Wells Fargo Agrees To Buy Back $1.3B In ARS

By Shannon Henson

Law360, New York (November 18, 2009) -- Wells Fargo & Co. has reached agreements to buy back about $1.3 billion in auction rate securities and pay a $1.9 million penalty to the state regulators that investigated allegations the bank misled customers about the riskiness of the investment.

The settlement requires unit Wells Fargo Investments to extend offers to repurchase auction rate securities from all customers nationwide by approximately Feb. 18, the North American Securities Administrators Association said Wednesday. The bank also reached an agreement with the California Attorney General's Office.

The "settlement demonstrates the value of states working in concert to benefit investors nationwide," said NASAA President and Texas Securities Commissioner Denise Voigt Crawford. "State securities regulators continue to lead the effort to ensure that investors receive redemptions for their frozen auction rate securities, which were marketed as safe and liquid investments, and we will continue to seek much-needed relief for investors who have suffered from the collapse of the ARS markets."

NASAA said that the settlement calls for Wells Fargo to buy back at par value all auction rate securities purchased through its brokerage unit by investors before Feb. 13, 2008.

Wells Fargo must also fully reimburse certain investors who sold their auction rate securities at a discount after the market failed. And it must consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by investors covered by the settlement as a result of their inability to access their funds.

In return, the states will agree to terminate their probes into the bank's marketing and sale of auction rate securities to investors.

State securities regulators in California, Georgia, Missouri, Oregon, Texas, Utah and Washington were investigating whether Wells Fargo misled investors by falsely assuring them that auction rate securities were a safe, liquid alternative to cash, certificates of deposit or money market funds.

The ARS markets froze in February 2008, prompting complaints from investors who could not withdraw money from their accounts. When the markets failed, customers of Wells Fargo Investments nationwide held an estimated $2.95 billion in auction rate securities, NASAA said.

California Attorney General Edmund G. Brown Jr. said that Wells Fargo persuaded thousands to purchase the securities with promises of “robust returns.” He brought a suit in April seeking to restore the cash value of the auction rate securities California investors bought from Wells Fargo.

“Based on misleading advice, investors bought these risky securities. Now, retail investors and small businesses are finally getting their money back,” Brown said.

Wells Fargo said the buyback offer will generally be available to retail clients, individual investors, some and any other customers having less than $10 million in investable assets as of Jan. 31, 2008.

“We have been working with ARS issuers since the auction rate market froze, and while there has been progress, redemptions by issuers have not occurred as fast as anyone would have hoped or predicted," said Charles W. Daggs, chief executive officer of Wells Fargo Investments, LLC. "We are glad to have resolved this for our customers through an actual repurchase of their ARS.”

In October, JPMorgan Chase & Co. reached a similar deal, agreeing to offer buybacks of $480 million. Bank of America Corp., Citigroup Inc., Wachovia Corp., Merrill Lynch & Co. and Comerica Inc. have also reached settlements in connection with their auction rate securities practices.

The investigation into possible violations by Wells Fargo is part of a larger effort to address problems in connection with the offer and sale of auction rate securities, NASAA said.

In April 2008, NASAA announced the formation of a multistate task force, comprised of securities regulators in 12 states, to investigate whether Wall Street firms had systematically misled investors when placing them in auction rate securities.

--Additional reporting by Christine Caulfield