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Wells Fargo to Pay $1.4 Billion in Auction-Rate Securities Settlement
The Recorder
November 19, 2009
Art: Kai Jaffe
Wells Fargo & Co. will buy back an estimated $700 million in troubled auction-rate securities from California investors under terms of a settlement announced by Attorney General Jerry Brown on Wednesday.
The banking giant will also pay the AG's office $600,000 to cover investigation expenses and monitoring of the settlement's terms. In exchange, Brown will drop the civil lawsuit he filed against Wells Fargo in San Francisco Superior Court in April.
"Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold," Brown said.
In a separate deal reached with the North American Securities Administrators Association -- which included investigators from the California Department of Corporations and other states' regulators -- the San Francisco-based banker has agreed to repurchase nonliquid auction rate securities totaling approximately $700 million from non-California residents. The Department of Corporations is finalizing a separate consent order with Wells Fargo and will receive an undetermined amount of penalties from the company.
"We have been working with ARS issuers since the auction rate market froze, and while there has been progress, redemptions by issuers have not occurred as fast as anyone would have hoped or predicted," Wells Fargo Investments CEO Charles Daggs said in a statement. "We are glad to have resolved this for our customers."
Brown accused three subsidiaries of the bank of peddling the debt instruments as safe, cash-like investments that could be sold at periodic auctions. But as the subprime mortgage crisis hit, the auctions failed and investors could no longer cash out.
Under terms of the deal with Brown, individuals, charities, trusts and corporations who purchased auction-rate securities worth less than $10 million as of Jan. 31, 2008, are eligible for the buyback. The securities had to be purchased before Feb. 14, 2008, and they had to have failed at auction at least once since then.
Customers who sold their securities at a loss between Feb. 13, 2008, and Wednesday will be offered the difference between their sale price and par, plus "reasonable" interest, according to the agreement. Since 2008, lawsuits and investigations brought by state regulators have pressured firms to repurchase more than $61 billion in auction-rate securities, according to the North American Securities Administrators Association.
At Girard Gibbs, the San Francisco firm serving as lead counsel in 13 auction-rate securities class actions, attorneys were still reviewing terms of the attorney general's settlement to see whether their clients will be made whole.
While some plaintiffs have recovered their investments through past broker-dealer buybacks, others, particularly corporations, have been excluded by terms of legal settlements, said Girard Gibbs Managing Partner Daniel Girard. Settlement negotiators often argue that corporations should have known better the risks of auction-rate securities than individual investors, Girard said. Girard and his colleagues contend that no one could have known the risky nature of the investment vehicles without "inside information."
Girard Gibbs still has litigation pending on behalf of investors excluded from settlements as well as plaintiffs targeting securities remarketers that have not settled with regulators.
