Wells Fargo & Co. has agreed to settle for $148 million the civil claims and criminal charges accusing Wachovia Bank of taking part in a bid-rigging scam with other financial firms and overcharging local and state governments on their investments. The settlement resolves allegations that for eight years, Wachovia rigged at least 58 transactions involving proceeds from over $9 billion of municipal bonds. By agreeing to settle, Wells Fargo, which acquired Wachovia three years ago, is not denying or admitting to these allegations.
In its allegations against Wachovia, the SEC said the financial firm earned ill-gotten gains in the millions of dollars by using tips provided about rival bids, turning in bogus bids to give competitors an advantage, and working with some of them to rig auctions so it would benefit. The Justice Department said Wachovia’s illegal behavior corrupted the bidding system for investment contracts while preventing municipalities from getting to avail of a competitive process. However, because the financial firm admitted to the illegal conduct, cooperated with the investigation, took action to deal with anti-competitive behavior, the federal government decided not to prosecute.
Involved in investigating Wachovia were the SEC, attorneys general in more than two dozen states, and the US Justice Department. The federal agencies have been looking at how a number of Wall Street firms and local-government advisers worked together to rig competitive auctions in order to charge excessive fees to public agencies that bought the investments.
More than dozen banks have been named as alleged co-conspirators. Other financial firms that have settled similar claims over muni bond bid-rigging are Bank of America, Corp., UBS AG, and JPMorgan Chase & Co. With this latest settlement, the banks will have paid $673 million to settle the municipal bond-related allegations.
The charges against the financial firms involve investment contracts purchased by cities and state with proceeds from the municipal-bond market. At competitive auctions organized by financial advisers, these contracts should have gone to banks offering the highest return.
According to investigators, what instead ended up happening is that some of these advisers would direct business to a certain bidder in exchange for kickbacks. Meantime, other banks would purposely make bids they knew wouldn’t win to cover up the alleged conspiracy. Because governments usually have to invest bond proceeds in the short term until it is time to spend the cash on public projects, the bogus bidding practices adversely impacted what municipalities ended up paying for reinvestment products. The bid-rigging cost the US Treasury and other governments money.
Wells Fargo Pays $148 Million to Settle Wachovia Muni Bid-Rigging Charges, Bloomberg, December 8, 2011
Wells Settles Wachovia Bid-Rig Case, Wall Street Journal, December 9, 2011
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Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities, Institutional Investor Securities Blog, December 6, 2011
Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance, Institutional Investor Securities Blog, November 30, 2011
$75K FINRA Arbitration Award Against Wells Fargo Advisors LLC For Defaming an Ex-Employee in Form U-5 is Confirmed by District Court, Stockbroker Fraud Blog, November 30, 2011
Our securities fraud attorneys represent institutional investors that lost money because of broker-dealer misconduct. Contact Shepherd Smith Edwards and Kantas LTD LLP.