Regulators eye bank's auction-rate bond sales
Wachovia Corp. reported Monday that its securities unit has been questioned and subpoenaed by federal and state regulators over auction-rate securities.
The bank released few details of the inquiry, but a civil suit filed in March alleges that Wachovia downplayed the risks associated with those securities.
Auction-rate securities are bonds whose interest rates reset periodically based on bids submitted by investors to the underwriting banks. In February, the market for auction-rate securities began to dry up because banks backed away from them as they dealt with plummeting earnings.
That meant investors were unable to sell their bonds. At the same time, issuers such as cities, hospitals and student loan companies were forced to pay higher interest rates. (When investors don't submit an adequate number of bids, the interest rate resets to a "fail rate" that's usually related to an industry reference rate.)
The Securities and Exchange Commission and several state regulators have requested information from Wachovia concerning its underwriting, sale and auctions of these securities, the Charlotte bank reported. Wachovia says it will cooperate fully with any investigations.
Wachovia also said it is being sued by a client over allegations related to auction-rate securities. The lawsuit filed March 19 in New York, which seeks class-action status, claims that Wachovia downplayed the risks of auction-rate securities.
The plaintiff, Judy Waldman, alleges that Wachovia misrepresented auction-rate securities as highly liquid, equivalent to cash or money market accounts, and suitable for short-term investing. Through a trust, Waldman invested $100,000 into two auction-rate securities at the beginning of January.
Wachovia said it "intends to vigorously defend the civil litigation." Lehman Brothers also has recently faced a client lawsuit over auction-rate securities.
On March 28, Massachusetts subpoenaed several banks, including Bank of America, regarding auction-rate securities. The state is investigating whether the bank properly informed investors that auction-rate investments could become illiquid.
"Yet another after-effect of the subprime lending excesses," William Galvin, Massachusetts' secretary of the commonwealth, said of the banks pulling out of the auction market.
Massachusetts also subpoenaed UBS and Merrill Lynch, officials said. Bank of America declined to comment.
In Monday's filing, Wachovia also said it was being investigated by the U.S. Attorney's Office for the Southern District of Florida over its relationship with money-exchange companies and its compliance with anti-money laundering regulations. The bank said it stopped working with these companies last year and is cooperating.
http://www.charlotte.com/business/story/621497.html
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