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As they used to sing on Broadway, the Wells Fargo wagon is a-coming, and this time it's carrying a little something for investors in its auction-rate securities. California Attorney General, Edmund "Jerry" Brown, Jr., announced today that he has secured a settlement in which Wells will pay investors, charities and small businesses $1.4 billion over the purchase of auction rate securities from Wells subsidiaries based on "misleading advice."
Auction rate securities are investments that, under the Agreement between the Attorney General and the Wells Fargo parties, are "long-term bonds issued by municipalities, corporations and student loan companies, or perpetual equity instruments issued by closed end mutual funds, with variable interest rates that reset through a bidding process known as a Dutch auction." The AG's suit alleged that these Wells Fargo affiliates: Wells Fargo Investments, LLC; Wells Fargo Brokerage services, LLC and Wells Fargo Institutional Securities, LLC misrepresented these investments as a "safe, liquid and cash-like investment."
Further, the suit claims that the Wells companies ignored warnings from the SEC, Big 4 accounting firms and the Financial Accounting Standards Board that auction-rate securities should not be considered "cash equivalents." Of course when the $330 billion market froze in February '08, so did the "cash" owned by all the investors.
Wells is alleged to have failed to inform investors precisely how these complicated securities or the auction process actually worked. They are also charged with not supervising or training their sales staff.
Under the settlement agreement, Wells will buy back $1.4 billion in securities from investors nationwide, including about $700 million from California investors. The process of providing notice to eligible investors starts no later than 90 days from the date of the agreement.
Wells Fargo admits no wrong doing under the terms of the settlement.