Archive for the “Wachovia” Category

The nation’s largest bank, Citigroup, is the first Wall Street firm to plead a deal with federal and state regulators over claims of fraudulently marketing and selling auction rate securities to investors.

Under a settlement with New York State Attorney General Andrew Cuomo and the Securities and Exchange Commission (SEC), Citigroup will buy back approximately $7.3 billion of the illiquid securities from individual investors, charities and businesses with assets of less than $10 million, as well as pay a hefty fine of $100 million. Of that amount, $50 million is civil penalty to New York State, with a separate $50 million civil penalty to the North American Securities Administrators Association (NASAA).

The deal requires Citigroup to purchase the auction rate bonds by the end of February 2009.

Earlier this month, Cuomo and the SEC accused Citigroup of deceiving as many as 40,000 investors by downplaying the risks of auction securities during a time when the auction market was nearing collapse.

Auction rate securities are long-term, interest-bearing bonds issued by municipalities, student loan companies and others. Interest rates on the securities reset at weekly or monthly auctions, where existing investors can sell their auction bonds. In February, however, the $330 billion auction market essentially froze when Wall Street investment banks abandoned their role as a buyer of the securities. As a result, millions of investors were stuck with illiquid securities.

Citigroup is the largest underwriter of auction rate debt.

The decision to buy back the auction securities from investors follows a dismal second quarter for Citigroup, which recorded a $2.5 billion loss because of write downs on subprime mortgages and other risky debt totaling $12 billion. As of last year, the bank has incurred more than $58 billion of write downs and credit losses.

As part of its settlement agreement, Citigroup also must use its “best efforts” to help some 2,600 institutional investors sell roughly $12 billion of the frozen instruments they hold.

For months, state and federal regulators have intensified their probes of Wall Street firms over alleged wrongdoings in the auction rate market. Only hours after the Citigroup settlement was announced, Merrill Lynch - also a target of several investigations - agreed to buy back an estimated $10 billion of auction securities at full value beginning in January. Merrill’s offer is good for one year and, like Citigroup’s agreement, does not apply to institutional clients.

As reported Aug. 8 in the New York Times, the exclusion of institutional investors in the agreements with Citigroup and Merrill Lynch - and potentially other banks to follow - may be a calculated move on the part of regulators in that these investors were sold riskier securities backed by the student loan and mortgage markets and banks may not have the ability to absorb those losses.

On the same day it was announced that Citigroup and Merrill Lynch reached deals to resolve their auction rate charges, Bank of America revealed it had received subpoenas from state and federal regulators regarding its auction-rate securities practices.

Other firms under the glare of scrutiny by state and federal regulators include UBS, Goldman Sachs, Lehman Brothers, JPMorgan Chase, Morgan Stanley and Wachovia Corporation.

Moving forward, if Citigroup follows through and fulfills its commitment to buy back $7.3 billion of auction rate securities from individual investors, it will unprecedented, and one of the largest amounts recovered to date from one company.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.Â

It hasn’t been a good week for Wachovia Corporation. On Aug. 4, the bank saw its stock fall as much as 11 percent after analyst Morgan Keegan urged investors to sell their holdings. The following day, Wachovia and its affiliates were sued by a group of investors, who claim the companies caused them substantial financial losses because of ties the now-defunct Evergreen Ultra Short Opportunities Fund’s had to risky investments in subprime mortgage-backed securities.

In the lawsuit, which was filed in a federal court in Boston, investors charge that Wachovia, Evergreen Fixed Income Trust, Evergreen Distributor Inc., Dennis Ferro, chief executive of Evergreen Investments, and Kasey Phillips, principal financial officer of the trust, incorrectly valued and sold shares of the Evergreen Ultra Short Opportunities Fund at artificially inflated prices.

According to the complaint, “As shareholders redeemed their shares, the selling shareholders were overpaid, depleting the fund’s reserves and harming the plaintiffs.

“Plaintiffs purchased at an inflated price and were also damaged by the fund’s failure to properly redeem the shares of the fund investors at a price representing the correct net asset value.”

The complaint also charges that various statements found in the prospectus of Evergreen’s Ultra Short Opportunities Fund were false or misleading because the Fund failed to employ the safe investing strategy outlined. Instead, unbeknownst to investors, the Evergreen Ultra Short Opportunities Fund invested heavily in high-risk subprime mortgages, with more than 70% of its assets ultimately in these illiquid securities.

In 2008, the Evergreen Ultra Short Opportunities Fund was named one of the worst-performing ultra-short bond funds, losing more than 20 percent. By comparison, similar bond funds posted losses of about 2 percent.

In June, Evergreen Investments announced it was shutting down the Ultra Short Opportunities Fund. The Fund’s shareholders would be paid only $7.48 per share from the liquidation.

