As the SEC’s investigation of the auction rate securities (ARS) market continues, the Commission on February 5 announced a settlement with Wachovia Securities LLC that will provide more than $7 billion in liquidity to thousands of customers who invested in ARS before the market for those securities collapsed.
The settlement resolves the SEC’s charges that Wachovia, headquartered in St. Louis, misled investors regarding the liquidity risks associated with ARS that it underwrote, marketed and sold. “The Enforcement Division negotiated unprecedented settlements-in-principle with a number of broker/dealer firms, including Wachovia,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, in a statement.
Merri Jo Gillette, Director of the SEC’s Chicago Regional Office, said in the statement that, “Wachovia did not ensure that its sales force understood the ARS products it was selling. As a result, Wachovia’s customers were not adequately informed of the nature and risks associated with ARS and were caught holding illiquid securities when the ARS market froze.”
The SEC’s complaint, filed in the U.S. District Court for the Northern District of Illinois, alleges that Wachovia and A.G. Edwards & Sons, Inc., whose broker/dealer operations were consolidated into Wachovia on January 1, 2008, misrepresented to customers that ARS were safe, highly liquid investments that were comparable to cash or money market instruments. According to the SEC’s complaint, “Wachovia reinforced the perception of liquidity by routinely purchasing ARS from A.G. Edwards’ customers between auctions, without telling customers that Wachovia’s willingness to do so depended upon the continued success of the auctions.”