Wells Fargo (WFC) Settles for $11 Million in Wachovia CDO Charges

Wells Fargo (NYSE:WFC) settled charges with the SEC in relationship to Wachovia Capital Markets having overpriced two collateralized debt obligations, or CDOs, for $11 million.

The charges came with the acquisition of Wachovia by Wells Fargo in 2008, whereby they assumed all liabilities connected to the company.

The SEC alleged Wachovia overpriced two CDOs in 2006 and 2007 and sold them to the Zuni Indian Tribe and individual investors.

Per the settlement, there was no admission or denial of having done anything wrong in the situation.

The SEC has said:

"Wachovia Capital Markets violated the securities laws in two respects. First, Wachovia Capital Markets charged undisclosed excessive markups in the sale of certain preferred shares or equity of a CDO called Grand Avenue II to the Zuni Indian Tribe and an individual investor. As detailed in the order, Wachovia Capital Markets 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. Months later, the Zuni Indian Tribe and the individual investor paid 90 and 95 cents on the dollar. Unbeknownst to them, these prices were over 70 percent higher than the price at which the equity had been marked for accounting purposes.

"Second, Wachovia Capital Markets misrepresented to investors in a CDO called Longshore 3 that it 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 Capital Markets transferred these assets at stale prices in order to avoid losses on its own books."

Wells Fargo was trading at $32.05, gaining $0.06, or 0.19 percent, as of 12:27 PM EDT.

Wells Fargo (WFC), CDOs and (C) (DB) (JPM) (MS) (UBS)

In what is an extremely dubious case that reportedly will be brought against Wells Fargo (NYSE:WFC) concerning CDOs, which would have powerful negative repercussions on shareholders in Citigroup (NYSE:C), Deutsche Bank (NYSE:DB), J.P. Morgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS) and UBS (NYSE:UBS), the Securities and Exchange Commission is reportedly about to file civil charges against Wells Fargo for allegedly overcharging investors for mortgage bonds.

Rochale Securities analyst Dick Bove responded to the probability, saying, "The bulk of the shareholders never owned Wachovia stock whatsoever. The first question that came to my mind; who really should be at risk for legal penalties?"

At issue is whether or not Wells Fargo didn't reflect the diminishing value of the underlying loans when it sold collateralized debt obligations to investors. The SEC doesn't think it did, or rather Wachovia did, at the time.

Concerning the repercussions for other banks and their shareholders, Bove concluded, "Those CDOs were sold in a market environment. If the precedent is established that an issuer has to pay up if the value of securities you sell in a market auction goes down in value, then you have a real problem for bank shareholders."

Talk about regulation and federal agencies gone awry.