Wells Fargo & Co. has agreed to pay $11.2 million to settle allegations that Wachovia's corporate and investment bank improperly sold two complex mortgage-backed securities in late 2006 and early 2007.
In an order filed Tuesday, the Securities and Exchange Commission said Wells would pay $6.75 million in restitution, plus a $4.45 million civil penalty. The San Francisco-based bank, which bought Charlotte's Wachovia in 2008, neither admitted nor denied the SEC's findings.
The SEC said Wachovia violated anti-fraud provisions of the securities law regarding two collateralized debt obligations, or CDOs, the bank sold to investors as the U.S. housing market was showing signs of stress.
"We are committed to uncovering misconduct involving complex financial instruments and opaque markets," said Kenneth Lench, an SEC enforcement division official.
Wells spokeswoman Mary Eshet noted the settlement related to Wachovia actions in 2007, early in the credit crisis. "The issues presented here were complex, and Wells Fargo is pleased to have resolved this matter with the SEC," she said.
CDOs were created by investment banks by pooling mortgage loans and then slicing them up into high to low degrees of risk, with the supposedly safest "tranches" making payments to investors first. These securities have been blamed for fueling demand for risky mortgages, helping to create the housing bubble and later producing billions of dollars in losses for investors and the banks.
The Wall Street Journal reported Monday that Wachovia could face CDO-related charges and indicated the SEC was looking at the industry broadly. Last year, Goldman Sachs Group Inc. agreed to pay $550 million to settle SEC charges that the firm misled investors in a subprime mortgage-based CDO. The SEC on Tuesday declined comment.
According to the SEC order, Wachovia charged excessive markups in the sale of a portion of a CDO called Grand Avenue II to the Zuni Indian tribe and an unnamed individual investor who were customers of a Wachovia Securities financial adviser in El Paso, Texas. Grand Avenue II was a $1.5 billion CDO backed by residential mortgage-backed securities.
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