SEC Charges Wachovia With Fraudulent Bid Rigging in Municipal Bond Proceeds

SEC Charges Wachovia With Fraudulent Bid Rigging in Municipal Bond Proceeds Wachovia Agrees to $148 Million Settlement With SEC and Other Authorities FOR IMMEDIATE RELEASE 2011-257 Washington, D.C., Dec. 8, 2011 – The Securities and Exchange Commission today charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds. Additional Materials Litigation Release No. 22183 SEC Complaint Final Judgment The SEC alleges that Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico. Wachovia won some bids through a practice known as “last looks” in which it obtained information from the bidding agents about competing bids. It also won bids through “set-ups” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor. Wachovia facilitated some bids rigged for others to win by deliberately submitting non-winning bids. Wachovia agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wachovia also entered into agreements with the Justice Department, Office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general that include the payment of an additional $102 million. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Department’s Antitrust Division. “Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business.” said Robert Khuzami, Director of the SEC’s Division of Enforcement. Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “Wachovia hid its fraudulent practices from municipalities by affirmatively assuring them that they had not engaged in any manipulative conduct. This settlement will result in significant payments to municipalities harmed by Wachovia’s unlawful actions.” Wachovia Bank is now Wells Fargo Bank following a merger in March 2010. When municipal securities are sold to investors, portions of the proceeds often are not spent immediately by municipalities but rather temporarily invested in municipal reinvestment products until the money is used for the intended purposes. These products are typically financial instruments tailored to meet municipalities’ specific collateral and spend-down needs, such as guaranteed investment contracts (GICs), repurchase agreements (repos), and forward purchase agreements (FPAs). The proceeds of tax-exempt municipal securities generally must be invested at fair market value, and the most common way of establishing that is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality. According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, Wachovia engaged in fraudulent bidding of GICs, repos, and FPAs from at least 1997 to 2005. Wachovia’s fraudulent practices and misrepresentations not only undermined the competitive bidding process, but negatively affected the prices that municipalities paid for reinvestment products. Wachovia deprived certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, and jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted. Without admitting or denying the allegations in the SEC’s complaint, Wachovia has consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933 and has agreed to pay a penalty of $25 million and disgorgement of $13,802,984 with prejudgment interest of $7,275,607. The settlement is subject to court approval. Financial institutions have now paid a total of $673 million in settlements resulting from the ongoing investigations into corruption in the municipal reinvestment industry. Others charged prior to Wachovia are: J.P. Morgan Securities LLC – $228 million settlement with SEC and other federal and state authorities on July 7, 2011. UBS Financial Services Inc. – $160 million settlement with SEC and other federal and state authorities on May 4, 2011. Banc of America Securities LLC – $137 million settlement with SEC and other federal and state authorities on Dec. 7, 2010. In a related action to the Banc of America matter, the SEC today charged the firm’s former vice president and marketer Dean Pinard for his role in various improper bidding practices. Pinard is the beneficiary of a grant of conditional amnesty from criminal prosecution by the Department of Justice provided to Banc of America’s parent corporation. Pinard, who cooperated with the investigation, agreed to pay more than $40,000 to settle the SEC’s case without admitting or denying the findings. He is barred from association with any broker, dealer, investment adviser, municipal securities dealer, or municipal advisor. The SEC’s investigation, which is continuing, has been conducted by Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers, who are members of the Municipal Securities and Public Pensions Unit in the Philadelphia Regional Office. The SEC thanks the other agencies with which it has coordinated this enforcement action, including the Antitrust Division of the U.S. Department of Justice, Federal Bureau of Investigation, Internal Revenue Service, Office of the Comptroller of the Currency, and 26 State Attorneys General. # # # For more information about this enforcement action, contact: Elaine C. Greenberg, Chief, Municipal Securities and Public Pensions Unit and Associate Regional Director Mark R. Zehner, Deputy Chief, Municipal Securities and Public Pensions Unit Mary P. Hansen, Assistant Regional Director SEC’s Philadelphia Regional Office (215) 597-3100 http://www.sec.gov/news/press/2011/2011-257.htm Home | Previous Page Modified: 12/08/2011

