Home > Auction-Rate Probe Hits Wachovia

Auction-Rate Probe Hits Wachovia

July 17, 2008

In the latest sign of a regulatory crackdown of the auction rate
securities market, a team of 10 state securities regulators showed up at
the St. Louis headquarters of Wachovia Securities Thursday to demand
documents and conduct interviews about the firm's sales and marketing
practices, according to Missouri authorities.

The group includes investigators from Missouri, Illinois, Massachusetts,
New Jersey, Pennsylvania and other states, all of which are part of a
task force of states regulators investigating auction rate securities
and led by the  Massachusetts securities regulator. They are all members
of the North American Securities Administrators Association.

The Missouri Secretary of State Robin Carnahan's office has also
subpoenaed more than a dozen Wachovia Securities agents and executives
seeking more information and records on its auction rate securities
business, according to a statement issued by the office.

The Missouri Securities Division launched an investigation in April into
Wachovia Securities and others requesting records and information.
Wachovia has not fully complied with requests, "prompting today's onsite
inspection," according to the regulator's statement. The Securities and
Exchange Commission also requested information from Wachovia earlier
this year.

The state's Securities Division is also conducting investigations into
auction rate securities sales at Commerce Bank N.A. and Stifel, Nicolaus
& Co. Inc.

Officials at Wachovia did not immediately comment. No charges against
Wachovia have at this point grown out of the investigations.

"Hundreds of Missouri investors have called my office because of
inability to access their money," said Ms. Carnahan in the statement.
She added that she aims to take actions to "make these investors whole."

The action comes after over 70 formal complaints were filed with the
Missouri Securities Division over the last four months -- all from
investors that feel they were misled in their purchase of auction rate
securities, according to the statement.

The $330 billion market for auction rate securities allowed issuers such
as municipalities, student loan companies, closed end mutual funds and
financial institutions to borrow money for the long term, but at short
term, or lower, interest rates.

The borrower's rates were set weekly or monthly in auctions that were
conducted by Wall Street firms. When the brokerages stopped supporting
the auctions as buyers-of-last-resort this past February, the market
seized and investors were left unable to easily sell their securities
and access their money.

Wachovia is the subject of arbitration clams and a class action lawsuit
that was filed in New York in March. The basis of the claim is that
investors were told they were buying securities "equivalent to cash or
money market funds," according to the complaint. It also alleges that
Wachovia "knew, but failed to disclose to investors, material facts
about auction rate securities."

Wachovia was a mid-sized player in the auction rate securities business,
and is the parent to the St. Louis-based brokerage firm formerly known
as A.G. Edwards & Sons, Inc.

Several Wall Street firms have been the subject of civil litigation in
the form of class action lawsuits and over 100 arbitration claims filed
by investors, in addition to federal and state regulatory
investigations.

Massachusetts' securities regulator filed a civil fraud lawsuit last
month against UBS AG, which was one of the largest players in the
auction rate securities market. The regulators allege the firm knowingly
misled investors to buy auction-rate securities knowing the market was
disintegrating. Massachusetts regulators also accused UBS of books and
records violations for stalling in making its business records available
to regulators.

UBS has said it will defend itself against the charges. 

In the only known criminal matter to come out of the melt down of the
auction rate securities market, the Justice Department's U.S. attorney's
office for New York's Eastern District is conducting an investigation
into whether two former Credit Suisse Group brokers lied to investors
about how they placed their money into auction rate securities.

Credit Suisse, which is not a target of the investigation, according to
people familiar with the matter, has said the firm immediately suspended
the two brokers when problems arose about a year ago. The employees
resigned from Credit Suisse in September of 2007.

The U.S. attorney's office and Paul Weinstein a lawyer for one of the
brokers previously declined to comment on the investigation for a Wall
Street Journal article last week. Kenneth Breen, a lawyer representing
the other broker said previously his client shouldn't be blamed for an
unforeseeable market failure and that the investors knew the risks. 

Wachovia Corp.'s stock has fallen 80% in the past year along with many
banks and financial institutions, as the company takes large losses on
its loans. Recently, the stock has been under pressure amid turnover in
the chief executive's office and news the company will report a $2.6 to
$2.8 billion loss in the second quarter.

Firms are under pressure to buy back the securities they sold to
investors, but the cost would be burdensome for many banks and brokerage
firms already under pressure from the credit crunch.

Wednesday UBS announced a plan to purchase up to $3.5 billion of
tax-exempt auction rate securities from its clients, then package it up
and sell it to money market fund managers. If the plan works, this would
represent less than 15% of its clients total auction rate securities'
holdings.

As reported in the Wall Street Journal