Regulators probe St. Louis Wachovia Securities office

Jul 18, 2008 (The Kansas City Star - McClatchy-Tribune Information Services via COMTEX) -- WB | Quote | Chart | News | PowerRating -- Securities regulators from Missouri and other states descended Thursday on the downtown St. Louis headquarters of Wachovia Securities after receiving complaints from investors over frozen auction-rate securities.

The regulators sought documents concerning the firm's sales practices and marketing strategies, according to a release from Missouri Secretary of State Robin Carnahan's office.

Carnahan said her office was also investigating complaints filed against Commerce Bank and Stifel Nicolaus & Co., a St. Louis brokerage. Both marketed the securities.

During the last four months, more than 70 complaints have been filed with the Missouri Securities Division, a division of Carnahan's office, over some $40 million in frozen auction-rate securities. That was the most complaints the office has received about any single matter during her tenure, she said.

Chuck Kim, an executive vice president at Commerce Bancshares, which has dual headquarters in Kansas City and St. Louis and owns Commerce Bank, said Thursday the company was working with its auction-rate customers on a "case by case basis" to address their liquidity problems.

He acknowledged that Commerce had received a request for information from Missouri regulators and said it was cooperating with them.

Wachovia issued a statement saying that many securities firms, including Wachovia, "were responding to inquiries from regulators about the auction rate securities industry. The discussions that are occurring today are a part of this ongoing process."

Stifel officials could not be reached.

Wachovia is a unit of Charlotte, N.C.-based Wachovia Corp., the country's fourth-largest banking company.

Auction-rate securities are long-term debt instruments bought and sold at weekly and monthly auctions where new interest or dividend rates are set. The instruments were marketed as alternatives to money-market funds and touted as being safe and liquid.

But in February, the nation's $330 billion auction-rate market collapsed in the wake of the global credit crunch, causing the auctions to fail and banks to turn away customers who sought to cash in their auction-rate investments. That, in turn, drove up interest rates for auction-rate security issuers such as municipalities and student-loan providers, including Missouri's student loan agency, the Missouri Higher Education Loan Authority.

The agency, known by its acronym MoHELA, suspended its loan consolidation and private lending services in February. About 65 percent of the agency's debt, or more than $1 billion, consists of auction-rate securities backed by federally insured student loans.

A St. Louis-area couple recently filed suit over the auction-rate securities issued by MoHELA, hoping to recover $3.8 million they invested. The couple alleged that A.G. Edwards failed to advise them that the securities were not cash alternatives and were of "questionable liquidity."

"This same story has been told to me over and over again by people all over the country," said St. Louis attorney L. Steven Goldblatt, who initially represented the couple.

"People were told that the securities were cash equivalents or cash alternatives, that they were absolutely safe and insured, and that they could be redeemed at any time. That wasn't true."

The lawsuit over MoHELA's auction-rate securities is just one of many across the country alleging that the instruments were misleadingly billed as safe, secure and liquid. Some of the nation's biggest banks have been named as defendants, including Citigroup, Deutsche Bank, Merrill Lynch, Morgan Stanley, UBS and Wachovia.

Wachovia first disclosed in May that it had received subpoenas from federal and state regulators over its sale of auction-rate securities. It also said it had been named in a class-action lawsuit filed in federal court in New York on behalf of buyers of the securities. The plaintiffs alleged Wachovia misrepresented the securities' quality, risk and characteristics.

The Kansas City law firm of Stueve Siegel Hanson, which has been active in much of the auction-rate securities litigation around the country, was recently appointed co-lead counsel for the plaintiffs in the case against Wachovia. Norm Siegel, a partner with the firm, said auction-rate securities typically were sold to large institutions, which once held up to 90 percent of them.

More than three years ago, though, accounting firms began telling their institutional clients that they couldn't record the instruments as cash or cash equivalents. That's when dealers started marketing the securities to ordinary Americans, Siegel said.

"The minimum purchase used to be $250,000. They lowered it to $25,000," he said.

In a complaint filed against UBS last month, Massachusetts regulators alleged that UBS "stepped up its sales campaign to investors even as, and because, large corporate cash managers were shunning auction-rate securities and its own inventory was ballooning."

The Missouri securities division launched its investigation in April.

Carnahan's office said Wachovia had not "fully complied" with its requests for documents, e-mails, transcripts and other records. That triggered Thursday's on-site investigation involving 10 inspectors from Missouri, Illinois, Massachusetts and other states.

To reach Dan Margolies, call 816-234-4481 or send e-mail to dmargolies@kcstar.com.

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