Thursday, April 23, 2009

Wells Fargo Rightfully Sued

From New York Times' Dealbook:

Attorney General Jerry Brown of California sued Wells Fargo on Thursday for $1.5 billion, contending that the bank had misled investors about the safety and liquidity of the auction-rate securities that it sold.

“Wells Fargo’s affiliates promised investors auction-rate securities were as safe and liquid as cash, when in fact they were not, and now investors are unable to get their money when they need it,” Mr. Brown said in a statement.

“This lawsuit seeks to recover $1.5 billion for Californians and holds these companies accountable for giving investors false and deceptive advice,” he said.
Auction-rate securities are investments with long-term maturities that Wells Fargo and other banks marketed as short-term investments equivalent to cash, Mr. Brown’s office said. These securities paid a slightly better interest rate than a bank account, and investors could sell them at regular weekly or monthly auctions that provided liquidity.

These auctions froze up in February 2008 as subprime mortgage crisis began to take its toll on the credit markets, and investors were no longer able to redeem their securities for cash.

As a result, Mr. Brown’s office said, about 2,400 Californians who had invested with Wells Fargo were unable to redeem more than $1.5 billion worth of securities.

Mr. Brown’s office said the three Wells Fargo affiliates that sold auction-rate securities refused to redeem them, even though other banks including UBS, Citigroup, Wachovia and Merrill Lynch were doing so by last August.

The affiliates named in the lawsuit are Wells Fargo Investments, Wells Fargo Brokerage Services and Wells Fargo Institutional Securities, which Mr. Brown violated California’s securities laws.

In response, Wells Fargo disputed Mr. Brown’s claims. “We fully understand and deeply regret the effects this prolonged liquidity crisis has had on our clients,” Charles W. Daggs, chief executive of Wells Fargo Investments, said in a statement. “Wells Fargo could not have predicted these extraordinary circumstances, and even with the benefit of hindsight is not responsible for them.”

He added that Wells Fargo had tried to help investors who bought auction-rate securities by giving them “access to 90 percent of the par value of their A.R.P. holdings through nonrecourse loans at favorable rates.”

Mr. Brown filed his complaint in San Francisco Superior Court seeking to restore the cash value of the auction-rate securities, force Wells Fargo to disgorge any subsequent profits tied to the securities, and obtain civil penalties of $25,000 per violation. This could amount to hundreds of millions in civil penalties, he said.



In a way this is great, but does it ever end? And how is it affecting their mortgage programs? Also, WHO'S NEXT?

Thank you to New York Times DealBook

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