SEC Settles Action Charging Wachovia Corporation with Proxy Disclosure and Other Reporting Violations Involving the 2001 Merger Between First Union Corporation and Old Wachovia Corporation


Wachovia Agrees to an Injunction and $37 million penalty

Washington, D.C., November 4, 2004 -- The Securities and Exchange Commission today filed a settled civil action in the United States District Court for the District of Columbia against Wachovia Corporation (Wachovia) for violations of proxy disclosure and other reporting requirements in connection with the 2001 merger between First Union Corporation (First Union) and Old Wachovia Corporation (Old Wachovia). Under the settlement, Wachovia must pay a $37 million penalty and is to be enjoined from future violations of the federal securities laws.

The Commission’s Complaint alleges that Old Wachovia and First Union failed to disclose in quarterly reports and in a joint proxy statement-prospectus filed in connection with the merger, that Old Wachovia intended to – and did in fact – purchase $500 million of First Union common stock (FTU) during the period when First Union and SunTrust Banks, Inc. (SunTrust) had launched competing bids for Old Wachovia. Old Wachovia favored First Union’s bid, which offered Old Wachovia shareholders shares of First Union stock in exchange for their Old Wachovia shares. As a result, Old Wachovia’s shareholders were unable to evaluate the effect of Old Wachovia’s purchases of FTU shares before voting on the competing bids. During the course of the SEC staff’s investigation into this matter, Wachovia provided incomplete and untimely document productions and failed to ensure comprehensive and complete responses to requests made and subpoenas issued by the SEC staff. These production deficiencies and delays unnecessarily prolonged the SEC staff’s investigation. The Commission took this conduct into account in setting the penalty in this case.

Without admitting or denying the allegations in the complaint, Wachovia consented to entry of a judgment alleging violations of Sections 13(a) and 14(a) of Securities Exchange Act of 1934 and Rules 12b-20, 13a-13 and 14a-9 thereunder.

“A company must provide full and accurate disclosure with respect to its activities in the market during a takeover battle and cannot just rely on boiler plate disclosures,” said Thomas C. Newkirk of the SEC’s Division of Enforcement.

“The substantial penalty here reflects not only the seriousness of the disclosure violations but also the Company’s failure to meet its legal obligations in the course of an SEC investigation,” added Stephen M. Cutler, Director of the Enforcement Division at the SEC.

The Commission’s complaint alleges:

  • On April 16, 2001, First Union and Old Wachovia announced that they had signed a stock-for-stock merger proposal, which offered Old Wachovia shareholders two shares of First Union common stock (NYSE:FTU) for each share of Old Wachovia common stock (NYSE:WB) plus either a one-time special payment of $0.48 or two preferred shares with dividends.
  • On May 4, 2001, Old Wachovia began purchasing shares of FTU and continued to do so on numerous days until June 28, 2001, the day before a restrictive period, pursuant to Regulation M, commenced. During this time period, Old Wachovia purchased a total of 16,491,000 shares of FTU for a total purchase price of $551,281,036.
  • Almost all of Old Wachovia’s purchases were made pursuant to a May 2, 2001 Old Wachovia authorization signed by its Investment Management Committee, which authorized the purchase of up to $500 million worth of FTU stock during the period when Old Wachovia was repurchasing its own stock. Because of its desire to consummate the merger with First Union, Old Wachovia had an interest in ensuring that First Union’s stock did not become significantly less valuable in relation to Old Wachovia’s stock as a result of Old Wachovia’s repurchases of its own stock, because such a change would make the First Union offer appear less valuable. This interest intensified after SunTrust made a hostile takeover bid for Old Wachovia on May 14, 2001, which initially offered a higher premium to Old Wachovia’s shareholders relative to First Union’s proposal.
  • On June 28, 2001, after the initial authorization had been exhausted, Old Wachovia’s Investment Management Committee authorized the purchase of an additional $55 million worth of FTU stock, which Old Wachovia used to purchase additional FTU stock on June 28. First Union was aware of Old Wachovia’s purchases at the time they were made.
  • Between May 2 and May 8, 2001, Old Wachovia bought approximately $18 million of FTU shares on the open market. Old Wachovia stopped buying on May 8, pending regulatory clearance of its purchases under the Hart-Scott-Rodino Act. On May 31, 2001, Old Wachovia resumed buying FTU shares. Between May 31 and June 28, 2001, Old Wachovia purchased approximately $537 million of FTU shares.
  • Old Wachovia knew or should have known that its First Union purchases during this period could have the effect of supporting the price of FTU, which in turn would support the value of First Union’s merger proposal and make it appear more attractive to Old Wachovia shareholders. In fact, on June 25, 2001, Old Wachovia purchased 2.85 million shares of FTU, or 53% of the total trading volume for FTU on that day. The stock closed approximately $.50 higher on June 25 and the closing price on that day was included in the joint proxy statement sent to shareholders.
  • In connection with its FTU purchases, Old Wachovia instructed the broker executing the FTU purchases to do so in compliance with Rule 10b-18, a safe harbor provision applicable to a company purchasing its own securities or those of an affiliate, in this case First Union. In October 2003, subsequent to the transactions at issue in this case, the Commission adopted amendments to certain provision of Rule 10b-18, which provides a ‘safe harbor’ from liability for manipulation in connection with purchases by an issuer and certain related persons of the issuer’s common stock. Release 34-48766 (Nov. 10, 2003), 68 FR 64952. The amendments clarified that the safe harbor is not available for purchases effected from the time of public announcement of a merger, acquisition, or similar transaction involving a recapitalization, until the earlier of the completion of such transaction or the completion of the vote by target shareholders, subject to certain exceptions. 68 FR at 6495. The Commission alsoemphasized that "regardless of whether an issuer’s repurchases technically satisfy the conditions of the Rule, the safe harbor is not available if the repurchases are fraudulent or manipulative, when viewed in the totality of the facts and circumstances surrounding the repurchases (i.e. facts and circumstances in addition to the volume, price, time, and manner of the repurchases)." 68 FR 64953. "To come within the safe harbor, however, an issuer's repurchases must satisfy (on a daily basis) each of the section's four conditions. Failure to meet any one of the four conditions will remove all of the issuer's repurchases from the safe harbor for the day." 17 240.10b-18 Preliminary Note 1.

With respect to these purchases, neither First Union nor Old Wachovia disclosed in their Forms 10-Q and 10-Q/A filed in May and June 2001, or in the proxy statement-prospectus sent to over two hundred thousand shareholders on June 29, 2001, that: a) Old Wachovia authorized the purchase of FTU shares; b) subject to regulatory filings, Old Wachovia intended to purchase up to $500 million worth of FTU shares; and c) the total number of FTU shares that Old Wachovia purchased in May and June 2001. This material information was not disclosed until August 2001, after the shareholders voted on the merger. Old Wachovia should have publicly disclosed more detailed information about its purchases of FTU stock so that the market would be able to evaluate the effect of those purchases on FTU’s stock price during that period. By failing to disclose this material information, First Union and Old Wachovia violated Sections 13(a) and 14(a) of the Securities Exchange Act of 1934.

Thomas C. Newkirk, (202) 942-4550
Laura Josephs, (202) 942-7872

See Also:  Litigation Release 18958
Last modified: 11/4/2004