Investment Firms Face Calif. Lawsuit Over Sale of Risky Auction-Rate Securities

Investment firms affiliated with Wells Fargo & Co. have been sued by California Attorney General Gerry Brown and accused of engaging in deceptive, misleading tactics in selling $1.5 billion worth of risky investments that were falsely billed as being just as safe as cash.

The lawsuit, filed today in state court in San Francisco, seeks return of money investors across the United States spent on the investments, called auction-rate securities. Wells Fargo Investments, Wells Fargo Brokerage Services, and Wells Fargo Institutional Services are named as defendants in the suit. About 2,400 people in California alone purchased the investments though the Wells Fargo firms, according to the lawsuit.

Risky Investments Sold as Safe

Auction-rate securities are investments for which the interest rate is determined in auctions, typically held weekly or monthly. Many investors were lied to and told that the investments were safe and that they could get their money out of the securities if they wanted to. In reality, thousands of Californians have been unable to recover their funds from the investments months after the nation’s $330-billion auction-rate securities market collapsed, Brown said.

California regulators say many unsophisticated investors were sold the complicated investments and should not have been pitched on the unsuitable investments. When things went south, investors found that their only real option was to sell the securities at huge losses.

Wells Fargo Denies Wrongdoing

In a statement issued in response to Brown’s lawsuit, Wells Fargo denied misleading investors and said that bank officials “fully understand and deeply regret the effects this prolonged liquidity crisis has had on our clients.”

The massive financial downturn that has crippled the U.S. economy created “extraordinary circumstances” that caused the demise of the auction-rate securities market and took with it billions of dollars in investor dollars, Wells Fargo said.

Other Investment Firms Also Targeted

Wells Fargo is just the latest financial firm to face the music for their selling of auction-rate securities. Several firms have agreed to buy back billions of dollars in the securities that are worth far less than what investors paid for them.

Wachovia Corp., which was purchased by Wells Fargo in 2008, agreed to repurchase $1.5 billion of the securities from California investors in a deal with state regulators. That case did not revolve around the same securities that are at the center of the new lawsuit, Brown said.

No related posts.