Wachovia to Halt Suspect Trading

Brokerage Wachovia Securities said Wednesday that it had permanently stopped a long-running trading practice at one of its Westlake Village offices after claims that the program may have violated securities rules.

Separately, a real estate investment trust said it had halted a discount stock purchase plan after learning its shares had been used in the trading practice.

The Times reported last week that Wachovia was investigating certain arbitrage trading at its Westlake Village office at 4550 E. Thousand Oaks Blvd. in response to an anonymous letter.

The New York Stock Exchange and the NASD, the brokerage industry’s self-regulatory agency, also are investigating the letter’s allegations, sources said. The NYSE and the NASD (formerly the National Assn. of Securities Dealers) declined to comment.

Wachovia said Wednesday that its probe was continuing but that it had decided to ban the trading practice in any case. “There are no plans to restart it no matter what the outcome of the investigation is,” said spokesman Tony Mattera at Wachovia’s Richmond, Va., headquarters.

The arbitrage trading program has been used by some brokers and their clients at the branch since the 1980s, according to people familiar with the matter. The practice involves buying shares directly from companies that offer price discounts on such stock purchases, then quickly selling the shares in the open market.

Participants would generally reap relatively small percentage returns on each transaction but could multiply the gains by engaging in the trading on a continuing basis, the people said. The purchase price discount typically is 2% off a stock’s market price, investors said.

Firms that offer discounted stock purchase plans do so to raise capital from smaller investors. The firms generally limit individual accounts to purchases of $5,000 to $10,000 a month.

The anonymous letter had accused the Wachovia brokers of using fictitious accounts to boost the amount of money involved in the trading, according to people familiar with the matter. The use of fictitious accounts could violate federal securities rules and the terms set by the companies issuing the discounted shares.

Wachovia’s Mattera said the brokerage wouldn’t comment on what its probe had found so far.

Because the stock purchases under the program were made directly with the companies issuing new shares, the brokers made no money on that part of clients’ trades. But they earned commissions when the shares were sold in the open market.

Some investors who said they had been clients of the Wachovia office for years contended that, although they used multiple accounts in the practice, all the accounts were legitimate.

One investor, who spoke on condition of anonymity, said it was common for him to have accounts in the names of children, grandchildren or other family members, but that he legally controlled all of the money.

“We have meticulously followed the prospectus rules,” the investor said, referring to the rules each company sets down for investors who want to participate in discount purchase plans.

Another investor said the practice, known as “the program” at the Wachovia office, gave companies a consistent way to raise capital more cheaply than by selling large blocks of new stock via investment banks.

Discounted stock purchase plans have been common among real estate investment trusts. Several REITs confirmed that the arrangements were attractive because of the relatively low cost of issuing such shares. But most of the companies assert that the programs are aimed at attracting long-term investors rather than short-term traders.

Sovran Self Storage Inc., a Buffalo, N.Y.-based real estate trust, halted its discount stock purchase plan in late January after receiving a copy of the letter alleging improper trades at the Wachovia branch, according to Diane Piegza, Sovran’s vice president of communications.

“We believe that certain participants may be engaging in ‘positioning’ transactions in order to benefit from the discount” off the stock’s market price, Sovran said in a letter to investors.

The firm said the plan was “primarily intended for the benefit of long-term investors, and not for the benefit of individuals or institutions who engage in short-term trading activities that could cause aberrations in the trading volume of our common stock.”