Wachovia Securities raided in auction-rate investigation

From Times Wire Reports

Securities regulators from several states investigating Wachovia Securities’ auction-rate securities sales practices entered the company’s St. Louis headquarters Thursday and requested its documents and records.

Missouri officials said they conducted what they called a “special inspection” at Wachovia, part of a broad probe into questionable practices involving auction-rate securities.

Missouri Secretary of State Robin Carnahan’s office said the visit to Wachovia Securities, the former A.G. Edwards, concerned the collapse of the $330-billion auction-rate securities market. Wachovia Securities is part of the Charlotte-based bank Wachovia Corp.

“Hundreds of Missouri investors have called my office because of inability to access their money,” Carnahan said in a statement. She said she aimed to take actions “to make these investors whole.”


Wachovia spokeswoman Christy Phillips-Brown said, “Most securities firms, including Wachovia, are responding to inquiries from regulators about the auction-rate securities industry. The discussions that are occurring today are a part of this ongoing process.”

The Securities and Exchange Commission declined to comment.

Auction-rate securities had been seen by many as a safe investment. They were used, among other things, to fund municipal projects and agencies. They were promoted by brokers as liquid investments because customers normally could get out of them quickly.

The interest rates on such securities were reset at regular auctions, but the market fell apart during the credit crisis when investment banks stopped buying because the paper was seen as too risky. The market’s failure left many issuers, including local governments, unable to fund projects or daily operations unless they borrowed at much higher rates. That in turn left investors unable to access their cash.


The raid by the state, which also sought information on internal evaluations and marketing strategies, followed more than 70 formal complaints filed with the Missouri Securities Division over the last four months, representing more than $40 million of frozen investments.

Wachovia, the nation’s fourth-largest bank, is the subject of arbitration claims and a class-action lawsuit that was filed in New York in March.

Thursday’s raid added to the difficulties faced by new Wachovia Corp. President and Chief Executive Robert Steel, who assumed his post last week from the Treasury Department where he was deputy undersecretary for domestic finance.

Despite the raids, Wachovia shares joined a general stock market rally and rose $2.90, or 27.5%, to $13.44.