Wells Fargo in Hot Water Over Auction Rate Securities

April 30, 2009. By Heidi Turner

San Francisco, CA: The state of California has jumped into the auction rate securities fiasco, accusing Wells Fargo & Co of fraud for its role in the auction rate securities market. California is not the first state to get involved with auction rate securities and how they were marketed. Other states have taken action against what they allege are misleading practices in the sale of auction rate securities by a number of financial firms.

In its lawsuit, California alleges that 3 Wells Fargo investment subsidiaries—Wells Fargo Investments, Wells Fargo Brokerage Services and Wells Fargo Institutional Services—marketed the auction rate securities as being as safe as cash. According to the state, investors were not only told that the securities were like cash, they were also told they could get their money back in 8 days. However, as all too many investors found out, that simply was not true—at least, it was not true after the auction rate securities market collapsed. In fact, after months of waiting, some people still do not have their money back.

The lawsuit seeks recovery of $1.5 billion invested in the Wells Fargo subsidiaries on behalf of approximately 2,400 investors from California. Among the allegations made in the suit are that the subsidiaries continued to sell auction rate securities even though there were signs that the market was collapsing, that the investors were not made properly aware of the risks involved in auction rate securities and that sales personnel themselves were not made aware of all the ins and outs of the securities.

"Wells Fargo's affiliates promised investors auction-rate securities were as safe and liquid as cash, when in fact they were not, and now investors are unable to get their money when they need it," California Attorney General Edmund G. Brown said. "This lawsuit seeks to recover $1.5 billion for Californians and holds these companies accountable for giving investors false and deceptive advice."

Wells Fargo has responded to the allegations by saying that it tried to aid customers affected by the auction rate securities collapse by offering loans to get them through. Furthermore, it said it could not have predicted the collapse of the market. In addition to the California lawsuit, Wells Fargo also faces a suit from Washington State.

In February 2008, investors in auction rate securities were stunned to discover that the market for the securities had collapsed, leaving them with investments that either could not be sold at all or could only be sold at a loss—despite being told that the securities were safe. In an interview with the Los Angeles Times, one investor said that the auction rate securities fraud, extending beyond Wells Fargo, "dwarfs all frauds in history, including Madoff."

In fact, more than $330 billion of auction rate securities have been sold to investors, many of whom have now found that their investment was frozen and they do not have access to their money. Some financial services companies, including Wachovia, have agreed to buy back auction rate securities from their investors. However, not all financial services companies have followed suit.

Although it may appear that investors who have been affected by the collapse of the auction rate securities market are wealthy people who could withstand losses, California's lawsuit alleges that the securities were sold to people for whom the securities were an unsuitable investment. The Attorney General cites the case of a woman suffering from lung cancer who needed her money for treatment for her illness. She was allegedly advised by a Wells Fargo agent to put the money in an account with a higher interest rate. Although the woman told the agent she could not tolerate any risk, the money was put in an auction rate securities account. When the auction rate securities market collapsed, the woman no longer had access to her money.

No loss is acceptable when an investment has been marketed as very safe and equivalent to cash. There is enough natural risk that comes with investing—investors should not have to worry that the people selling them the investments are misleading them about the nature of those investments.

If you believe you were misled about the nature of auction rate securities, it may just be time to contact a lawyer about your options.