Wells Fargo Pays $11 Million to Settle SEC Charges it Bilked Zunis

Wells Fargo Securities will pay $11 million to settle an Securities and Exchange Commission (SEC) complaint that its predecessor, Wachovia Capital Markets, cheated investors - including the Zuni Tribe - in securities deals involving collateralized debt obligations.

The SEC said Wchovia 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.

"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 when telling buyers that assets are priced at fair market value," SEC enforcement director Robert Khuzami said in a statement announcing the settlement. 

In addition, the SEC saidWachovia Capital Markets misrepresented to investors in another collateralized debt sale 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 those assets at stale prices in order to avoid losses on its own books.

Kenneth Lench, Chief of the SEC Division of Enforcement’s Structured and New Products Unit, added, “We are committed to uncovering misconduct involving complex financial instruments and opaque markets and, where appropriate, compensating defrauded investors for their losses.”