U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission


Litigation Release No. 20885 / February 5, 2009

Securities and Exchange Commission v. Wachovia Securities, LLC, Civil Case No. 09 CV 743 (N.D. Ill.)

SEC Finalizes ARS Settlement with Wachovia, Providing Over $7 Billion in Liquidity to Investors

The Securities and Exchange Commission today announced a settlement with Wachovia Securities, LLC that will provide more than $7 billion in liquidity to thousands of customers who invested in auction rate securities (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 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 Jan. 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.

The SEC's complaint alleges that Wachovia became aware of mounting evidence in late 2007 and early 2008 that put the firm on notice that the risk of auction failures had materially increased. Wachovia, nevertheless, continued to market ARS to its customers as highly liquid investments. On Feb. 14, 2008, Wachovia followed the lead of other broker-dealers and decided to stop supporting auctions. Without broker-dealer support, ARS auctions failed and thousands of Wachovia's customers were left holding billions of dollars in illiquid ARS, without any practical means of redeeming, selling or deriving value from them.

Without admitting or denying the SEC's allegations, Wachovia agreed to be permanently enjoined from violations of Section 15(c) of the Securities Exchange Act of 1934, the broker-dealer fraud provision, and to comply with a number of undertakings, some of which are set forth below. After Wachovia has completed its obligations under the settlement agreement, the SEC will decide whether to seek a financial penalty.

The settlement, which is subject to court approval, provides, among other things, that:

  • Wachovia will offer to buy back ARS from all investors who purchased ARS from Wachovia into accounts maintained at Wachovia on or before Feb. 13, 2008. Wachovia's buyback has two phases. In the first phase, which ended on Nov. 28, 2008, Wachovia offered to purchase ARS held by natural persons, not-for-profit and religious organizations and for other accounts with account values or household values up to $10 million. As of Nov. 28, it purchased over $6.2 billion of eligible ARS from customers. Second, beginning no later that June 10 and ending no later than June 30, 2009, Wachovia will offer to purchase ARS held by all other investors.
  • Wachovia will pay customers who sold their ARS below par between Feb. 13, 2008, and Nov. 10, 2008, the difference between par and the sale price of the ARS, plus reasonable interest.
  • Wachovia will compensate customers who took out loans from Wachovia after Feb. 13, 2008, because of liquidity concerns by reimbursing customers for no less than the negative carry associated with any such loans.
  • Wachovia will offer to lend its customers the full par value of their ARS, pending the contemplated buyback, with interest rates set so that customers will have no negative carry on their loans.
  • Further, if eligible customers incurred consequential damages because of the illiquidity of their ARS, they may participate in special Financial Industry Regulatory Authority (FINRA) arbitrations.

Wachovia Capital Markets LLC, an affiliate of Wachovia, has voluntarily agreed to provide identical remedial relief to Wachovia Capital customers who purchased ARS in Wachovia Capital accounts.

The SEC notes the substantial assistance and cooperation from the Missouri Secretary of State, the North American Securities Administrators Association, the Office of the New York Attorney General, and FINRA.

SEC Complaint



Modified: 02/05/2009