Wachovia Securities LLC agreed to the settlement, which resolved charges from the SEC that the bank misled investors regarding the liquidity risks associated with auction-rate securities that it underwrote, marketed and sold.
The SEC's complaint, filed in the U.S. District Court for the Northern District of Illinois, alleged that Wachovia and A.G. Edwards & Sons Inc., whose broker-dealer operations were consolidated into Wachovia on Jan. 1, 2008, misrepresented to customers that ARS were safe, highly liquid investments that were comparable to cash or money market instruments. According to the SEC's complaint, Wachovia reinforced the perception of liquidity by routinely purchasing ARS 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.
Wachovia became aware of mounting evidence in late 2007 and early 2008 that put the firm on notice that the risk of auction failures had materially increased, according to the SEC. Wachovia continued to market ARS to its customers as highly liquid investments. On Feb. 14, 2008, Wachovia followed the lead of other broker-dealers and decided to stop supporting auctions, the SEC said. Without broker-dealer support, ARS auctions failed and thousands of Wachovia's customers were left holding billions of dollars in illiquid ARS, without any practical means of redeeming, selling or deriving value from them.
Wachovia Capital Markets LLC, an affiliate of Wachovia, has voluntarily agreed to provide identical remedial relief to Wachovia Capital customers who purchased ARS in Wachovia Capital accounts.