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Wachovia Reaches Auction Rate Securities Settlement

Aug 15, 2008 | Parker Waichman Alonso LLP

Wachovia Corp., one of the biggest banks to be caught up in the auction rate securities mess, has agreed to buy back billions of dollars worth of illiquid investment vehicles, the Securities and Exchange Commission (SEC) announced today.  Wachovia is the fifth bank in the past week to agree to such a settlement.

Auction rate securities are long-term corporate bonds, municipal bonds and preferred stock on which the interest rates are reset periodically based on bids submitted through securities firms. Generally, rates are reset every  seven, 14, 28 or 35 days. Because they can be sold during weekly or monthly auctions, banks and brokerages often touted auction rate securities as short-term investments or cash equivalents.  Unfortunately, because of the credit crises, the market for auction rate securities crashed.  Thousands of investors have been bewildered to find out that the investments they were sold as cash equivalents are now illiquid.

Various state and federal agencies have been investigating the auction rate securities crash, amid suspicions that investment banks misled their clients about both the liquidity of the vehicles and safety of the market.  Last month, a group of state regulators probing the crash of the auction rate securities market visited the headquarters of Wachovia Securities in St. Louis seeking to access documents and conduct interviews about the firm’s sales and marketing practices, according.  The group, which was led by official from Massachusetts, included state regulators from Missouri, Illinois, Massachusetts, New Jersey, Pennsylvania and other states.  They were all members of the North American Securities Administrators Association, and were part of a task force looking into possible irregularities in the auction rate securities market.

Under the terms of the settlement announced today, Wachovia will buy back $5.7 billion worth of auction rate securities held by individual investors, small businesses and charitable organizations.  The bank will also offer to purchase about $3.1 billion of securities held by all other Wachovia investors, according to an SEC news release. The settlement includes investors who bought the securities through Wachovia Securities LLC and Wachovia Capital Markets LLC. New York Attorney General Andrew Cuomo  said Wachovia would also pay civil penalties of $50 million.

The SEC said the settlement was reached with the help of Missouri's secretary of state, the North American Securities Administrators Association, New York's attorney general and the Financial Industry Regulatory Authority. The regulator's investigation into the auction-rate securities market is ongoing.

Wachovia is just the latest bank to agree to an auction rate securities settlement.  Yesterday, the New York Attorney General's Office announced that JPMorgan Chase & Co. and Morgan Stanley agreed yesterday to buy back more than $7 billion in auction-rate securities and pay fines totaling $60 million.  Last week, UBS AG and Citigroup said they would redeem about $26 billion of the auction-rate securities and pay fines of a combined $250 million. Merrill Lynch & Co. offered to repurchase about $10 billion of the securities last week and is still in talks with regulators.