Wells Fargo Securities will pay $11 million in a settlement of accusations that it misrepresented and overcharged for two complex debt products tied to housing industry performance.
Wells Fargo & Co. neither admitted nor denied the Securities and Exchange Commission findings in agreeing to the settlement.
The penalties were related to "misconduct in the sale" of two collateralized debt obligations, when the housing market was beginning to decline in late 2006 and 2007.
The conduct by Wachovia Capital Markets, as the unit then was known, violated securities laws in two ways, the SEC said.
First, the SEC said, 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.
Second, the SEC said, 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."
Instead, 40 residential mortgage-backed securities were transferred from an affiliate at above-market prices, the SEC said. Wachovia Capital Markets transferred these assets at "stale prices, in order to avoid losses on its own books."
The SEC's order does not find that Wachovia Capital Markets acted improperly otherwise in structuring the CDOs or in the way it described the roles played by those involved in the structuring process.
Wells Fargo Securities agreed to settle the SEC's charges by paying more than $11 million in disgorgement and penalties, much of which will be returned to investors.
