Wells Fargo Paying $148 Million to Settle Wachovia Muni Bid-Rigging Case

The Securities and Exchange Commission Thursday charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds.

The SEC alleges that Wachovia -- now Wells Fargo Bank (WFC) following a merger in March 2010 -- generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico.

Wachovia allegedly won some bids through a practice known as last looks in which it obtained information from the bidding agents about competing bids. It was also accused of winning bids through set-ups in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia's favor. Furthermore, it was alleged that Wachovia facilitated some bids rigged for others to win by deliberately submitting non-winning bids.

In a statement released Thursday, Wells Fargo announced it has agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wells Fargo will also pay $8.9 million to the Internal Revenue Service, $46.1 million to the Securities and Exchange Commission, $34.5 million to the Office of the Comptroller of the Currency and an additional $58.8 million to 26 state attorneys general.

Wachovia won bids by playing an elaborate game of 'you scratch my back and I'll scratch yours,' rather than engaging in legitimate competition to win municipalities' business, said Robert Khuzami, director of the SEC's Division of Enforcement in a statement.

Wells Fargo said the payments will not have an adverse effect on the firm's financial results and the settlement will not adversely affect the conduct of any current business of Wells Fargo.

Shares for Wells Fargo are down 1.74 percent, or 47 cents, to $26.58 in Thursday mid-day trading, faring slightly better than the benchmark S&P 500 Financials Sector Index (INDEXSP), which lost 4.88 points or 2.73 percent, to 173.85.

According to the SEC, financial institutions have now paid a total of $673 million in settlements resulting from the ongoing investigations into corruption in the municipal reinvestment industry.

Others charged prior to Wachovia are:

• J.P. Morgan Securities LLC - $228 million settlement with regulators on July 7, 2011.
• UBS Financial Services Inc. - $160 million settlement with regulators on May 4, 2011.
• Banc of America Securities LLC - $137 million settlement with regulators on Dec. 7, 2010.