Attorney General Cuomo Announces Settlement with Wachovia to Recover Billions for Investors in Auction Rate Securities

Total of $8.5 Billion to Be Returned to Investors

Total Auction Rate Securities Settlements to Date: Approximately 35 Billion Dollars to More than 145,000 Investors

Wachovia to Pay $50 Million Penalty

Atorney General Andrew M. Cuomo announced on August 15, 2008 another agreement to provide liquidity to consumers who purchased auction rate securities.  Under the latest agreement, Wachovia Securities, LLC and Wachovia Capital Markets, LLC (collectively, “Wachovia”) will return over $8.5 billion to investors across New York State and the nation. The agreement settles allegations that Wachovia made misrepresentations in its marketing and sales of auction rate securities.  Wachovia marketed and sold auction rate securities as safe, cash-equivalent products, when in fact they faced increasing liquidity risk.

Within the past eight days, Cuomo has signed agreements restoring nearly $35 billion of liquidity to thousands of investors nationwide.

Under Cuomo’s settlement, Wachovia has agreed to buy back, no later than November 28, 2008, all illiquid auction rate securities from all Wachovia retail customers, charities, and small businesses. Wachovia will also pay damages to investors who sold securities for a loss. Wachovia will also pay New York State and the North American Securities Administrators Association (“NASAA”) civil penalties in the amount of $50 million, which will be distributed pro rata by states’ investment dollar totals. 

  “At the heart of this investigation is the simple goal of returning billions of dollars back into the hands of investors, which in turn injects confidence into the entire market,” said Attorney General Andrew Cuomo. “The industry is now taking responsibility for correcting a problem they helped create, and we’ll continue working to make all investors whole.”

Agreement comes a day after agreements with JP Morgan and Morgan Stanley and one week after Cuomo settled similar allegations against Citigroup and UBS.  The five settlements together provide relief to thousands of investors who were left holding nearly $35 billion worth of securities they could not sell after the widespread failure of the auction rate securities market this past February:

Institution  Approximate Number of Accounts  Approximate Amount of Buyback (in billions)
Citigroup  38,000 $ 7.3
UBS  40,000 $ 11.5
Morgan Stanley  19,500 $ 4.5
JP Morgan Chase  6,000 $ 3.0
Wachovia  43,000 $8.5
Totals:  146,500    $34.8

From the beginning of his investigation into the auction rate market, the Attorney General’s objective has been to bring relief to investors stuck with illiquid auction rate securities.  Citigroup, UBS, JP Morgan, Morgan Stanley, and Wachovia are five of the larger participants in the auction rate securities market, and among them are responsible for more than half of all auction rate securities owned by investors.  The settlements with Citigroup, UBS, JP Morgan, Morgan Stanley, and Wachovia accomplish precisely the kind of relief investors have demanded, and deserve.  The investigation continues as to other market participants. 

Under the settlement, Wachovia will also:

• Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed;
• Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds;
• Undertake to expeditiously provide liquidity solutions to all other institutional investors;
• Reimburse all refinancing fees to any New York State municipal issuers who issued auction rate securities through Wachovia since August 1, 2007.

The Attorney General thanked NASAA and its multi-state ARS Task Force, who joined the Attorney General in announcing the agreements, for their efforts in achieving settlements. He also thanked specifically Missouri, which was the lead state in  investigations, and noted the personal involvement of Missouri Secretary of State Robin Carnahan.  In addition, the Attorney General thanked the enforcement staff of the Securities and Exchange Commission for their cooperation in their auction rate securities investigations.

Assistant Attorneys General Vicki Andreadis, Peter Dean, Pamela Mahon, Armen Morian, Christopher Mulvihill, Alisha Smith and Ethan Zlotchew, conducted the Wachovia investigation along with Kitty Kay Chan, Economist for the Division of Economic Justice, all under the supervision of David A. Markowitz, Chief of the Investor Protection Bureau, and Eric Corngold, Executive Deputy Attorney General for Economic Justice.

Cuomo’s auction rate securities investigation is continuing.