SEC Charges Wachovia With Fraudulent Bid Rigging in Municipal Bond Proceeds Wachovia Agrees to $148 Million Settlement With SEC and Other Authorities FOR IMMEDIATE RELEASE 2011-257 Washington, D.C., Dec. 8, 2011 – The Securities and Exchange Commission today charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds. Additional Materials Litigation Release No. 22183 SEC Complaint Final Judgment The SEC alleges that Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico. Wachovia won some bids through a practice known as “last looks” in which it obtained information from the bidding agents about competing bids. It also won bids through “set-ups” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor. Wachovia facilitated some bids rigged for others to win by deliberately submitting non-winning bids. Wachovia agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wachovia also entered into agreements with the Justice Department, Office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general that include the payment of an additional $102 million. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Department’s Antitrust Division. “Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business.” said Robert Khuzami, Director of the SEC’s Division of Enforcement. Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “Wachovia hid its fraudulent practices from municipalities by affirmatively assuring them that they had not engaged in any manipulative conduct. This settlement will result in significant payments to municipalities harmed by Wachovia’s unlawful actions.” Wachovia Bank is now Wells Fargo Bank following a merger in March 2010. When municipal securities are sold to investors, portions of the proceeds often are not spent immediately by municipalities but rather temporarily invested in municipal reinvestment products until the money is used for the intended purposes. These products are typically financial instruments tailored to meet municipalities’ specific collateral and spend-down needs, such as guaranteed investment contracts (GICs), repurchase agreements (repos), and forward purchase agreements (FPAs). The proceeds of tax-exempt municipal securities generally must be invested at fair market value, and the most common way of establishing that is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality. According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, Wachovia engaged in fraudulent bidding of GICs, repos, and FPAs from at least 1997 to 2005. Wachovia’s fraudulent practices and misrepresentations not only undermined the competitive bidding process, but negatively affected the prices that municipalities paid for reinvestment products. Wachovia deprived certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, and jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted. Without admitting or denying the allegations in the SEC’s complaint, Wachovia has consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933 and has agreed to pay a penalty of $25 million and disgorgement of $13,802,984 with prejudgment interest of $7,275,607. The settlement is subject to court approval. Financial institutions have now paid a total of $673 million in settlements resulting from the ongoing investigations into corruption in the municipal reinvestment industry. Others charged prior to Wachovia are: J.P. Morgan Securities LLC – $228 million settlement with SEC and other federal and state authorities on July 7, 2011. UBS Financial Services Inc. – $160 million settlement with SEC and other federal and state authorities on May 4, 2011. Banc of America Securities LLC – $137 million settlement with SEC and other federal and state authorities on Dec. 7, 2010. In a related action to the Banc of America matter, the SEC today charged the firm’s former vice president and marketer Dean Pinard for his role in various improper bidding practices. Pinard is the beneficiary of a grant of conditional amnesty from criminal prosecution by the Department of Justice provided to Banc of America’s parent corporation. Pinard, who cooperated with the investigation, agreed to pay more than $40,000 to settle the SEC’s case without admitting or denying the findings. He is barred from association with any broker, dealer, investment adviser, municipal securities dealer, or municipal advisor. The SEC’s investigation, which is continuing, has been conducted by Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers, who are members of the Municipal Securities and Public Pensions Unit in the Philadelphia Regional Office. The SEC thanks the other agencies with which it has coordinated this enforcement action, including the Antitrust Division of the U.S. Department of Justice, Federal Bureau of Investigation, Internal Revenue Service, Office of the Comptroller of the Currency, and 26 State Attorneys General. # # # For more information about this enforcement action, contact: Elaine C. Greenberg, Chief, Municipal Securities and Public Pensions Unit and Associate Regional Director Mark R. Zehner, Deputy Chief, Municipal Securities and Public Pensions Unit Mary P. Hansen, Assistant Regional Director SEC’s Philadelphia Regional Office (215) 597-3100 http://www.sec.gov/news/press/2011/2011-257.htm Home | Previous Page Modified: 12/08/2011