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FINANCIAL CRISIS

Wells to buy back frozen securities

The bank agrees to pay $1.4 billion to investors who were left stranded in early 2008.

November 19, 2009|Walter Hamilton and Tom Petruno and Jerry Hirsch

NEW YORK AND LOS ANGELES — More than two years after he put the bulk of his savings into a supposedly secure investment account at Wells Fargo & Co., Gus White will finally get his money back.

Wells Fargo said Wednesday that it had agreed to buy back about $1.4 billion in adjustable-rate bonds that had been frozen since the credit crisis struck early last year, including $700 million held by California residents.

Before the crisis, small investors around the country bought billions of dollars of so-called auction-rate securities that Wells Fargo and other financial firms had allegedly marketed as safe and as liquid as savings accounts and money market funds.

But the investors were left stranded when the global credit markets convulsed in the wake of the subprime-mortgage meltdown in February 2008. Those who could sell had to do so at steep discounts.

Investors who held on weren't sure when or whether they'd get all their money back.

"I was scared to death for quite a while," said White, 60, of Newport Beach. "It was very stressful."

In agreements with California and other states, Wells Fargo agreed to repurchase the securities at face value and to reimburse customers who sold at a loss.

Auction-rate securities were issued by municipalities and closed-end mutual funds with interest rates that were reset at regular 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 that of a typical money market fund.

Buyers of the paper typically said they were told they could sell it at any auction for the amount they paid. But the auctions ground to a halt when no one wanted to buy the securities as the credit crunch took hold. Banks and investment firms, saying they also had been blindsided by the credit crunch, initially refused to buy back the securities.

The auction-rate market returned slowly and some investors were able to redeem their holdings. Wells Fargo said Wednesday that it had worked with issuers of the securities to help customers get their money back.

But "redemptions by issuers have not occurred as fast as anyone would have hoped or predicted," Charles W. Daggs, chief executive of Wells Fargo's retail brokerage, said in a statement. "We are glad to have resolved this for our customers."

The agreement by Wells Fargo to make customers whole follows similar moves since late last year by a long line of major financial institutions that sold auction-rate debt, including about 20 that reached settlements with the Securities and Exchange Commission, New York Atty. Gen. Andrew Cuomo and other regulators.

Wachovia Corp., which Wells bought late last year, previously agreed to buy back $8.5 billion of auction-rate paper.

California sued Wells Fargo this year, and several other states were investigating its auction-rate practices.

"Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold," California Atty. Gen. Jerry Brown said.

The state alleged that the San Francisco bank's salespeople weren't properly trained in the intricacies of auction-rate securities and that the risks of the investments weren't explained to clients.

In one case, a Bay Area company shifted $400,000 in working capital from a money market account to auction-rate securities. According to Brown's office, the business intended to use the money to expand, but when the auction-rate market failed, the company couldn't get access to the money and instead was forced to lay off workers.

In addition to buying back the securities, Wells agreed to arbitration to resolve claims by investors who say they were harmed by the inability to access their funds, according to state securities regulators.

Some brokerages that sold auction-rate securities but didn't help create them have refused to settle, including San Francisco-based Charles Schwab Corp., which Cuomo sued over the issue in August.

Schwab contends that it was merely an intermediary, in most cases locating the securities for clients who specifically asked for them.

Wells Fargo has said its retail brokerage didn't actively market auction-rate securities to clients or give brokers special incentives to sell them.

The Wells settlement "will put tremendous pressure on remaining brokerages to reach settlements and repay investors," said Jacob Zamansky, a New York attorney who has represented investors in auction-rate suits.

A Schwab spokesman said the Wells settlement "does not change our position on the issue."

The Wells Fargo accord was a long time coming for customers such as White, who said he used the proceeds from a sale of a company to buy auction-rate securities in August 2007.

"I said, 'I want as much return as I can get, but I have to be liquid. I can't tie anything up,' " he recalled. "They said it was 'so safe it's boring.' "

Wells Fargo redeemed almost three-quarters of his holdings about six months after the market froze, White said, but he continued to worry about the rest of his money.

"I would call to complain," he said, "and the answer I would get is 'There are a lot more people with a lot more money in it than you.' "

--

walter.hamilton@latimes.com

tom.petruno@latimes.com

jerry.hirsch@latimes.com

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