The State of California has accused Wells Fargo & Co. of fraud for the company’s role in an investment meltdown that has been compared in magnitude to the Bernard Madoff scandal. Attorney General Jerry Brown sued three Wells Fargo investment subsidiaries, alleging they committed securities fraud by telling California investors that $1.5 billion of risky securities sold to them were as safe as cash. The Attorney General had this to say when filing the suit:
The securities were sold to customers on the basis that they were like cash and people could get their money back in eight days. Now, it turns out they were not like cash and people can’t get their money back even after many, many months, and they’re mad as hell.
The lawsuit, filed in state court in San Francisco, seeks to recover the money invested by about 2,400 Californians in what are known as auction-rate securities. These were marketed by the Wells Fargo subsidiaries. Auction-rate securities, generally backed by student loans, municipal bonds or other debt, have interest rates that are reset periodically through auctions — sometimes as often as once a week. More than $330 billion of the securities were sold in recent years to investors attracted to their yields, which could be one or more percentage points above a typical money market fund.
Regulators have alleged that many banks and investment firms deceived their clients into believing that auction-rate securities were as safe as a money market account. But when the market for auction-rate securities collapsed in February 2008, many investors couldn’t sell the securities, or could sell them only at a loss. It’s believed by some experts that auction-rate preferred securities are the largest fraud ever perpetrated by Wall Street on investors. Several financial-service companies that issued auction-rate debt have agreed to repurchase billions of dollars of the devalued securities to settle claims by regulators that they defrauded investors. Recently, Wachovia Corp., which Wells Fargo acquired last year, agreed to repurchase $1.5 billion of the securities from California investors in a settlement with the state Department of Corporations that also included a division of Citigroup Inc.
Brown’s lawsuit names Wells Fargo Investments, Wells Fargo Brokerage Services and Wells Fargo Institutional Services as Defendants. It alleges that they began selling auction-rate securities in 2001 and continued to sell them right up to the collapse of the market last year, despite signs that the market was beginning to crack in the second half of 2007. It’s alleged that Wells Fargo sales personnel weren’t properly trained in the intricacies of auction-rate securities, and that the risks of the investments weren’t explained to clients. Investors included retirees and small businesses, and accounts ranged from $25,000 into the millions of dollars.
Source: Los Angeles Times
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