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Wells Fargo to Pay $11 Million to Settle SEC CDO Sale Claims

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April 5 (Bloomberg) -- Wells Fargo & Co., the biggest U.S. home lender, agreed to pay $11.2 million to settle regulatory claims that Wachovia Capital Markets improperly sold two collateralized debt obligations tied to home mortgages.

The Wachovia unit, acquired by Wells Fargo in the wake of the 2008 credit crisis, charged “undisclosed excessive markups” while selling stakes in a CDO to the Zuni Indian tribe and an individual investor as housing markets began collapsing, the U.S. Securities and Exchange Commission said today in a statement. Wachovia also falsely claimed it acquired assets for a CDO “on an arm’s-length basis,” the SEC said.

“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,” SEC Enforcement Director Robert Khuzami said in the statement.

Regulators are investigating banks’ sales of CDOs -- pools of assets packaged into new securities -- after bundles of subprime mortgages disguised as highly rated assets helped spark the worst financial crisis since the Great Depression. As part of that sweep, the SEC is looking at CDO deals involving banks such as JPMorgan Chase & Co., Morgan Stanley, Deutsche Bank AG and Citigroup Inc., according to people familiar with the matter. Goldman Sachs Group Inc. agreed last year to pay $550 million to settle improper-sales claims.

Wells Fargo agreed to resolve the SEC claims, related to alleged violations in 2006 and 2007, without admitting or denying wrongdoing.

‘Early Days’

“The settlement relates to actions taken by Wachovia in 2007 in the early days of the credit crisis,” Mary Eshet, a Wells Fargo spokeswoman, said in an e-mailed statement. “The issues presented here were complex, and Wells Fargo is pleased to have resolved this matter.”

Wachovia charged the Zuni Indian tribe and the unidentified individual investor more than 70 percent above the market price when it sold them an investment in Wachovia’s $1.5 billion Grand Avenue II CDO in 2007, the SEC said. By the end of that year, the securities linked to the product had been downgraded and the transaction went into default as of February 2008.

Evergreen Investments

In 2009, Wachovia’s Evergreen Investments unit agreed to pay $40 million to settle SEC claims that it didn’t properly disclose changes in value of mortgage-backed securities. As a result, Evergreen overstated the performance of one fund by as much as 17 percent from February 2007 through its closing in June 2008, the SEC said.

Institutional Financial Market Inc.’s Cohen & Company Securities LLC unit agreed to pay $899,000 in restitution and a $50,000 fine last year to resolve Financial Industry Regulatory Authority claims of excessive markups in three sets of CDO sales in 2007 and 2008, according to the company’s annual report.

In a second claim today, the SEC said Wachovia misled investors about a $1.3 billion CDO called Longshore 3. Wachovia said it acquired assets “at fair market prices” even though about $250 million worth of mortgage-backed securities had been transferred at about $4.6 million above market value, according to the SEC’s order. The assets were transferred at “stale” prices to avoid losses, the SEC said.

Wachovia Capital Markets, which was renamed Wells Fargo Securities after the takeover by the San Francisco-based bank, will pay more than $11 million in penalties and disgorgement to the SEC, which will return much of the money to the investors, the agency said.

Near Bankruptcy

Wachovia came within 24 hours of declaring bankruptcy in September 2008 after defaults on home mortgages soared and depositors rushed to withdraw funds. Analysts traced the bank’s slide to its 2006 takeover of Golden West Financial Corp., a California provider of adjustable-rate mortgages that allowed borrowers to skip payments and add them to the loan balance.

Wachovia agreed to sell itself to New York-based Citigroup Inc. on Sept. 29, 2008, to avert a collapse. Less than a week later, Wachovia accepted a higher bid from San Francisco-based Wells Fargo in a deal that created the fourth-largest U.S. bank. Wachovia was based in Charlotte, North Carolina.

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net.

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net; David Scheer at dscheer@bloomberg.net; Lawrence Roberts at lroberts13@bloomberg.net.