The SEC charged Wachovia Bank on Thursday with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds.
Wachovia neither admitted nor denied the allegations in the SEC’s complaint, and has consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933; it has also agreed to pay a penalty of $25 million and disgorgement of $13,802,984 with prejudgment interest of $7,275,607. The settlement is subject to court approval.
The Securities and Exchange Commission alleged that Wachovia brought in millions of dollars in illicit gains during an eight-year period from 1997 to 2005 by fraudulently rigging at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico.
Using a practice known as “last looks,” Wachovia won some bids by getting information from bidding agents about competing bids. It also won bids through “setups” in which bidding agents deliberately obtained nonwinning bids from other providers so that it could rig the field in Wachovia’s favor. In addition, said the SEC, Wachovia facilitated some bids rigged for others to win by deliberately submitting nonwinning bids.
Portions of the proceeds of municipal securities sales to investors often are not spent right away by municipalities, but instead are temporarily invested in municipal reinvestment products until the money is used for the intended purposes. Typically these products are financial instruments designed to meet municipalities’ specific collateral and spend-down needs, such as guaranteed investment contracts, repurchase agreements, and forward purchase agreements.