Wells Fargo Securities agreed to settle SEC charges that Wachovia Capital Markets  ("Wachovia") - prior to its being acquired by Wells - violated securities laws when it sold 2 collateralized debt obligations tied to the performance of residential mortgage-backed securities.  Wachovia, which sold the CDO's as the U.S. housing market began to collapse in late 2006 and early 2007, allegedly violated the securities laws in 2 respects:

• First, Wachovia charged undisclosed excessive markups in the sale of certain preferred shares or equity of a CDO to the Zuni Indian Tribe and an individual investor.  Months earlier, Wachovia marked down $5.5 million of equity to 52.7 cents on the dollar after the deal closed and it was unable to find a buyer.  Then, Wachovia sold the securities to the Zuni Indian Tribe and the individual investor at 90 and 95 cents on the dollar, respectively.   The buyers, obviously, were unaware that the securities had been marked down previously for accounting purposes.

• Second, Wachovia misrepresented to investors in another CDO that it acquired assets from affiliates “on an arm’s-length basis” and “at fair market prices” when, in fact, 40 residential MBS's had been transferred from an affiliate at above-market prices.  Wachovia then transferred these assets at stale prices in order to avoid losses on its own books.  The SEC’s order does not find that Wachovia Capital Markets acted improperly otherwise in structuring the CDOs or in the way it described the roles played by those involved in the structuring process.

To settle SEC charges, Wells Fargo Securities agreed to to pay more than $11mn in disgorgement and penalties, much of which will be returned to harmed investors through a Fair Fund - $6.75mn disgorgement plus $4.45mn penalty.

“Wachovia caused significant losses to the Zuni Indians and other investors by violating basic investor protection rules – don’t charge secret excessive markups, and don’t use stale prices when telling buyers that assets are priced at fair market value.”  -- Robert Khuzami, Director of SEC Division of Enforcement.

        SEC Staff Credits.   Brent Mitchell, Jeffrey Leasure, Jason Anthony, Reid Muoio - all members of the Structured and New Products Unit - conducted the SEC’s investigation.   [SEC Release 11-85, 4/5]