8.15.2008 Wachovia Securities, LLC and Wachovia Capital Markets, LLC (collectively “Wachovia”) settled charges brought by the SEC related to the issuance and sale of auction rate securities (“ARS”). The SEC announced that investors, small businesses, and charities who purchased ARS through Wachovia could receive up to $9 billion to fully restore their losses and liquidity through a preliminary settlement that has been reached in principle with Wachovia.

The SEC alleged that Wachovia made misrepresentations to thousands of its customers about the liquidity risk associated with ARS. Specifically, Wachovia marketed ARS to investors as cash alternatives, and represented that it would provide one-day or same-day liquidity by purchasing customers' ARS. However, Wachovia failed to adequately disclose that the liquidity of these securities was premised on Wachovia providing support bids for auctions it managed when there was not enough customer demand, and that its offer to provide one-day liquidity could be withdrawn at any time. When Wachovia stopped supporting auctions in February 2008, there were widespread auction failures and Wachovia stopped making good on its offer to provide one-day liquidity.

Under the terms of the agreement in principle, which are subject to finalization, review and approval by the SEC:

  • Wachovia agrees to repurchase ARS from all investors who purchased ARS from Wachovia prior to the collapse of the ARS market in mid-February 2008. In the wake of the market collapse, Wachovia investors are currently unable to liquidate approximately $8.8 billion in ARS holdings. Under the proposed settlement, Wachovia will offer to purchase roughly $5.7 billion of ARS held by individual investors, small businesses, and charitable organizations. The buy back will begin on November 10, 2008 and conclude by November 28, 2008. Wachovia also will offer to purchase the roughly $3.1 billion of ARS held by all other Wachovia investors in a buy back that will occur between June 10 and June 30, 2009.
  • Wachovia Securities, LLC will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934 (the “1934 Act”), and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
  • Until Wachovia actually provides for the liquidation of the ARS, Wachovia will provide customers no net loans that will remain outstanding until the ARS are repurchased.
  • To the extent customers have incurred consequential damages beyond the loss of liquidity in the customer's holdings of ARS, Wachovia will participate in a special arbitration process that the customer may elect and that will be overseen by the Financial Industry Regulatory Authority (“FINRA”), whereby Wachovia will not contest liability for its misrepresentations or omissions concerning ARS.
  • Wachovia will provide notice to all customers of the settlement terms.
  • Wachovia faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether Wachovia has satisfactorily completed its obligations under the settlement, and the costs incurred by Wachovia in meeting those obligations, including other penalties incurred and the cost of remediation.

Click http://www.sec.gov/news/press/2008/2008-176.htm to access a press release about the administrative action.