Wachovia settles with ARS investors for $7B

Wachovia Securities LLC today reached a settlement with the SEC in which it agreed to pay investors more than $7 billion to buy back failed auction rate securities. St. Louis-based Wachovia and its unit A.G. Edwards & Sons had been accused of misrepresenting ARS as safe, liquid investments that are comparable to cash and money market investments. According to the Securities and Exchange Commission’s complaint, salespeople working for Wachovia did not adequately disclose that the auctions could fail, making the securities illiquid. The brokers also did not properly reveal that the auction of the securities could depend on broker-dealers’ placing support bids, and that Wachovia could stop purchasing ARS from A.G. Edwards’ customers between auctions, according to the regulator. When the auctions had failed in February 2008, Wachovia investors — primarily retail customers — were stuck with more than $14 billion in illiquid ARS, according to the SEC. Under the settlement, Wachovia agreed to repurchase ARS from all customers who bought them on or before Feb. 13, 2008. In an earlier phase of the buyback, which ended Nov. 28, the firm bought more than $6.2 billion of eligible securities from investors with account values of less than $10 million, non-profits and religious organization. In the second phase of the settlement, the firm will begin to repurchase securities from all other investors beginning June 10 and ending June 30. Also, Wachovia will pay the investors who sold their ARS below par between Feb. 13, 2008 and Nov. 10, 2008, the difference between par and the sale price of the security. Wachovia will also repay customers who took loans after Feb. 13 due to lack of liquidity. Finally, any customers with consequential damages stemming from the ARS’ illiquidity may participate in arbitrations held by the Financial Industry Regulatory Authority Inc. of Washington and New York.