The state of California accused Wells Fargo & Co. of fraud Thursday for the company's role in an investment meltdown that has been compared to the Bernard Madoff scandal in magnitude.
Atty. Gen. Jerry Brown sued three Wells Fargo investment subsidiaries, alleging they committed securities fraud by telling California investors that $1.5 billion of risky securities sold to them were as safe as cash.
The securities "were sold to customers on the basis that they were like cash and people could get their money back in eight days," Brown said in an interview. "Now, it turns out they were not like cash and people can't get their money back even after many, many months, and they're mad as hell."
The lawsuit, filed in state court in San Francisco, seeks to recover the money invested by about 2,400 Californians in what are known as auction-rate securities marketed by the Wells Fargo subsidiaries.
Auction-rate securities, generally backed by student loans, municipal bonds or other debt, have interest rates that are reset periodically through auctions -- sometimes as often as once a week. More than $330 billion of the securities were sold in recent years to investors attracted to their yields, which could be a percentage point or more above a typical money market fund.
Regulators have alleged that many banks and investment firms deceived their clients into believing that auction-rate securities were as safe as a money market account. But when the market for auction-rate securities collapsed in February 2008, many investors couldn't sell the securities, or could sell them only at a loss.
"Auction-rate preferred securities is the largest fraud ever perpetuated by Wall Street on investors," said Harry Newton, a private investor who operates the AuctionRatePreferreds.org website. "It dwarfs all frauds in history, including Madoff."
Several financial-service companies that issued auction-rate debt have agreed to repurchase billions of dollars of the devalued securities to settle claims by regulators that they defrauded investors.
Last month, Wachovia Corp., which Wells Fargo acquired last year, agreed to repurchase $1.5 billion of the securities from California investors in a settlement with the state Department of Corporations that also included a division of Citigroup Inc. Brown said that case didn't involve the securities at issue in the lawsuit he filed Thursday.
