Jerry Brown (D)
SAN FRANCISCO (Legal Newsline)-Wells Fargo affiliates have agreed to return $1.4 billion to investors to settle claims by the state attorney general that the banking giant misled investors over the safety of auction-rate securities, officials said Wednesday.
Under the landmark settlement with California Attorney General Jerry Brown, the bank will pay buy back $1.4 billion in non-liquid auction-rate securities from thousands of retail customers, charities, and small businesses nationwide, including about $700 million to California investors.
The San Francisco-based company, additionally, will pay the attorney general's investigation costs as well as $1.9 million in penalties to the states.
"Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold," Brown said. "Based on misleading advice, investors bought these risky securities. Now, retail investors and small businesses are finally getting their money back."
Earlier this year, Brown filed the lawsuit against three Wells Fargo affiliates-Wells Fargo Investments LLC, Wells Fargo Brokerage Services LLC and Wells Fargo Institutional Securities LLC. Brown filed his lawsuit in San Francisco County Superior Court.
Brown, a Democrat, alleged that the Wells Fargo affiliates "routinely misrepresented, marketed and sold auction-rate securities as safe, liquid and cash-like investments, omitting material facts. The company was also charged with failing to supervise and train its sales agents and selling unsuitable investments," Wednesday's statement said.
The lawsuit also alleged that despite warnings, Wells Fargo continued to sell auction-rate securities. In March 2005, the Securities and Exchange Commission, four major accounting firms and the Financial Accounting Standards Board all determined that auction-rate securities should not be considered "cash equivalents."
For auction-rate securities, the interest rate or dividend is reset periodically through an auction mechanism. The market for auction-rate securities soured last year.
From Legal Newsline: Reach staff reporter Chris Rizo at chrisrizo@legalnewsline.com.