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U.S. Securities and Exchange Commission

Wachovia Agrees to Preliminary Auction Rate Securities Settlement That Would Offer Approximately $9 Billion to Investors


Washington, D.C., Aug. 15, 2008 — The Securities and Exchange Commission's Division of Enforcement today announced that investors, small businesses, and charities who purchased auction rate securities (ARS) through Wachovia Securities, LLC and Wachovia Capital Markets, LLC (collectively Wachovia) could receive up to $9 billion to fully restore their losses and liquidity through a preliminary settlement that has been reached with Wachovia.

The proposed charges stem from alleged misrepresentations made by Wachovia to thousands of its customers about the liquidity risk associated with ARS. Specifically, Wachovia marketed ARS to investors as cash alternatives, and represented that it would provide one-day or same-day liquidity by purchasing customers' ARS. However, Wachovia failed to adequately disclose that the liquidity of these securities was premised on Wachovia providing support bids for auctions it managed when there was not enough customer demand, and that its offer to provide one-day liquidity could be withdrawn at any time. When Wachovia stopped supporting auctions in February 2008, there were widespread auction failures and Wachovia stopped making good on its offer to provide one-day liquidity.

Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said, "We continue to work with state regulators and others to bring real relief to investors who were not given the forthright information they needed in the process of purchasing auction rate securities. This agreement in principle with Wachovia, if approved by the Commission, will permit tens of thousands of Wachovia investors to get their money back."

Under the terms of the agreement in principle, which are subject to finalization, review and approval by the Commission:

  • Wachovia agrees to repurchase ARS from all investors who purchased ARS from Wachovia prior to the collapse of the ARS market in mid-February 2008. In the wake of the market collapse, Wachovia investors are currently unable to liquidate approximately $8.8 billion in ARS holdings. Under the proposed settlement, Wachovia will offer to purchase roughly $5.7 billion of ARS held by individual investors, small businesses, and charitable organizations. The buy back will begin no later than Nov. 10, 2008 and conclude by Nov. 28, 2008. Wachovia also will offer to purchase the roughly $3.1 billion of ARS held by all other Wachovia investors in a buy back that will begin no later than June 10, 2009 and conclude by June 30, 2009.
  • Wachovia Securities, LLC will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
  • Until Wachovia actually provides for the liquidation of the ARS, Wachovia will provide customers no net loans that will remain outstanding until the ARS are repurchased.
  • To the extent customers have incurred consequential damages beyond the loss of liquidity in the customer's holdings of ARS, Wachovia will participate in a special arbitration process that the customer may elect and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby Wachovia will not contest liability for its misrepresentations or omissions concerning ARS.
  • Wachovia will provide notice to all customers of the settlement terms.
  • Wachovia faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether Wachovia has satisfactorily completed its obligations under the settlement, and the costs incurred by Wachovia in meeting those obligations, including other penalties incurred and the cost of remediation.

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

The SEC's investigation into individuals and other entities that participate in the ARS market is continuing.

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For more information, contact:
Merri Jo Gillette
Regional Director, SEC's Chicago Regional Office
(312) 353-9338

Robert J. Burson
Associate Regional Director, SEC's Chicago Regional Office
(312) 353-7428



Modified: 08/15/2008