Wachovia Corporation, now a part of Wells Fargo & Co. (WFC), will have to shell out a $2.52 million assessment fee to the state for its involvement in the auction rate securities market.
An auction rate security (ARS) typically refers to a debt instrument with a long-term nominal maturity, for which the interest rate is regularly reset through a Dutch auction.
Since February 2008, most of such auctions have failed and the auction market has been largely frozen. In late 2008, investment banks that had marketed and distributed ARSs have agreed to repurchase most of them at par. Wachovia announced yesterday that it would buy back $324.6 million of ARSs it sold to investors.
Wachovia has been slapped with a multi-state investigation under which it will have to pay a $50 million penalty along with buying back $9 billion in auction rate securities sold to its investors.

On July 21, Morgan Keegan – a regional brokerage firm owned by the Regions Financial Corporation (RF) – was sued by the SEC. Morgan Keegan was accused of misleading clients about risks in $925 million in auction-rate securities that it had sold.

Last year, large banks including JP Morgan Chase (JPM), Morgan Stanley (MS), Citigroup (C) and Merrill Lynch – now owned by the Bank of America (BAC) – had agreed to buy back ARSs from investors as part of industry-wide settlements with federal and state regulators. The settlements involved securities abuses by the firms.

Wachovia Corporation was purchased by Wells Fargo on December 31, 2008, when it ceased to be an independent corporation. Wells Fargo purchased Wachovia after a government-enforced sale to avoid a failure of Wachovia.
With the acquisition of Wachovia and the exit of small payers, Well Fargo has gained a larger share in mortgage markets. We believe it is better positioned than its peers. We maintain a Neutral rating on the shares.
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