The SEC said Tuesday that Wells Fargo Securities agreed to pay more than $11 million to settle charges that Wachovia Capital Markets engaged in misconduct in the sale of two collateralized debt obligations (CDOs), including one sold to the Zuni tribe and an individual investor four years ago with “undisclosed excessive markups.”
The CDOs were tied to the performance of residential mortgage-backed securities and were hurt as the U.S. housing market came under distress in late ‘06 and early ‘07. One, Grand Avenue II, was sold to investors by a registered rep with Wachovia Securities in El Paso, Texas.
“Wachovia caused significant losses to the Zuni Indians and other investors by violating basic investor protection rules – don’t charge secret excessive markups, and don’t use stale prices when telling buyers that assets are priced at fair market value,” said Robert Khuzami (left), director of the SEC’s division of enforcement, in a press release.
The SEC’s order found that, with the first CDO -- Grand Avenue II, Wachovia marked down $5.5 million of equity to 52.7 cents on the dollar after the deal closed and it was unable to find a buyer, according to the SEC. Months later, the Zunis and the individual investor paid 90 and 95 cents on the dollar. Unbeknownst to them, these prices were over 70% higher than the price at which the equity had been marked for accounting purposes, the SEC says.
With the second CDO – Longshore3, Wachovia misrepresented that it acquired assets from affiliates “on an arm’s-length basis” and “at fair market prices” when, in fact, 40 residential mortgage-backed securities were transferred from an affiliate at above-market prices. Wachovia Capital Markets transferred these assets at stale prices in order to avoid losses on its own books.
In agreeing to pay $6.75 million in disgorgement and $4.45 million in penalties – $7.4 million of which will be returned to the investors through a Fair Fund -- Wells Fargo Securities did not admit or deny the findings.
“The settlement relates to actions taken by Wachovia in 2007 in the early days of the credit crisis,” Wells Fargo said in a statement on Wednesday. “The issues presented here were complex, and Wells Fargo is pleased to have resolved this matter with the SEC.”