At the time of the liquidation, the total value of the Evergreen Ultra Short Opportunities Fund was $403 million. In December 2007, it had been valued at $947 million.

Evergreen Investments is the money-management unit of Wachovia Corp.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Wachovia’s new chief, Robert Steel, delivered a record loss of $8.9 billion for its second quarter, along with plans to slash dividend payouts to shareholders and cut thousands of jobs, disappointing news for the nation’s fourth-biggest U.S. bank.

Wachovia’s net charge-offs - loans it doesn’t believe it can collect - soared to 1.10% of total loans from 0.14% a year ago and 0.66% in the first quarter. Loans nearing default rose to 2.41% from 0.49% and 1.70%, respectively.

Wachovia’s performance results are far worse than what Wall Street analysts originally predicted. Much of the bank’s financial problems stems to the fallout from its 2006 acquisition of Golden West Financial Corp.

At the height of the subprime crisis, Wachovia paid more than $25 billion for the Oakland, California-based lender, which specialized in risky “pay-option mortgages” that essentially allowed borrowers to skip some of their payments.

The Golden West acquisition proved to be an ongoing source of trouble for Wachovia and ultimately cost former CEO Kennedy Thompson his job. In April 2008, Wachovia moved to tighten up its underwriting standards, and last month made the decision to stop offering negative amortization mortgages altogether.

Adding to a disappointing second-quarter are Wachovia’s plans to slash its stock dividend to 5 cents per share from 37.5 cents. The company also will eliminate about 10,750 jobs, as it attempts to become a leaner Wachovia.

In the wake of its earnings announcement, three rating agencies – Moody’s Investors Service, Standard & Poor’s and Fitch Ratings - downgraded their ratings on Wachovia’s debt, citing increased expectations of losses in the bank’s mortgage portfolio and its reduced flexibility to raise more capital.

Things have gone from bad to worse for Wachovia this year. On July 17, Securities regulators from several U.S. states raided the St. Louis headquarters of Wachovia Securities, which is part of Wachovia Corp., seeking documents and records on the firm’s sales practices of auction-rate securities.

Both Wachovia Corp. and Wachovia Securities also are named in a lawsuit filed this past March, which seeks class action status for customers say they were misled about the quality, risk and characteristics of auction-rate securities.

Meanwhile, Wachovia’s $8.9 billion second-quarter loss marks the first time the bank has posted consecutive losses in at least two decades. This time, however, the loss is unprecedented - more than 12 times that of Wachovia’s first-quarter loss.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Massachusetts Secretary of State William Galvin launched an investigation into the auction-rate securities operations of Wachovia Securities. Galvin’s auction-rate probe is separate from that of the Missouri Securities Division, whose officials paid a surprise visit on July 17 to Wachovia’s St. Louis headquarters for information about sales practices of auction-rate bonds.

Wachovia Securities is part of the Charlotte-based bank, Wachovia Corp.

Galvin’s office already has levied misconduct and fraud charges on one investment bank, UBS, for the improper sale of auction-rate securities to investors. The Massachusetts regulator also has accused UBS of ramping up marketing efforts to unload the securities while knowing the market was headed for deep trouble.

In February, the $330 billion market for auction-rate securities seized up, as brokerage firms stopped providing financial support. Investors who had previously been told auction-rate securities were “safe, liquid cash alternatives” found they could no longer access their cash.

Sixty-year-old Tom Nagel is one of those investors. As reported in a July 17 article by Kelsey Volkmann in the St. Louis Business Journal, Nagel had invested more than $500,000 with Wachovia Securities for his retirement. When his wife became ill and the couple needed money for her medical treatment, Nagel contacted his broker and learned the unsettling news that his money was frozen in auction-rate securities.

“Why would a 60-year-old man be put into a bond that comes due in 2034?” asked Nagel in the Business Journal article.

As it turns out, Nagel’s broker of 30 years invested his money in a South Carolina student loan company. A bad move - student-loan backed auction-rate securities have been hit the hardest from the meltdown of the auction market, with 99 percent of every student-loan related auction failing.

Nagel apparently was one of the first investors to lodge a complaint with the Missouri Securities Division and the Securities and Exchange Commission (SEC) for unknowingly being placed into auction-rate securities by his broker.

Meanwhile, Nagel and thousands of investors like him are faced with frozen investments - and the reality that they will be forced to forego retirement or pay their children’s college education because they were sold a bill of goods. At the very least, the apparent crackdown by state and federal regulators on Wall Street’s mishandling of auction-rate securities may give a glimmer of hope that someone is on their side.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Securities regulators from several states raided the St. Louis headquarters of Wachovia Securities, demanding information connected to the company’s mishandling of auction-rate securities.

