Wells Fargo Investments LLC has agreed to repay about $1.3 billion to clients whose funds were frozen in the auction-rate securities market in the latest of a series of settlements with state securities regulators.

The company, a unit of San Francisco-based Wells Fargo & Co , has agreed to offer to buy back auction-rate securities by mid-February 2010, the bank and the North American Securities Administrators Association announced on Wednesday.

Auction-rate securities are long-term debt instruments whose interest rates are regularly reset through auctions. The market froze in February 2008 as the credit crunch took hold, trapping investors and issuers and prompting complaints from investors around the country who were unable to withdraw money from their accounts.

Wells Fargo will also reimburse clients who sold securities at a discount after the market froze and pay $1.9 million in penalties to states, the North American Securities Administrators said in a statement.

The bank, in a separate statement, said the agreement resolves all active probes and enforcement actions concerning its involvement in the auction-rate securities market. Wells Fargo said it reached separate agreement with the securities industry trade group and the California attorney general's office.

Wells Fargo clients held an estimated $2.95 billion in auction-rate securities at the time, the trade group said.

Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold, California Attorney General Edmund Brown said in a statement.

About $700 million of the total potential buybacks could be to California investors, Brown said.

The U.S. Securities and Exchange Commission and accounting firms determined in March 2005 that auction-rate securities should not be considered cash equivalents, but Wells Fargo marketed them as safe, liquid, cash-like investments until the market froze, he added.

In addition to California, other states whose securities regulators led the settlement negotiations with Wells Fargo were Georgia, Missouri, Oregon, Texas, Utah and Washington.

The settlement is the latest in a string of deals banks across the nation have struck with regulators following the failure of the auction-rate securities market last year.

States, including California, New York and Massachusetts, launched probes of Wall Street practices in the market following allegations they misled clients by assuring them the auction-rate securities were a safe, liquid alternative to cash, certificates of deposit or money market funds.

Since 2008, state securities regulators have secured deals with banks including Citigroup, Merrill Lynch, Goldman Sachs, Deutsche Bank, Wachovia, JP Morgan, Morgan Stanley, UBS and TD Ameritrade.

The settlements have returned more than $61 billion to investors, the largest return of funds in history, according to the association.

(Reporting by Ciara Linnane in New York and Peter Henderson in San Francisco; additional reporting by Elinor Comlay in New York; Editing by Leslie Adler)

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