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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Thursday, December 8, 2011

Wachovia Pays $148 Million to State and Federal Regulators to Settle Fraud Allegations Involving Municipal Bond Derivatives

Wachovia Bank N.A. and Wells Fargo Bank, N.A., as its successor, entered into settlements totalling $148 million with 26 state regulators, the SEC and other federal regulators as part of an ongoing national investigation of alleged anticompetitive and fraudulent conduct in the municipal bond derivatives industry.

As part of the multistate settlement with 26 Attorneys General, Wachovia has agreed to pay $54.5 million in restitution to affected state agencies, municipalities, school districts and not-for-profit entities nationwide that entered into municipal bond derivative contracts with Wachovia between 1998 and 2004.  In addition, Wachovia agreed to pay a $1.25 million civil penalty and $3 million for fees and costs of the investigation to the settling states.

Wachovia also agreed to pay $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, and Internal Revenue Service. 

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. In April 2008, the states began investigating allegations that certain large financial institutions, including national banks and insurance companies, and certain brokers and swap advisors, engaged in various schemes to rig bids and commit other deceptive, unfair and fraudulent conduct in the municipal bond derivatives market.

The investigation, which is still ongoing, revealed collusive and deceptive conduct involving individuals at Wachovia and other financial institutions, and certain brokers with whom they had working relationships. The wrongful conduct took the form of bid-rigging, submission of non-competitive courtesy bids and submission of fraudulent certifications of compliance to government agencies, among others.

According to the SEC, 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.

Wachovia is the fourth financial institution to settle with a multistate task force in the ongoing municipal bond derivatives investigation following Bank of America, UBS AG and JP Morgan.  To date, the state working group has obtained settlements worth almost $310 million.

http://lawprofessors.typepad.com/securities/2011/12/wachovia-pays-148-million-to-state-and-federal-regulators-to-settle-fraud-allegations-involving-muni.html

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