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Washington State Charges Wells Fargo Of Misleading Investors In Auction Rate Securities (ARS)

Late last month, Wells Fargo joined a growing list of financial services firms to face the glare of scrutiny from federal and state securities regulators for deceiving customers in the sales of auction rate securities. Following a lengthy investigation, regulators in Washington State filed a complaint against Wells Fargo & Co. on Nov. 20, claiming the bank intentionally misled its customers about the risks of auction rate securities.

According to the complaint, San Francisco-based Wells Fargo has sold nearly $4 billion of auction rate securities. Instead of educating customers about the instruments and the possibility of auction failures, Wells Fargo pitched the instruments as similar to money-market funds. Unless the bank agrees to buy back the securities from customers at face value, the Washington State Department of Financial Institutions (DFI) says it will suspend Wells Fargo's broker-dealer and investment advisor licenses, as well as levy fines.

Auction rate securities are municipal or corporate bonds with interest rates that reset every seven, 14, 28 or 35 days. In February 2008, the $330 billion market for auction rate securities came to a grinding halt after Wall Street banks decided to pull their support from the market. As a result, thousands of investors were left with illiquid securities - investments that many investors say their brokerage told them were “cash-like” and “liquid.”

Wells Fargo is denying the charges by the DFI, and says its involvement in the auction rate market was significantly different from financial firms such as UBS, Citigroup, Morgan Stanley and others that have settled with securities regulators and agreed to buy back auction securities from various customers. Specifically, Wells Fargo contends it never acted as an underwriter of auction rate securities and only participated in auctions through a third-party intermediary.

For Wells Fargo customers who have money still frozen in illiquid auction rate securities, that rationale is a moot point. Many investors are like 81-year-old David Guren, who invested $100,000 from his Wells Fargo brokerage account in ARS notes. At the time he made his investment, Guren reportedly told his broker that he wanted to be in a liquid vehicle so that he could purchase a home. Instead, according to a Dec. 4 article on Bloomberg, the broker put Guren's money in auction rate securities. When the Auction Rate market seized up in February, so too did Guren's money. To this day, his money remains frozen.

To read the entire Nov. 20 complaint issued by the Securities Division of the Department of Financial Institutions against Wells Fargo, go to: http://www.dfi.wa.gov/consumers/news/2008/wellsfargo.htm.

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