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Home > Securities Arbitration Blog > Wachovia Successor to Pay $148 Million to Settle Charges of Fraud and Bid Rigging

Wachovia Successor to Pay $148 Million to Settle Charges of Fraud and Bid Rigging

Filed in: Unfair Securities PracticesSECInvestment Fraud
Posted: December 14, 2011 @ 10:45 pm - Nicholas Guiliano
    Wells Fargo Bank, N.A., successor by merger to Wachovia Bank N.A., has agreed to pay $46 million to settle charges brought by the Securities and Exchange Commission that Wachovia fraudulently rigged bids in municipal bond reinvestment transactions in 25 states and Puerto Rico.

The payment consists of a $25 million penalty and disgorgement of almost $14 million, plus prejudgment interest of about $7.3 million.

Wachovia merged with Wells Fargo in March 2010. As successor to Wachovia, Wells Fargo also signed agreements with the Justice Department, the Office of the Comptroller of the Currency, the Internal Revenue Service, and state attorneys general that call for payment of an additional $102 million.

The settlements were reached thanks to long-term investigations into widespread corruption in the municipal securities reinvestment industry. The investigation also led to criminal charges by the Justice Department’s Antitrust Division against 18 individuals.

The $46 million payment to the SEC will be returned to affected municipalities or borrowers, according to an announcement from the SEC.

According to the SEC complaint filed in U.S. District Court for the District of New Jersey on Dec. 8, Wachovia rigged at least 58 transactions involving the reinvestment of proceeds from the sale of over $9 billion in municipal securities. The bid rigging took place over an eight-year period.

Without admitting or denying the allegations in the complaint, Wells Fargo/Wachovia consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933. The settlement is subject to court approval.

In the “tainted transactions” described in the complaint, Wachovia placed bids to provide reinvestment products to the municipalities. The bank committed fraud by engaging in secret arrangements with bidding agents to improperly win the business from the municipalities and guarantee itself profits.

Monies from the sales of tax-exempt municipal securities must be invested at fair market value, and the most common way of making sure this happens is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

The fraud and misrepresentations practiced by Wachovia affected the prices of the reinvestments, the complaint said, calling in to doubt whether the municipalities purchased the reinvestment instruments at fair market value.

As a result, the fraud financially damaged many towns by jeopardizing the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that is supposed to establish the fair market value of the investment was corrupted.

Wachovia won some bids through a practice known as “last looks,” in which bidding agents passed advance information to the bank about competing providers’ bids. The bank also won bids planned in advance by bidding agents who deliberately obtained off-market non-winning bids, therefore allowing Wachovia to win the bid, a practice know as a "set-up," the complaint said.

In addition, the complaint said Wachovia facilitated set-ups that benefited other providers by deliberately submitting bids to bidding agents that were designed to lose. These included courtesy bids, a type of purposely non-winning bids submitted in order to satisfy particular tax regulations.

When municipal securities are sold to investors, any monies not immediately spent by the municipalities are temporarily invested in municipal reinvestment products to generate some income until the money is used for its intended purposes.

These products are designed to meet municipalities’ specific collateral and spend-down needs, the SEC explained in its announcement. Typically they are financial instruments such as guaranteed investment contracts, repurchase agreements and forward purchase agreements.

According to the complaint, Wachovia fraudulently bid on guaranteed investment contracts, repurchase agreements and forward purchase agreements from at least 1997 to 2005.

 Four other financial institutions have paid $673 million in total as a result of the ongoing investigations into corruption in the municipal reinvestment industry. The SEC previously charged J.P. Morgan Securities LLC, which settled with the SEC and other federal and state authorities in July for $228 million. UBS Financial Services Inc.paid $160 million to settle with the SEC and other federal and state authorities in May, and Banc of America Securities LLCreached a $137 million settlement with the SEC and other federal and state authorities on Dec. 7.

 The continuing investigation has been conducted by Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers of the Municipal Securities and Public Pensions Unit in the Philadelphia Regional Office of the SEC. Other agencies involved included the Antitrust Division of the U.S. Department of Justice, the FGI, the IRS, the Office of the Comptroller of the Currency, and state attorneys general.

***

If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.


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