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Wachovia Corp. reached a nationwide settlement over its marketing of auction-rate securities, agreeing to buy back nearly $9 billion from investors.
Separately, Missouri-based Commerce Bank offered to repurchase $545 million in auction-rate securities from as many as 140 customers.
The settlement by Wachovia subsidiaries Wachovia Securities and Wachovia Capital Markets resolves allegations that they misrepresented the securities as safe, cash-equivalent products. Investors have not been able to access their money since the collapse of the auction-rate securities market.
As part of the settlement, Wachovia also agreed to pay a $50 million penalty to be distributed pro rata among the states, depending on each state's investment totals.
The Wachovia settlement comes about a month after securities regulators from Missouri and other states descended on the St. Louis headquarters of Wachovia Securities, looking for information about the company's sales practices. The offices were formerly the headquarters of A.G. Edwards, which Wachovia acquired last year for $6.8 billion.
The inquiry was launched after Missouri Secretary of State Robin Carnahan said the Missouri Division of Securities, a division of her office, had received more than 70 complaints from investors over some $40 million in frozen auction-rate securities.
Missouri was the lead state in a North American Securities Administrators Association task force set up to investigate the marketing and sale of auction-rate securities.
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 melted down 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. Some 65 percent of the agency's debt, or about $3.55 billion, consists of auction-rate securities backed by federally insured student loans.
The Wachovia settlement calls for the company to buy back all of the auction-rate securities it sold to clients, including $5.7 billion held by some 40,000 individuals, charities and small businesses. Those investors will be able to redeem their securities by Nov. 28. Larger, institutional investors will have until June 2009 to redeem their securities.
"I have received hundreds of calls from Missourians and investors around the nation who need their money to make medical payments, run their businesses, or retire as planned," Carnahan said at a news conference Friday in St. Louis. "I am pleased that six months of uncertainty and worry is over and that these investors will soon get their money back."
In a statement, Wachovia president and chief executive Robert K. Steel said: "We understand that unprecedented market conditions have created difficulties for our clients, particularly those holding auction-rate securities. We are pleased to announce a comprehensive solution for the liquidity needs of clients who purchased auction-rate securities at Wachovia and to resolve this matter with federal and state regulators."
The agreement comes a day after JP Morgan Chase & Co. agreed to buy back $3 billion in auction-rate securities and Morgan Stanley agreed to buy back $4.5 billion as part of settlements reached with New York State Attorney General Andrew Cuomo and other state officials. The two firms also will pay fines totaling $60 million.
Those two settlements, in turn, came about a week after Citigroup agreed to buy back $7.3 billion and UBS agreed to buy back $11.5 billion in auction-rate securities.
Cuomo's office said Friday that the five settling financial institutions accounted for more than half of all auction-rate securities sold in the United States.
Kansas City attorney Norm Siegel, whose law firm was recently appointed co-lead counsel for the plaintiffs in civil lawsuits against Wachovia over its marketing of auction-rate securities, applauded the settlements. But he said the private litigation would continue.
"We believe there's additional damage associated with the sale of these securities that has not been picked up by the settlements," he said.
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More information on Missouri-based Commerce Bank's repurchase plan -- C4
To reach Dan Margolies, call 816-234-4481 or send e-mail to dmargolies@kcstar.com.
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