This article first appeared in the St. Louis Beacon: August 15, 2008 - Wachovia Corp. has agreed to buy back from investors about $8.8 billion in controversial securities, settling allegations that its St. Louis-based brokerage unit misrepresented the ease with which consumers could get their money.
"Wachovia neither admits nor denies allegations of wrongdoing," the company said Friday, referring to a tentative settlement that will create a bigger loss than the banking giant had predicted.
The preliminary agreement was announced almost simultaneously by the Securities and Exchange Commission's enforcement division, Missouri Secretary of State Robin Carnahan and New York Attorney General Andrew Cuomo.
The settlement still must be approved by the SEC.
On Aug. 12, Wachovia said it had set aside $500 million, before taxes, in reserves as the estimated cost of settling with the states and the SEC. On Friday, it said it would set aside another $275 million, before taxes, for the third quarter.
"Wachovia does not currently expect that the purchase of auction-rate securities under the agreement in principle will have a material effect on capital, liquidity or overall financial results," the company said.
"We understand that unprecedented market conditions have created difficulties for our clients, particularly those holding auction rate securities," said Robert K. Steel, Wachovia's CEO. "We are pleased to announce a comprehensive solution ... and to resolve this matter with federal and state regulators."
Wachovia also could face an SEC fine, depending on the agency's assessment of compliance with the proposed settlement. Wachovia will pay a total fine of $50 million to state regulatory agencies and the North American Securities Administrators Association.
Wachovia Securities, which includes the former A.G. Edwards, was accused of improperly marketing auction-rate securities, which are bonds, corporate bonds or preferred stock whose interest rates are periodically reset at auctions.
The securities were promoted as having better interest rates than Treasury securities or money market funds. Wachovia marketed them "as cash alternatives, and represented that it would provide one-day or same-day liquidity by purchasing customers' auction rates securities," the SEC said Friday.
However, quick access depended on Wachovia's ability to find enough buyers when the securities were auctioned. As the economy tanked, there were fewer buyers.
"When Wachovia stopped supporting auctions in February 2008, there were widespread auction failures and Wachovia stopped making good on its offer to provide one-day liquidity," the SEC said.
The SEC said an estimated $8.8 billion in Wachovia auction-rate securities are frozen in customers' accounts. Wachovia will buy back $5.7 billion from individual investors, charities and small businesses by Nov. 28. The buyback starts Nov. 10. Wachovia will offer no-interest loans to clients who need money before the repurchasing of auction-rate securities is completed.
Carnahan said more than 40,000 investors are in this group. "Today's settlement is a major step towards making these investors whole," Carnahan said.
Wachovia will repurchase another $3.1 billion from other investors by June 30, 2009. This buyback starts June 10, 2009.
"We continue to work with state regulators and others to bring real relief to investors who were not given the forthright information they needed in the process of purchasing auction rate securities, said Linda Chatman Thomsen, director of the SEC's Division of Enforcement.
The agreement calls for Wachovia Securities to be permanently prohibited from violating an SEC law regarding "the use of manipulative or deceptive devices" by brokers.
By early afternoon, Wachovia's stock was down 6 cents to $15.75.
Robert W. Steyer, a freelance journalist in New York, was a business reporter with the St. Louis Post-Dispatch.