WASHINGTON — Even as Wall Street churned out mortgage-backed securities and derivatives in 2006, the sellers of the often-convoluted packages sometimes knew that parts of the deals — namely those that they could not sell — were worth far less than face value.
So it seemed reasonable in October 2006, when Wachovia Capital Markets, after failing to find a buyer for a tranche of a collateralized debt obligations known as Grand Avenue II, listed the securities on its books at 52.7 cents on the dollar.
Four months later, with the mortgage market starting to collapse, Wachovia sold those same securities to the Zuni Indian Tribe for 90 to 95 cents on the dollar. A year later, the deal went into default, and the tribe and other investors lost millions.
The Securities and Exchange Commission said Tuesday that it had approved an $11 million settlement for a securities fraud complaint related to the Grand Avenue II deal and a second derivatives transaction with a subsidiary of Wells Fargo, which bought Wachovia in 2008 as the troubled bank neared collapse.
“Wachovia caused significant losses to the Zuni Indians and other investors by violating basic investor protection rules,” Robert Khuzami, the director of the S.E.C.’s enforcement division, said in a statement. The rules, he added, include “don’t charge secret excessive markups, and don’t use stale prices when telling buyers that assets are priced at fair market value.”
Without admitting wrongdoing, Wells Fargo Securities agreed to pay a disgorgement of $6.75 million and a civil penalty of $4.45 million, the S.E.C. said, with $7.4 million going to a fund to be distributed to investors who had lost money on the two transactions.
In a second deal involving a C.D.O., called Longshore 3, Wachovia Capital Markets falsely told investors that it had acquired some of the assets “on an arm’s-length basis,” and at “fair market prices.” In fact, the S.E.C. said, Wachovia “transferred these assets at stale prices in order to avoid losses on its own books.”
In a statement, Well Fargo said: “The settlement relates to actions taken by Wachovia in 2007 in the early days of the credit crisis. The issues presented here were complex, and Wells Fargo is pleased to have resolved this matter with the S.E.C.”
In its order outlining the case, the S.E.C. documents numerous instances of conduct that could only have been performed by individuals who worked for Wachovia — marking up the value of the Grand Avenue securities by 70 percent, or approving the false and misleading disclosure that the Longshore securities were acquired “on an arms-length basis” and “at fair market prices.”
But no individuals were included in the complaint, or even named, in the S.E.C.’s cease and desist order or the settlement.
Both the Zuni Indian Tribe, whose reservation is in Arizona and western New Mexico, and an individual investor who bought a substantial share of the transaction, bought the Grand Avenue securities at an inflated price through a Wachovia broker in El Paso, Tex., the S.E.C. said
A spokeswoman for Wells Fargo, Mary Eshet, declined to comment on whether any of the people involved in the C.D.O. sales still worked for Wells Fargo. Regarding the lack of charges against individuals, she pointed to a footnote in the S.E.C.’s order that says C.D.O.’s trade infrequently and are not listed on an exchange, making current prices “not readily discoverable.”
Lorin L. Reisner, deputy director of the S.E.C.’s enforcement division, said that “it’s reasonable to assume that we look very carefully at the involvement of individuals” in cases like this. He said the S.E.C. had filed complaints against individuals in several cases related to the financial crisis, including senior executives of Countrywide Financial, New Century Financial and IndyMac Bancorp.
The S.E.C. complaints were brought by the enforcement division’s structured and new products unit, one of four new enforcement offices created by Mr. Khuzami after he took over as agency’s top enforcer in February 2009.
