Wells Fargo to repay $1.3 billion in auction-rate pact

Thursday, 22 Oct 2009 12:21pm EDT

NEW YORK (Reuters) - Wells Fargo Investments LLC will repay about $1.3 billion to clients whose funds were frozen in the auction-rate securities market in the latest of a series of settlements with state securities regulators, an industry association said on Wednesday.

The company, a unit of San Francisco-based Wells Fargo & Co, has agreed to offer to buy back auction-rate securities by mid-February 2010, the North American Securities Administrators Association said in a statement.

Auction-rate securities are long-term debt instruments whose interest rates are regularly reset through auctions. The market froze in February 2008 as the credit crunch took hold, trapping investors and issuers and prompting complaints from investors around the country who were unable to withdraw money from their accounts.

Wells Fargo will also reimburse clients who sold securities at a discount after the market froze and pay $1.9 million in penalties to states, said the statement.

A Wells Fargo spokeswoman was not immediately available to comment.

Wells Fargo clients held an estimated $2.95 billion in auction-rate securities at the time, said the statement.

"Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold," California Attorney General Edmund Brown said in a statement.

California was among the states whose securities regulators led the settlement negotiations with Wells Fargo.

About $700 million of the total potential buybacks could be to California investors, Brown said.

The U.S. Securities and Exchange Commission and accounting firms determined in March 2005 that auction-rate securities should not be considered "cash equivalents," but Wells Fargo marketed them as safe, liquid, cash-like investments until the market froze, he added.

Other states whose securities regulators led the settlement negotiations with Wells Fargo were Georgia, Missouri, Oregon, Texas, Utah and Washington.

The settlement is the latest in a string of deals banks across the nation have struck with regulators following the failure of the auction-rate securities market last year.

States, including California, New York and Massachusetts, launched probes of Wall Street practices in the market following allegations they misled clients by assuring them the auction-rate securities were a safe, liquid alternative to cash, certificates of deposit or money market funds.

Since 2008, state securities regulators have secured deals with banks including Citigroup, Merrill Lynch, Goldman Sachs, Deutsche Bank, Wachovia, JP Morgan, Morgan Stanley, UBS and TD Ameritrade.

The settlements have returned more than $61 billion to investors, the largest return of funds in history, according to the association.

(Reporting by Ciara Linnane in New York and Peter Henderson in San Francisco, Editing by Leslie Adler)

http://www.reuters.com/article/newsOne/ ... 8A20091118