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Settlements Reached in Wells Fargo, Bank of America Securities Fraud Charges

Jun 9, 2009 | Parker Waichman LLP

Wells Fargo and Bank of America have reached separate  agreements to settle securities fraud charges with various state and federal regulators.  According to a Wall Street Journal report,  the Wells Fargo settlement involves its Boston-based mutual fund Evergreen Investment Management Co, while the Bank of America settlement resolves charges regarding the sale of auction rate securities.  

According to the Journal, Wells Fargo has agreed to  pay $40 million in an agreement with  the Securities and Exchange Commission (SEC)  and the Massachusetts Securities Division to settle charges that Evergreen misled investors about the value of some securities it sold and making selective disclosures to investors.  As part of the settlement agreement, Evergreen did not admit to any wrongdoing. At the time the allegations covered by the settlement occurred, Evergreen was a unit of Wachovia Group, which was acquired by Wells Fargo last year.

The SEC alleged that Evergreen inflated the value of mortgage-related securities in its Evergreen Ultra Short Opportunities Fund by as much as 17% between February 2007 and June 2008, when it closed and liquidated the fund, the Journal said.  The SEC charged that Evergreen began repricing the securities after its valuation committee learned on June 10, 2008 that the portfolio managers had known since March about problems with a certain mortgage-backed security but had failed to disclose it to the committee.  

When Evergreen began to reprice the overstated holdings in  the fund, regulators allege it only let certain customers know.  These customers - many were also customers of Evergreen affiliate Wachovia Securities LLC - were also told more adjustments were coming.  As a result, the regulators charge, those customers given preferential treatment were able to cash out and lessen their losses.  By law, mutual funds must treat all investors equally, the Journal said.

Bank of America has reached an agreement with the California Department of Corporations to "facilitate" the return of more than $3 billion to clients in that state who purchased auction rate securities, the Journal said.  The state will also receive $9.7 billion in penalties from Bank of America as part of a multi-state probe of the auction rate securities market.

As we've reported previously, auction rate securities are financial instruments 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 could 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 in 2008. Thousands of investors were bewildered to find out that the investments they were sold as cash equivalents were actually illiquid.

According to a report on, California regulators noted that Bank of American made repurchase offers to all individual, small-business and charitable institutional investors from California.  The company has also promised its "best efforts" to work with auction rate securities issuers, state and federal regulators and other parties to attempt to provide liquidity for  institutional investors by the end of the year.

According to, Bank of America  has not admitted nor denied any of the charges detailed by the settlement order.

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