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WACHOVIA SECURITIES, LLC
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DOCKET NO. CO-10-7568-S
I. PRELIMINARY STATEMENT
WHEREAS, the Commissioner, through the Securities and Business Investments Division of the Department of Banking (“Division”), conducted an investigation pursuant to Section 36b-26(a) of the Act into the activities of the Wachovia Entities to determine whether either or both of them had violated, were violating or were about to violate any provisions of the Act or Regulations (“Investigation”);
WHEREAS, after a books and records inspection by the Multi-State Task Force on July 17, 2008, Wachovia Securities cooperated fully with the regulators conducting the investigations by responding to inquiries, providing documentary evidence and other materials, and providing regulators with access to information relating to the investigations;
II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS
WHEREAS, the Wachovia Entities, through their execution of this Consent Order, each voluntarily waive the following rights:
To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut;
To present evidence and argument and to otherwise avail themselves of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut;
|3.||To present their respective positions in a hearing in which each is represented by counsel;|
|4.||To have a written record of the hearing made and a written decision issued by a hearing officer; and|
|5.||To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order;|
NOW THEREFORE, the Commissioner, as administrator of the Act, hereby enters this Consent Order.
III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER
|The Wachovia Entities each admit the jurisdiction of the Commissioner, neither admit nor deny the Findings of Fact and Conclusions of Law contained in this Consent Order, and consent to the entry of this Consent Order by the Commissioner.|
IV. FINDINGS OF FACT
|1.||Auction rate securities (collectively referred to herein as “ARS”) are long-term debt or equity instruments that include auction preferred shares of closed-end funds, municipal auction rate bonds, and various asset-backed auction rate bonds. While ARS are all long-term instruments, one significant feature of ARS (which historically provided the potential for short-term liquidity) is the interest/dividend reset through auctions that occur in varying increments of between 7 and 42 days. If an auction is successful, investors are able to exit the ARS market on a short-term basis. If, however, an auction “fails,” investors are required to hold all or some of their ARS until the next successful auction in order to liquidate their funds. Beginning in February 2008, the ARS market experienced widespread failed auctions.|
|2.||In early March 2008, Wachovia Securities’ investors, unable to access their ARS funds, began to submit complaints to the Division.|
Marketing and Sales of ARS to Investors In connection with the sale of ARS, some Connecticut investors stated that they were variously told by Wachovia Securities and its registered agents that ARS were:
just like cash b.
same as cash; c.
safe as cash; d.
same as money markets; e.
safe as money markets; f.
cash equivalents; g.
short-term adjustable rate securities; h.
cash alternatives; i.
completely safe; j.
liquid at any time; and/or k.
always liquid at an auction.
In connection with the sale of ARS, some Connecticut investors stated that they were variously told by Wachovia Securities and its registered agents that ARS were:
Wachovia Securities further fostered the misconception that ARS were cash-like instruments by providing account portfolio summaries to certain of its customers that listed ARS as “cash equivalents.” In fact, ARS were not “cash equivalents” and full liquidity was only available at an auction if the auction was successful.
|5.||Although Wachovia Securities sold ARS as conservative, safe, and liquid investments to its investors until February 2008, the Wachovia Entities had information to the effect that several auctions had failed in August 2007 and early 2008, before the mass failures in February 2008. During this same period of time, the Wachovia Entities failed to inform their customers who purchased ARS after such auctions began to fail that certain auctions would have failed had the Wachovia Entities or another broker-dealer not entered support bids in those auctions.|
|6.||Although the Wachovia Entities knew, or should have known, of the inherent risks and the recent volatility of the ARS market, only minimal information regarding the ARS market was provided to Wachovia Securities’ retail ARS customers.|
The Wachovia Entities and their registered securities agents were, or should have been, aware that the ARS market was suffering from increasing failures and liquidity issues, and they should have disclosed those facts to investors who were purchasing ARS after such issues arose. Based on these facts, the Wachovia Entities engaged in dishonest and unethical practices in the marketing and sale of ARS within the meaning of Sections 36b-4(b) and 36b-15(a)(2)(H) of the Act. These practices constituted grounds to revoke the Wachovia Entities’ registrations under Section 36b-15 of the Act. These practices included, among other things, the following:
Temporary Maximum Rate Waiver on Certain ARS
The interest rates on ARS are reset periodically through the auction process. In the event that there is insufficient demand for a particular issue and an auction fails, the interest rate resets to a “maximum rate” or “failure rate” as defined in the offering documents for that particular issue. Typically, this maximum rate would be higher than prevailing market rates in order to compensate ARS holders who are unable to sell their positions and offer an “incentive” to induce buyers to return to the market although in some cases, particularly for student loan auction rates, the maximum rate might be lower than the prevailing rate. 9.
In December 2007, with the encouragement of its underwriters, the Missouri Higher Education Loan Authority (“MOHELA”) sought and secured approval to waive its maximum rate for certain issues of ARS. Absent such waivers, the ARS issued by MOHELA would not have been allowed to reset at interest rates high enough to clear auctions. 10.
