Wells Fargo Securities will pay $11 million in penalties for misrepresenting --- and overcharging for -- two complex debt products tied to housing industry performance.
The penalties were related to “misconduct in the sale” of two collateralized debt obligations, when the housing market was beginning to swoon in late 2006 and 2007.
The conduct by Wachovia Capital Markets, as the unit then was known, violated securities laws in two ways, the SEC said.
First, Wachovia Capital Markets charged undisclosed excessive markups in the sale of certain preferred shares or equity of a CDO called Grand Avenue II to the Zuni Indian Tribe and an individual investor.
Wachovia Capital Markets marked down $5.5 million of equity to 52.7 cents on the dollar after the deal closed and it was unable to find a buyer. Later, an Indian tribe and an individual investor paid 90 and 95 cents on the dollar. The markups were more than 70 percent higher than what Wachovia said they were worth, in its internal accounting.
Second, Wachovia Capital Markets misrepresented to investors in a CDO called Longshore 3 that it acquired assets from affiliates “on an arm’s-length basis” and “at fair market prices.”
Instead, 40 residential mortgage-backed securities were transferred from an affiliate at above-market prices, the SEC said. Wachovia Capital Markets transferred these assets at “stale prices, in order to avoid losses on its own books.”
The SEC’s order does not find that Wachovia Capital Markets acted improperly otherwise in structuring the CDOs or in the way it described the roles played by those involved in the structuring process.
Wells Fargo Securities agreed to settle the SEC’s charges by paying more than $11 million in disgorgement and penalties, much of which will be returned to harmed investors.
“Wachovia caused significant losses to the Zuni Indians and other investors by violating basic investor protection rules – don’t charge secret excessive markups, and don’t use stale prices when telling buyers that assets are priced at fair market value,” said Robert Khuzami, Director of the SEC Division of Enforcement.
Wells Fargo Securities consented to the entry of an administrative order directing that it cease and desist from committing similar violations. Wells Fargo neither admitted nor denied the SEC findings.
A total of $7.4 million will be returned to investors.