Nov. 18 (Bloomberg) -- Wells Fargo & Co., the fourth- biggest U.S. lender by assets, will repay as much as $1.4 billion to brokerage clients whose funds were frozen when the auction-rate securities market collapsed last year, the bank said in a statement.

San Francisco-based Wells Fargo agreed to buy back auction- rate debt sold through its brokerage unit before Feb. 13, 2008, the North American Securities Administrators Association said today. The bank said in a statement it will pay $1.9 million in fines and expenses.

Regulators in Oregon, California, Georgia, Missouri, Texas, Utah and Washington investigated whether Wells Fargo Investments LLC misled clients by falsely assuring them auction-rate bonds were a safe, liquid alternative to cash, certificates of deposit or money market funds, the association said. State overseers led by the group have forced banks to buy back $61 billion in auction-rate securities since the market froze in February 2008.

“Getting $61 billion freed up for investors is nothing less than awesome,” said Texas Securities Commissioner Denise Voigt Crawford, the association’s president, in a phone interview from Austin. “What’s incredible is the enormity of the results.”

Last Settlement

The Wells Fargo agreement marks the last of the settlements with large banks that sold auction-rate securities, Crawford said. They are long-term bonds with interest rates that reset every week or month. The market totaled $330 billion before it collapsed when dealers stopped supporting auctions that didn’t attract bidders, leading to investors being trapped holding hundreds of billions of dollars of the debt.

The U.S. Securities and Exchange Commission and Financial Industry Regulatory Authority have also investigated sales of auction-rate securities and forced dealers to settle.

Efforts to recover investor funds will continue, with the focus on so-called downstream sellers of the securities, Crawford said. They are firms that didn’t underwrite the securities or manage the auctions, selling them to investors.

Wells Fargo clients held an estimated $2.95 billion in auction-rate securities when the market froze. Wells Fargo said the buyback offer would be available to individuals, some charitable groups and other organizations with less than $10 million, according to a press release. The settlement covers all classes of auction-rate securities including preferred, Mark Breckler, a California senior assistant attorney general, said at a press conference today. The state participated in the investigation.

‘Glad’ to Resolve

“We are glad to have resolved this for our customers through an actual repurchase” of the auction-rate securities, said Charles Daggs, chief executive officer of Wells Fargo Investments, in the bank’s release.

The buybacks are expected to have a financial impact of $150 million, after taxes, on Wells Fargo earnings, according to the press release. The company expects to recover the cost over time through redemptions of the securities, it said. The bank posted a record third-quarter profit by limiting loan defaults and cutting costs from Wachovia Corp., which it acquired in late 2008. Net income almost doubled to $3.24 billion, or 56 cents a diluted share.

‘Equivalent to Cash’

California Attorney General Jerry Brown sued Wells Fargo in April, alleging the company deceptively advertised $1.5 billion in auction-rate securities sold to investors. About $700 million, or about half, of the Wells Fargo buybacks will be from Californians, according to a press release from Brown’s office.

Wells Fargo marketed the securities “as equivalent to cash,” Brown said at a press conference today in Oakland, California. “In truth, it was not cash and there were circumstances in which investors couldn’t get their cash back for more than a year.”

Bank of America Corp., Citigroup Inc., Credit Suisse Group AG,Goldman Sachs Group Inc. and Morgan Stanley are among securities firms that have settled with state and federal regulators over auction-rate securities sales practices. Wachovia Securities, which Wells Fargo acquired on Dec. 31, settled in August, 2008, according to the bank.

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net.

Last Updated: November 18, 2009 17:03 EST