According to Missouri Secretary of State Robin Carnahan’s office, a team of 10 regulators, including those from Missouri, Illinois, Massachusetts, New Jersey and Pennsylvania, entered Wachovia’s headquarters in the morning of July 17 to seek documents and records pertaining to Wachovia’s sales strategies, internal evaluations of the auction-rate securities market and marketing practices.

More than a dozen sales agents and executives from Wachovia Securities also were served subpoenas as part of Carnahan’s investigation.

Carnahan’s probe into Wachovia Securities is part of a larger investigation into the questionable practices used by investment firms and others to market auction-rate securities to investors. Missouri’s investigation began in April, after more than 70 formal complaints were filed with the state securities division, representing more than $40 million of frozen auction-rate securities investments.

Auction-rate securities are municipal bonds, corporate bonds, and preferred stocks in which interest rates or dividend yields reset through auctions held every seven, 14, 28, or 35 days. From 1984 through 2006, only 13 auction failures were recorded. In February 2008, however, the auction market seized up, leaving investors who had been told they were holding safe, cash-like investments that they could access and cash out any time to learn otherwise.

This isn’t Wachovia Securities first run-in with the Missouri Securities Division. In 2005, the company agreed to pay state regulators $300,000, following allegations that it failed to properly supervise an investment agent.

“Hundreds of Missouri investors have called my office because of inability to access their money,” said Secretary of State Robin Carnahan in a statement. “They were told these investments were safe and easy to cash in, but now they cannot run their business, make medical payments or pay school tuition. Our office is doing all we can to find solutions that will make these investors whole.”

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Dennis Ferro, president and CEO of Evergreen Investments, will retire at the end of 2008, and be replaced by Peter Cieszko, the company’s current president of global distribution.

Ferro joined Evergreen as chief investment officer in 1999. He has worked in the financial-services industry for more than 38 years.

Evergreen Investments, which is the money-management arm of Wachovia Corporation, has faced numerous troubles this year with investments in asset- and mortgage-backed securities. According to a July 8 article in the Wall Street Journal, Wachovia was forced to buy some mortgage- and asset-backed investments to prevent some of Evergreen’s money-market funds from “breaking the buck,” meaning their net asset value per share would fall below $1.

In June, Evergreen announced the liquidation of its Ultra Short Opportunities Fund, which fell 20% this year as a result of heavy investments in toxic subprime mortgage securities. Investors will receive $7.48 per share, which is a substantial loss for those who believed the bond fund was a relatively conservative investment.

The Evergreen Ultra Short Opportunities Fund has been rated among the worst ultra short bond funds of 2008. Other poor performing funds include Charles Schwab’s YieldPlus Fund and the YieldPlus Select Fund. Both funds have lost more than 35% as a result of bad bets on investments in subprime-related mortgages.

Meanwhile, Ferro has said his decision to retire from Evergreen Investments has nothing to do with the turmoil surrounding asset- and mortgage-backed securities.

To date, Wachovia shares have fallen nearly 60 percent this year.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The news has not been good for the nation’s largest bank and indicates more Citigroup trouble. Analysts are forecasting that Citigroup losses will show even more write downs on subprime-related investments in the second quarter, reducing the value of its assets by $8.9 billion.

This is the third consecutive quarter showing Citigroup losses, and sent shares of the company’s stock to their lowest levels in more than a decade.

The New York-based company has seen nearly $15 billion of losses in the past two quarters, with more than $46 billion of credit losses and write-downs since mid-2007. Now, analysts say Citigroup may write down $7.1 billion in collateralized debt obligations (CDOs) and associated hedges, and $1.2 billion for other asset classes.

A cut in Citigroup’s dividend program also is likely. This will be the second dividend cut this year.

As reported June 26 on Bloomberg.com, Goldman Sachs analyst William Tanona lowered the ratings on U.S. brokerages from “attractive” to “neutral,” stating that the pace of deterioration in the financial sector is far worse than expected. Tanona also cut his six-month price target for Citigroup to $16 and put the bank on Goldman’s “conviction sell” list.

Goldman Sachs itself was downgraded June 26 by Wachovia, which cited renewed concerns about economic growth, slower prime brokerage business and a slowing pace of large capital raises.

The downgrade caused Goldman’s stock to fall 2% to $180 in pre-market trading.

The latest news indicates Citigroup trouble is not unexpected. Last week, Gary Crittenden, Citi’s chief financial officer, warned of additional large write downs and credit losses in the second quarter, saying its business remained under pressure amid unprecedented market conditions.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The recent announcement by Evergreen Investments, a unit of financial services giant Wachovia, to liquidate its Ultra-Short Opportunities Fund has many investors crying foul - charging that the fund was marketed as a low-risk investment designed to provide higher returns than money-market funds.

In 2008, the Ultra-Short Opportunities Fund was named one of the worst-performing ultra-short bond funds, losing 20 percent as a result of extensive investments in risky subprime-backed securities.

