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DISB Finalizes Settlement Agreement with Wachovia

Monday, October 19, 2009

DISB Finalizes Settlement Agreement with Wachovia

The investigation into Wachovia’s role in the marketing of ARS is part of a larger state-led effort to address problems in connection with ARS investments.

(Washington, DC) — Acting Commissioner Gennet Purcell of the DC Department of Insurance, Securities and Banking (DISB) recently signed a final Consent Order requiring Wachovia Securities to complete or confirm its repurchase of auction-rate securities (ARS) from District of Columbia clients to settle allegations that the firm’s securities dealers misled investors about the safety of the ARS market.

“DISB is holding Wachovia accountable for engaging in unethical behavior by selling auction rate securities to District of Columbia investors without full disclosure of the risks involved,” said Acting Commissioner Purcell who signed the Consent Order on September 15, 2009. “This action sends a strong message that states will not tolerate unethical and unlawful behavior.”

Although marketed and sold to investors as safe, liquid, and cash-like investments, ARS are actually long-term investments subject to complex auction processes that failed in early 2008, leading to illiquidity and lower interest rates for investors.

“From the day these auctions first failed, DISB has been seeking much needed relief and liquidity for investors stuck with auction rate securities,” the Acting Commissioner added. “I am pleased that Wachovia has agreed to do what’s right by repurchasing clients’ positions, and I expect other firms that sold these securities in the District of Columbia to do the same.”

The order also requires Wachovia to pay a $311,765.11 fine to the District of Columbia. The fined amount represents the District’s pro-rata share of a $50 million settlement negotiated by a multistate task force of state regulators formed by the North American Securities Administrators Association (NASAA).  During the investigation, regulators discovered that Wachovia’s securities dealers failed to adequately inform customers and train employees on the risks associated with buying ARS.

The investigation into Wachovia’s role in the marketing of ARS is part of a larger state-led effort to address problems in connection with ARS investments. Early in 2008, state offices began receiving complaints from investors throughout the country. As a result, in April, 12 states formed a task force to investigate whether the nation’s prominent Wall Street firms had systematically misled investors when placing them in ARS.

The Consent Order is the final step in the District’s ARS case against Wachovia, which was tentatively settled February 2009.  However, this is the first of other settlements that DISB is actively negotiating related to ARS sold in the District of Columbia by other Wall Street firms.