The Securities and Exchange Commission (SEC) announced Tuesday that Wells Fargo Securities agreed to settle charges that Wachovia Capital Markets engaged in misconduct in the sale of two CDOs tied to the performance of RMBS as the U.S. housing market was beginning to show signs of distress in late 2006 and early 2007.

Wells Fargo Securities, renamed as such after Wells Fargo & Co. bought Wachovia Corp. in 2008, agreed to settle the SEC’s charges by paying more than $11 million in disgorgement and penalties.

IDD on Tuesday left messages with Wells Fargo seeking comment.

Without admitting or denying the findings, Wells Fargo Securities consented to the entry of an administrative order directing that it cease and desist from committing or causing any violations and any future violations of Securities Act of 1933. Wells Fargo agreed to pay disgorgement of $6.75 million and a penalty of $4.45 million. A total of $7.4 million of those amounts will be returned to investors.

The SEC’s order found that Wachovia Capital Markets violated the securities laws in two respects.

First, according to the agency, 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. As detailed in the order, 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 more than 70% higher than the price at which the equity had been marked for accounting purposes.

Second, the agency said, 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” when, in fact, 40 RMBS were transferred from an affiliate at above-market prices. Wachovia Capital Markets transferred these assets at stale prices 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.

Without admitting or denying the findings, Wells Fargo Securities consented to the entry of an administrative order directing that it cease and desist from committing or causing any violations and any future violations of Securities Act of 1933. Wells Fargo agreed to pay disgorgement of $6.75 million and a penalty of $4.45 million. A total of $7.4 million of those amounts will be returned to investors.

 

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