As a result of the maximum rate waivers, certain MOHELA ARS issues reset to a higher rate for a brief period after the waiver was implemented. However, due to a feature of those issues that caps the average interest rate over any given one-year period, the interest rates reset to 0% after the expiration of the waiver period. The ramifications of this maximum rate waiver were not explained to Wachovia Securities’ customers who subsequently purchased MOHELA ARS.
Wachovia Securities engaged in dishonest and unethical practices within the meaning of Sections 36b-4(b) and 36b-15(a)(2)(H) of the Act by not adequately explaining to individual investors who purchased ARS with maximum rate waivers, among other things, the following:
|12.||Although ARS are complicated and complex products, Wachovia Securities did not provide its sales or marketing staff with the training and information necessary to adequately explain these products or the mechanics of the auction process to their customers. During the course of investigations, on-the-record statements taken from Wachovia Securities’ registered agents demonstrated that these agents lacked a basic understanding of the functionality of the ARS products and the auction rate market.|
|13.||Many of Wachovia Securities’ registered agents were not adequately educated in the ARS products they were selling and did not know where to look for information to bolster that knowledge. Wachovia Securities failed to provide timely and comprehensive sales and marketing literature regarding ARS and the mechanics of the auction process. In addition, Wachovia Securities failed to review account portfolio statements sent to its customers to ensure that they reflected accurate information regarding ARS.|
|14.||Wachovia Securities’ failure to provide sufficient training and information concerning ARS and the market environment in which they were sold was not limited to one or two agents, and is therefore indicative of Wachovia Securities’ failure to ensure that its registered personnel provided adequate information regarding ARS to its customers.|
Wachovia Securities failed to reasonably supervise its employees, which constitutes grounds for the revocation of Wachovia Securities’ registration under Section 36b-15(a) of the Act and contravenes Section 36b-31-6f(b) of the Regulations. Wachovia Securities’ failure to exercise reasonable supervision included:
V. CONCLUSIONS OF LAW
|16.||The Commissioner has jurisdiction over this matter pursuant to the Act.|
The Commissioner finds that Wachovia Securities failed to supervise its employees and engaged in dishonest or unethical practices in the securities business, that this conduct violates Sections 36b-4(b) of the Act and Section 36b-31-6f(b) of the Regulations, and that grounds therefore exist to revoke Wachovia Securities’ registration under Section 36b-15(a) of the Act.
The Commissioner finds that this Consent Order and the following relief are appropriate, in the public interest, and consistent with the purposes fairly intended by the policies and provisions of the Act.
VI. CONDITIONS PRECEDENT
For purposes of these Conditions Precedent and this Consent Order, the following terms shall have the meanings specified:
Conditions Precedent and Representations by Wachovia Securities and Wachovia Capital Markets
With respect to any claim for consequential damages, to the extent such claims are not resolved informally by the Wachovia Entities, the Wachovia Entities shall arbitrate the claim of any Relevant Class member who elects to arbitrate, pursuant to the following provisions:
On or before November 28, 2008, Wachovia Securities and Wachovia Capital Markets, respectively and separately, have refunded refinancing fees received by either of them to municipal auction rate issuers that issued such securities in the initial primary market between August 1, 2007 and February 13, 2008, and refinanced those securities through the Wachovia Entities after February 13, 2008.
VII. CONSENT ORDER
On the basis of the Findings of Fact, Conclusions of Law, and the Wachovia Entities’ consent to the entry of this Consent Order,
IT IS HEREBY ORDERED THAT:
This Consent Order concludes the investigation by the Division and any other action that the Division could commence under the Act on behalf of Connecticut as it relates to the Wachovia Entities and their marketing and sale of auction rate securities to investors.
This Consent Order is entered into solely for the purpose of resolving the referenced multi-state investigation, and is not intended to be used for any other purpose.
Wachovia Securities, LLC n/k/a Wells Fargo Advisors, LLC and Wachovia Capital Markets, LLC n/k/a Wells Fargo Securities, LLC Wachovia shall CEASE AND DESIST from violating the Act or any regulation or order under the Act, and shall comply with the Act, its regulations and any order under the Act.
Within ten (10) days after the entry of this Consent Order by the Commissioner, the Wachovia Entities shall remit by certified bank check made payable to “Treasurer, State of Connecticut” the sum of Eight Hundred Sixty-three Thousand Three Hundred Forty-one and 30/100 Dollars ($863,341.30) as a fine.
In the event another state securities regulator determines not to accept the Wachovia Entities’ state settlement offer in connection with the multi-state investigation referenced herein, the total amount of the Connecticut payment shall not be affected, and shall remain at Eight Hundred Sixty-three Thousand Three Hundred Forty-one and 30/100 Dollars ($863,341.30).
