Wells Fargo-Wachovia settles CDO claim with SEC for $11 million

A Securities and Exchange Commission investigation into Wachovia Capital Markets’ sale of two collateralized debt obligations supported by residential mortgage-backed securities resulted in Wells Fargo Securities agreeing to pay $11 million in fines and penalties this week. The SEC said Tuesday that  Wells Fargo Securities — which now manages the business of Wachovia after Wells Fargo acquired the bank in 2009 — did not deny nor admit the claim. Wells Fargo issued a statement about the agreement saying it “relates to actions taken by Wachovia in 2007 in the early days of the credit crisis.” The bank added that “the issues presented here were complex, and Wells Fargo is pleased to have resolved this matter with the SEC.” In a statement, the SEC said it accused Wachovia Capital Markets of breaking securities laws by charging “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.” The agency added that “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. Months later, the Zuni Indian Tribe and the individual investor paid 90 and 95 cents on the dollar. Unbeknownst to them, these prices were over 70 percent higher than the price at which the equity had been marked for accounting purposes,” the SEC said. The enforcement agency also accused Wachovia Capital Markets of misrepresenting a collateralized debt obligation called Longshore 3 as “an arm’s length basis” at fair prices when the transaction really involved 40 RMBS that 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.” Much of the $11 million in penalties that Wachovia Capital Markets has agreed to pay will go to 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 could not immediately comment. Write to Kerri Panchuk.