Wachovia Agrees to Preliminary Auction Rate Securities Settlement That
Would Offer Approximately $9 Billion to Investors
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FOR IMMEDIATE RELEASE
2008-176
Washington, D.C., Aug. 15, 2008 — The Securities and Exchange
Commission's Division of Enforcement today announced that investors,
small businesses, and charities who purchased auction rate securities
(ARS) through Wachovia Securities, LLC and Wachovia Capital Markets,
LLC (collectively Wachovia) could receive up to $9 billion to fully
restore their losses and liquidity through a preliminary settlement
that has been reached with Wachovia.
The proposed charges stem from alleged misrepresentations made by
Wachovia 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to provide one-day liquidity could be withdrawn at any time.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.
Linda Chatman Thomsen, Director of the SEC's Division of Enforcement,
said, "We continue to work with state regulators and others to bring
real relief to investors who were not given the forthright information
they needed in the process of purchasing auction rate securities. This
agreement in principle with Wachovia, if approved by the Commission,
will permit tens of thousands of Wachovia investors to get their money
back."
Under the terms of the agreement in principle, which are subject to
finalization, review and approval by the Commission:
* 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 no later than Nov. 10, 2008
and conclude by Nov. 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 begin no later than
June 10, 2009 and conclude by 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, 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.
The SEC acknowledges the substantial assistance and cooperation from
the Missouri Secretary of State, the North American Securities
Administrators Association (NASAA), the New York Attorney General and
FINRA.
The SEC's investigation into individuals and other entities that
participate in the ARS market is continuing.
# # #
For more information, contact:
Merri Jo Gillette
Regional Director, SEC's Chicago Regional Office
(312) 353-9338
Robert J. Burson
Associate Regional Director, SEC's Chicago Regional Office
(312) 353-7428
Modified: 08/15/2008
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