To the extent that the Wachovia Entities agree to any subsequent settlement with any NASAA jurisdiction arising out of the above-referenced coordinated investigations pertaining to the Wachovia Entities’ marketing and sale of Eligible ARS to retail ARS investors as described herein, which includes a term or terms analogous to the terms herein which are more favorable to retail ARS investors in such NASAA jurisdiction than those terms identified herein, the subsequent more favorable settlement term or terms shall, upon the Commissioner’s request, be incorporated by reference into this Consent Order and become equally applicable to Connecticut retail ARS investors;
|7.||If either of the Wachovia Entities defaults in its respective obligations set forth in this Consent Order, or fails to abide by its respective representations set forth herein, the Commissioner may vacate this Consent Order, at his sole discretion, upon ten (10) days notice to the affected Wachovia Entity, and without opportunity for administrative hearing, or may pursue such enforcement measures as are appropriate under the circumstances.|
|8.||This Consent Order is not intended to indicate that the Wachovia Entities or any of their affiliates or current or former employees shall be subject to any disqualifications contained in the federal securities laws, the rules and regulations thereunder, the rules and regulations of self regulatory organizations or various states’ securities laws, including any disqualifications from relying upon the registration exemptions or safe harbor provisions. In addition, this Consent Order is not intended to form the basis for any such disqualifications.|
|9.||Nothing contained in this Consent Order shall be deemed to be an admission of any liability, fault or wrongdoing by the Wachovia Entities, their affiliates or their current or former employees. This Consent Order shall not be admissible in any hearing, action, or proceeding except to prove the existence of this Consent Order or to enforce the terms of this Consent Order.|
|10.||For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against either of the Wachovia Entities including, without limitation, the use of any e-mails or other documents of the Wachovia Entities or of others for the marketing and sale of auction rate securities to investors, nor does it limit or create liability of the Wachovia Entities, or limit or create defenses of the Wachovia Entities to any claims.|
|11.||This Consent Order shall not disqualify the Wachovia Entities or any of their affiliates or current or former employees from any business that they otherwise are qualified or licensed to perform under applicable state law, and this Consent Order is not intended to form the basis for any disqualification.|
|12.||Nothing herein shall preclude Connecticut, its departments, agencies, boards, commissions, authorities, political subdivisions and corporations, other than the Commissioner and only to the extent set forth in paragraph 1 above, (collectively, “State Entities”) and the officers, agents or employees of State Entities from asserting any claims, causes of action, or applications for compensatory, nominal and/or punitive damages, administrative, civil, criminal, or injunctive relief against either of the Wachovia Entities in connection with the marketing and sale of auction rate securities at either of the Wachovia Entities.|
|13.||Each of the Wachovia Entities shall pay its own costs and attorneys’ fees with respect to this matter.|
NOW THEREFORE, the Commissioner enters the following:
|1.||The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered;|
|2.||Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against either of the Wachovia Entities based upon a violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by the Wachovia Entities and reflected herein are subsequently discovered to be untrue; and|
|3.||This Consent Order shall become final when entered.|
|So ordered at Hartford, Connecticut||_______/s/_________|
|this 15th day of July 2010.||Howard F. Pitkin|
CONSENT TO ENTRY OF ORDER
I, Doug Kelly, state on behalf of Wells Fargo Advisors, LLC f/k/a Wachovia Securities, LLC, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Wells Fargo Advisors, LLC; that Wells Fargo Advisors, LLC agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Wells Fargo Advisors, LLC voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. Wells Fargo Advisors, LLC further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that Wells Fargo Advisors, LLC shall pay pursuant to the foregoing Consent Order.
|Wells Fargo Advisors, LLC|
|f/k/a Wachovia Securities, LLC|
|Name: Doug Kelly|
City [sic] of: St. Louis
On this the 12 day of July, 2010, before me, Doug Kelly [sic], the undersigned officer, personally appeared Doug Kelly, who acknowledged himself to be the EVP of Wells Fargo Advisors, LLC f/k/a Wachovia Securities, LLC, a limited liability company, and that he, as such EVP, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the limited liability company by himself as EVP.
In witness whereof I hereunto set my hand.
Date Commission Expires: Mar. 14, 2013
CONSENT TO ENTRY OF ORDER
I, Barbara H. Wright, state on behalf of Wells Fargo Securities, LLC f/k/a Wachovia Capital Markets, LLC, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Wells Fargo Securities, LLC; that Wells Fargo Securities, LLC agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Wells Fargo Securities, LLC voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. Wells Fargo Securities, LLC f/k/a Wachovia Capital Markets, LLC further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that Wachovia shall pay pursuant to the foregoing Consent Order.
|Wells Fargo Securities, LLC|
|f/k/a Wachovia Capital Markets, LLC|
|Name: Barbara H. Wright|
County of: Mecklenburg
On this the 12th day of July, 2010, before me, Mary B. Cook, the undersigned officer, personally appeared Barbara H. Wright, who acknowledged himself/herself to be the SVP of Wells Fargo Securities, LLC f/k/a Wachovia Capital Markets, LLC, a limited liability company, and that he/she, as such SVP, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the limited liability company by himself/herself as SVP.
Date Commission Expires: July 5, 2014
1. In October 2007, Wachovia Corporation acquired the Missouri-based broker-dealer A.G. Edwards & Sons, Inc. ("AG Edwards") which was subsequently combined with Wachovia Securities, LLC.
2. Factual allegations in this Consent Order may apply to Wachovia Securities and/or Wachovia Capital Markets, but do not necessarily refer to both entities.