Saturday, August 16, 2008
The SEC and the New York Attorney General announced on August 15 that investors, small businesses, and charities who purchased auction rate securities (ARS) through and Wachovia Capital Markets, LLC (collectively Wachovia) could receive over $8.5 billion to fully restore their losses and liquidity through a preliminary settlement that has been reached with Wachovia.
Under the terms of the agreement in principle, which are subject to finalization, review and approval by the Commission:
Wachovia agrees to repurchase ARS from all investors who purchased ARS from Wachovia prior to the collapse of the ARS market in mid-February 2008. In the wake of the market collapse, Wachovia investors are currently unable to liquidate approximately $8.8 billion in ARS holdings. Under the proposed settlement, Wachovia will offer to purchase roughly $5.7 billion of ARS held by individual investors, small businesses, and charitable organizations. The buy back will begin no later than Nov. 10, 2008 and conclude by Nov. 28, 2008. Wachovia also will offer to purchase the roughly $3.1 billion of ARS held by all other Wachovia investors in a buy back that will begin no later than June 10, 2009 and conclude by June 30, 2009.
Wachovia Securities, LLC will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
Until Wachovia actually provides for the liquidation of the ARS, Wachovia will provide customers no net loans that will remain outstanding until the ARS are repurchased.
To the extent customers have incurred consequential damages beyond the loss of liquidity in the customer's holdings of ARS, Wachovia will participate in a special arbitration process that the customer may elect and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby Wachovia will not contest liability for its misrepresentations or omissions concerning ARS.
Wachovia will provide notice to all customers of the settlement terms.
Wachovia will also pay New York State and the North American Securities Administrators Association (“NASAA”) civil penalties in the amount of $50 million, which will be distributed pro rata by states’ investment dollar totals. Wachovia faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether Wachovia has satisfactorily completed its obligations under the settlement, and the costs incurred by Wachovia in meeting those obligations, including other penalties incurred and the cost of remediation.