Wells to pay $1.4 billion to securities investors

In yet another reminder that the financial crisis is far from over, Wells Fargo & Co. has agreed to buy back $1.4 billion in esoteric debt vehicles called "auction-rate securities" it sold to investors before the market for the securities collapsed last year and the auctions dried up.

The buy-back settles allegations made by California's attorney general that Wells Fargo peddled these securities as safe, solid and as good as cash -- even though large accounting firms had warned of potential risks if the auctions failed. Early last year, thousands of investors -- from wealthy retirees to university endowments, charitable foundations, municipalities and religious groups-- were left stranded when the market for the securities dried up, and the auctions failed.

Though a number of large banks and Wall Street brokerage firms have reached similar agreements, the Wells Fargo settlement stands out for its size, and by the fact that it involves a bank that is still receiving financial support from taxpayers. The U.S. Treasury invested $25 billion in Wells Fargo a year ago, and the San Francisco-based bank has yet to repay money, even though many of its rivals have.

"To the extent that the government is a shareholder of Wells Fargo, we're all paying for this" settlement, said Andrew Winton, chair of the finance department at the University of Minnesota. "It reinforces the whole notion of caveat emptor -- that you have to be careful what you get into, because these banks seem to have undersold the risks."

The securities resemble corporate debt, except the interest rates are set periodically, usually every week, in auctions overseen by brokerage firms that sold them.

A spokesman for the California attorney general's office said it is too early to determine how many Minnesota investors would recover money. About 40 percent of the auction-rate securities sold by Wells Fargo were bought by California residents.

Settlements with other banks and investment firms involving auction-rate securities have generated more than $6 million in penalty fees for the state of Minnesota, "and more is expected," according to a statement issued by the Minnesota Department of Commerce.

After the market collapsed, a long list of Minnesota companies and nonprofits -- including Park Nicollet Health Services, Best Buy, Lawson Software, Hutchinson Technology and MoneyGram International -- were caught holding the illiquid securities. Some companies took large write-downs.

The securities were initially only marketed to large institutional investors, with a minimum investment of $250,000 required. But, since 2006, minimum investments were cut to $25,000 and were marketed to "unsophisticated, retail investors," according to the lawsuit filed in April in California.

In early 2008, investors nationwide held about $330 billion of auction-rate securities.

"They were sold to people, sometimes without even an explanation of what they were, other than they were liquid," said Denise Crawford, Texas securities commissioner. Texas reached a settlement with Citigroup over the sale of the securities. Investors did not earn much of a premium for the additional risk, however. The interest rates were often as little as one-tenth of 1 percentage point higher than money market funds, Crawford said.

Bank of America, J.P. Morgan Chase, Citigroup, UBS and Goldman Sachs already have settled lawsuits. Nationwide, firms have agreed to repurchase $61 billion in auction-rate securities because of settlements, according to the North American Securities Administrators Association.

On Wednesday, the group announced its own settlement with Wells Fargo, with similar terms as those agreed to between California and the bank. That settlement stemmed from the work of securities regulators in California, Georgia, Missouri, Oregon, Texas, Utah and Washington.

Wells Fargo, Minnesota's largest bank by deposits, said in a statement Wednesday that it already has been voluntarily providing "significant liquidity" to customers who bought preferred auction-rate securities. Since April 2008, these customers have had access to up to 90 percent of the value of these securities, the bank said. Wells Fargo also agreed to pay $1.9 million in fines, though without admitting wrongdoing.

Shares of Wells Fargo rose 49 cents Wednesday to $28.86.

Chris Serres • 612-673-4308