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Home > Cases > Wachovia AG Edwards Auction-Rate Securities > Wachovia Securities Targeted In Auction-Rate Securities Probe

Wachovia Securities Targeted In Auction-Rate Securities Probe

On July 17, a team of state regulators organized a surprise inspection at the headquarters of Wachovia Securities as part of a multi-state investigation into the company's sales of auction-rate securities.

In a statement issued by Missouri's Securities Division, investigators from Missouri, Illinois, Massachusetts, Pennsylvania, New Jersey and five other states searched Wachovia's St. Louis headquarters, seeking documents, information and interviews about the firm’s auction-rate securities operations.

More than a dozen subpoenas also were issued to Wachovia executives and agents as part of the inspection.

According to Missouri investigators, the July 17 inspection was conducted because Wachovia failed to comply with information requests from state regulators on how the company sold auction-rate securities to investors. State regulators say that in the past four months, they have received more than 70 formal complaints from investors who claim they were misled about their auction-rate securities investments.

Auction-rate securities are long-term bonds sold by issuers such as municipalities, student loan companies, closed-end mutual funds, not- for-profit groups and others. The interest rate on auction-rate securities is reset at auctions held every seven, 14, 28 or 35 days.

For years, the $330 billion auction-rate market operated with only minor glitches. Then, in February 2008, following concerns the bond insurers that guaranteed the auction debt would lose their top credit ratings, the demand for auction-rate securities dried up. Without enough buyers, auctions for the securities failed.

At the same time, the Wall Street investment banks - which ran the auctions and had once used their own capital to prevent auctions from failing - walked away from the market entirely, no longer willing to take on additional debt.

As a result, an unprecedented number of auction failures occurred, leaving individual investors - many retirees, small business owners and families - holding illiquid securities they cannot cash out.

In addition to Wachovia, the majority of securities firms are being investigated by state and federal regulators for the way they marketed and sold auction-rate securities to investors.

To date, more than $200 billion of auction-rate securities sold by student-loan companies, municipalities and closed-end mutual funds are still frozen. Last month, Massachusetts Secretary of State William Galvin sued UBS AG - one of the largest players in the auction-rate- securities market - for fraud over the firm’s sale of auction-rate securities and for allegedly telling investors the securities were safe, liquid investments.

In July, the U.S. attorney's office for New York's Eastern District announced it was conducting an investigation into whether two former brokers at Credit Suisse Group AG lied to investors about how they placed their money into auction-rate securities. That case is the first criminal case to come about since the auction-rate market seized up in February.

Wachovia Securities is the trade name for the corporate, investment banking and capital markets of Wachovia Corporation and its subsidiaries.

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.


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