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Securities regulators visit Wachovia's St. Louis offices

Thursday, July 17, 2008 | 6:45 p.m. CDT; updated 9:00 p.m. CDT, Tuesday, July 22, 2008

CHARLOTTE, N.C. — Securities regulators from several U.S. states, investigating Wachovia Securities’ auction rate securities sales practices, went to the company’s St. Louis headquarters Thursday and requested its documents and records.

Missouri officials said they conducted what they called a “special inspection” at Wachovia, part of a broad probe into questionable practices involving auction rate securities.

Missouri Secretary of State Robin Carnahan’s office said the visit to Wachovia Securities, formerly A.G. Edwards, concerned the collapse of the $330 billion auction rate securities market. Wachovia Securities is part of the Charlotte-based bank Wachovia Corp.

“Hundreds of Missouri investors have called my office because of inability to access their money,” Carnahan said in a statement. She added that she aims to take actions “to make these investors whole.”

Wachovia spokeswoman Christy Phillips-Brown said, “Most securities firms, including Wachovia, are responding to inquiries from regulators about the auction rate securities industry. The discussions that are occurring today are a part of this ongoing process.”

The Securities and Exchange Commission declined to comment.

Auction rate securities had been seen by many as a safe investment. They were used, among other things, to fund municipal projects and agencies. They were promoted by brokers as liquid investments because customers normally could get out of them quickly.

The interest rates on such securities were reset at regular auctions, but the market fell apart during the credit crisis when investment banks stopped buying because the paper was seen as too risky. The market’s failure left many issuers, including local governments, unable to fund projects or daily operations unless they borrowed at much higher rates. That, in turn, left investors unable to access their cash.

The state’s action, which also sought information on internal evaluations and marketing strategies, followed more than 70 formal complaints filed with the Missouri Securities Division over the last four months, representing more than $40 million of frozen investments. In April, the Securities Division launched an investigation, requesting documents, e-mails, transcripts and other records from Wachovia Securities and other banks.

Wachovia Securities has not fully complied with these requests, prompting Thursday’s onsite inspection, Missouri officials said.

Except for an encampment of news trucks, nothing appeared out of the ordinary Thursday at Wachovia Securities’ sprawling campus west of downtown St. Louis. Employees who ducked out for a cigarette break or to grab lunch declined to comment, with many pleading ignorance of the investigation.

Wachovia, the nation’s fourth-largest bank behind Citigroup, Bank of America and J.P. Morgan Chase, is the subject of arbitration claims and a class-action lawsuit that was filed in New York in March.

In a regulatory filing in May, Wachovia said the Securities and Exchange Commission and other regulators are seeking information concerning the underwriting, sale and subsequent auctions of municipal auction-rate securities and auction-rate preferred securities.

“Further review and inquiry is anticipated by the regulatory authorities, and Wachovia will cooperate fully,” the company said in the filing.

According to the filing, the bank and Wachovia Securities have also been named in a lawsuit filed in March in New York. The lawsuit seeks class-action status for customers who purchased and continue to hold such securities based on alleged misrepresentations concerning the quality, risk and characteristics of the securities. The bank said it “intends to vigorously defend the civil litigation.”

Thursday’s events had no apparent effect on Wachovia shares, which joined a general stock market rally and rose $2.90, or 27.5 percent, to $13.44 in trading.

 


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