neither admitted nor denied the allegations in its settlement with the SEC.

Wachovia agreed to pay the SEC a $25 million civil penalty, $13.8 million in disgorgement of ill-gotten gains and $7.276 million in prejudgment interest.

The settlement proceeds, stemming from 58 transactions that were executed between 1997 and 2005 in connection with more than $9 billion in underlying muni bonds, will be returned to municipalities and conduit borrowers within 60 days of the court’s judgment.

Massachusetts will receive the largest restitution payment, $11.45 million, in connection with a $2.28 billion refunding and consolidated loan transaction sold in June 2002.

The smallest restitution, $14,980, is earmarked for Pennsylvania’s Economy Borough Municipal Authority from $2.975 million of guaranteed sewer revenue bonds sold in September 2004.

A three-page list of transactions attached to the final judgment shows the 58 deals to which the SEC referred in its Wachovia complaint, which was filed last week.

They include $1.1 billion of sewer revenue refunding warrants that Jefferson County, Ala., sold in 2003. The county will receive a restitution payment of $5.29 million.

A June 2005 transaction cited in the SEC’s complaint as “transaction two” with no identification of the parties was a $7.7 million forward purchase agreement for the investment of amounts to be held in a debt service reserve fund for the Jersey City Municipal Utilities Authority, according to bond offering documents and the final judgment. The agency’s underlying debt was $84.66 million of water revenue bonds sold in 2003.

The FPA transaction was structured such that all the interest to be earned on the investment would be paid as a single, upfront fee, with the winning bidder providing the highest upfront fee, the SEC’s complaint says.

The transaction was a “set-up” and Wachovia was permitted to lower its bid, “thereby avoiding leaving money on the table,” the commission said.

An hour before bids were to be submitted, a Wachovia managing director learned from the bidding agent, whom the SEC identifies as “Bidding Agent B,” that a competitor had misread the bid specifications and was backing off an earlier bid, the SEC alleges.

Wachovia told Bidding Agent B that it would bid $3.5 million, “unless that is going to prove embarrassing,” and the bidding agent said it “might,” the complaint said.

Before the bids, Bidding Agent B confirmed Wachovia would bid $3.3 million, but at the last minute, another bidder said he would be at $5.25 million, according to the SEC.

The bidding agent warned the other provider to check his bid, and make sure the five wasn’t a two, so he wasn’t “overpaying,” the regulator said.

Wachovia won the investment with the $3.3 million bid and falsely certified in its written bid submission that it had not reviewed offers from other providers before making its bid, the SEC’s complaint says.

The Jersey City Municipal Utilities Authority will receive a $426,322 restitution payment from Wachovia, according to the final judgment.

Gates Capital Corp. in New York, the financial advisor on the 2003 Jersey City utilities deal, did not respond to a request for comment, but it is not clear whether the firm was involved in the 2005 forward purchase agreement transaction.

A spokesperson for Wells Fargo, Dana Crothers Obrist, said, “We’re definitely pleased that this is resolved.”

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