Without admitting or denying Securities and Exchange Commission charges that Wachovia Securities misled investors about the risk that the market for auction-rate securities would shut down, Wachovia and the SEC today put the final touches on a settlement “that will provide more than $7 billion in liquidity to thousands of customers,” according to the commission.
The settlement will reward investors who put money into ARS that the St. Louis-based broker-dealer underwrote, marketed, and sold before auctions at which the securities could be redeemed ceased, the SEC stated in a release.
“Wachovia did not ensure that its sales force understood the ARS products it was selling. As a result, Wachovia’s customers were not adequately informed of the nature and risks associated with ARS and were caught holding illiquid securities when the ARS market froze,” said Merri Jo Gillette, director of the SEC’s Chicago office.
Filed in the U.S. District Court for the Northern District of Illinois, the SEC’s complaint alleged that Wachovia and A.G. Edwards & Sons, Inc., whose broker-dealer operations were consolidated into Wachovia on Jan. 1, 2008, misled investors by claiming “that ARS were safe, highly liquid investments that were comparable to cash or money market instruments.”
Wachovia, a subsidiary of Wachovia Securities Financial Holdings, buttressed the impression that ARS were liquid by “routinely” buying the securities from A.G. Edwards’ customers between auctions, “without telling customers that Wachovia’s willingness to do so depended upon the continued success of the auctions,” according to the complaint.
Subject to court approval, the settlement would require Wachovia to offer to buy back ARS in two phases from all investors who bought them from the firm on or before Feb. 13, 2008. In the first phase, which ended on Nov. 28, 2008, Wachovia offered to buy ARS from accounts that are worth up to $10 million held by individuals, nonprofits, religious organizations, and others. As of November 28, the broker-dealer had bought more than $6.2 billion of the securities. In the second phase, between June 10 and June 30, Wachovia will offer to buy ARS held by all other investors.
Under the terms of the settlement, the firm will pay customers who sold their ARS below par between Feb. 13, 2008, and Nov. 10, 2008 the difference between par and the sale price of the securities, “plus reasonable interest.” according to the SEC, which says its probe of the ARS market is continuing.