By comparison, similar bond funds posted losses of approximately 2 percent.

This isn’t the first time Evergreen Investments has found itself in hot water. In 2007, the company agreed to pay $32.5 million to settle accusations by the Securities and Exchange Commission (SEC) that it failed to prevent excessive trading in its mutual funds and that its former chief executive approved a secret deal allowing a broker to make market-timing trades.

Market timing, which entails making excessive trades in and out of mutual funds, is often done to take advantage of various inefficiencies in the way funds are priced. It is not illegal. However, most mutual fund companies, including Evergreen, pledge to investors that they will restrict market timing because excessive trades can cause damage to a fund’s return.

The SEC said Evergreen failed to have adequate controls in place to prevent market timing until October 2003. Nearly 90 percent of the damage among Evergreen funds hurt by market timing occurred in 1998 and 1999, according to the SEC.

Evergreen also was criticized by the SEC for failing to adequately keep track of e-mails.

Evergreen neither admitted nor denied findings in the settlement, according to its own news release.

The SEC also levied a $1 disgorgement fine and a $150,000 civil penalty on former Evergreen CEO William M. Ennis, finding that he, Evergreen and its affiliates “entered into an agreement to allow a registered representative of a broker-deal to market time” Evergreen funds. Ennis was barred from working in the industry for at least one year.

Meanwhile, Evergreen Investments is now shutting down the Ultra-Short Opportunities Fund to the tune of $403 million - an amount that is less than half of the fund’s original value six months ago.

As for investors in the fund - which had more than 70 percent of its assets in mortgage-backed securities - they will receive $7.48 per share from the liquidation.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Last week’s announcement by Evergreen Investments to liquidate its Ultra-Short Opportunities Fund is expected to generate an outcry - not to mention lawsuits - from investors who contend managers of the mutual fund failed to disclose the full extent of the fund’s risks.

In reality, Evergreen’s Ultra-Short Opportunities Fund lost 20 percent this year as a result of heavy investments in risky subprime-backed securities. In 2008, the fund was rated as one of the worst performing ultra-short bond funds. Behind the Ultra-Short Opportunities Fund was the Schwab YieldPlus Fund, which has lost an astonishing 35 percent of its value.

By comparison, similar bond funds have posted losses of about 2 percent.

Meanwhile, thousands of investors in the Ultra-Short Opportunities Fund will receive $7.48 per share - a major haircut for a fund that was supposedly considered a conservative investment.

For these investors, the next move may be in court. The Ultra-Short Opportunities Fund had more than 70 percent of its assets in mortgage-backed securities - hardly a low-risk investment or an appropriate place for investors only looking for a place to park cash.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Ultra-short bond funds have been hammered in the financial boxing ring lately. Now, Evergreen Investments’ Ultra-Short Opportunities Fund is the latest fund to be KO’d.

Banking giant Wachovia announced June 20 that its Evergreen Investments unit will shut down the fund to the tune of $403 million - less than half of its value six months ago.

An ultra-short bond fund is a mutual fund that invests in fixed-income instruments with extremely short-term maturities. As with other mutual funds, ultra-short bond funds invest in a wide range of securities - including corporate debt, government bonds, subprime mortgages, and other asset-backed securities.

Like a number of ultra-short bond funds this year, Evergreen’s Ultra-Short Opportunities Fund has struggled to stay afloat under the weight of the subprime crisis. The fund - which had nearly three quarters of its assets in mortgage-backed securities - lost more than 20 percent this year, making it the second worst performing of the ultra-short bond funds tracked by Morningstar Inc.

According to a press statement issued by Evergreen Investments, investors in the Ultra-Short Opportunities Fund will receive $7.48 a share, or the equivalent of the fund’s net asset value as of June 19.

As reported in a June 20 article on Bloomberg.com, the demise of the Ultra-Short Opportunities Fund highlights the difficulty asset managers have in pricing illiquid securities. According to Bloomberg, the fund was carrying a $13 million slice of the Novastar ABS CDO I Ltd., which was created last year out of low-rated subprime- mortgage bonds, at $9.1 million, or 70 percent of its face value.

Other funds in the same boat as Evergreen’s Ultra-Short Opportunities Fund include Schwab’s YieldPlus fund, which is down an astonishing 29 percent and considered the worst performer among ultra-short funds, and Fidelity Investments Ultra-Short Bond Fund, which has fallen more than 13 percent.

The financial failures of these funds have prompted investor lawsuits against the companies that marketed them as “safe” investments that would provide higher returns than money-market funds with only a marginally higher risk factor.

As it turns out, investors who owned shares in many ultra-short bond funds - including Evergreen’s Ultra-Short Opportunities Fund – were in fact highly exposed to toxic subprime-backed securities.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.