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The settlement, filed this month, emerged from a multi state investigation into the marketing and sales of auction-rate securities by several brokerage firms and investment banks. The securities, which have lengthy maturities, were promoted as safe, highly liquid alternatives to money-market instruments because their interest rates were reset at weekly or monthly auctions.
The market for auction-rate securities worked well for years, but investors lost access to their funds in February 2008 when credit markets contracted and auctions of the securities were disrupted.
Although auction-rate securities are complicated, "Wachovia Securities did not provide its sales or marketing staff with the training and information necessary to adequately explain these products or the mechanics of the auction process to their customers," the State Corporation Commission said in a consent order.
As part of the settlement, Wachovia agreed to buy back the securities from certain clients. Wachovia, now part of the banking company Wells Fargo & Co., did not admit or deny any wrongdoing.
Regulators in several states began investigating the sales and marketing of auction-rate securities last year after receiving complaints from investors. The State Corporation Commission said the number of Virginia investors affected by Wachovia's sales of auction-rate securities wasn't publicly available.
The commission reached similar settlements in July with the securities affiliates of two other large banking companies, Citigroup Inc. and Bank of America Corp. Both settlements included penalties and orders to buy back securities from customers who wanted to sell them.
Citigroup Global Markets Inc., a unit of Citigroup that managed auctions for auction-rate securities and also sold them, agreed to a $924,781 penalty. The company, whose operations at the time included brokerage firm Smith Barney, also agreed to set up dedicated toll-free phone lines to provide customers with information about the settlement terms.
In addition, Banc of America Securities and Banc of America Investment Services Inc. agreed to a $351,693 penalty. When market conditions for auction-rate securities began to deteriorate in 2007, the two Bank of America firms continued to sell the securities without informing their customers of the heightened risks, the commission said.
Tom Shean, (757) 446-2379, tom.shean@pilotonline.com
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