Wells Fargo Securities agreed to pay $11 million in disgorgement and penalties to settle U.S. Securities and Exchange Commission allegations of improper conduct in the sale of mortgage-backed securities as the housing market was beginning to crumble in late 2006 and early 2007.
According to the SEC, the broker-dealer then known as Wachovia Capital Markets caused significant losses to the Zuni Indian Tribe and other investors by charging excessive markups and claiming assets were priced at a “fair market value” when they were not. (Wachovia Capital Markets was renamed Wells Fargo Securities after the banks merged on Dec. 31, 2008).
The SEC found that Wachovia overcharged the Zuni Indian Tribe and an individual investor for certain preferred shares or equity of a collateralized debt obligation tied to the performance of residential mortgage-backed securities.
As detailed in the order, Wachovia marked down $5.5 million of equity to 52.7 cents on the dollar when it couldn’t find a buyer. Months later, the tribe and the investor paid 90 and 95 cents on the dollar. Unbeknownst to them, these prices were more than 70% higher than the price at which the equity had been marked for accounting purposes.
The SEC also found that Wachovia misrepresented to investors in a collateralized debt obligation called Longshore 3 that it had acquired assets from affiliates “on an arm’s-length basis” and “at fair market prices” when, in fact, 40 residential mortgage-backed securities were transferred from an affiliate at above-market prices.
“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,” said Robert Khuzami, director of the SEC Division of Enforcement, in a news release.
Wells Fargo, which did not admit or deny wrongdoing, was represented by Matthew Fitzwater of Sullivan & Cromwell.
Brent Mitchell, Jeffrey Leasure, Jason Anthony and Reid Muoio, who are members of the SEC’s structured and new products unit in Washington, conducted the agency’s investigation