California today sued investment subsidiaries of Wells Fargo & Co. for securities fraud, alleging that the San Francisco financial services company misled investors by selling $1.5 billion worth of risky securities that it peddled as being as safe as cash.
The securities "were sold to customers on the basis that they were like cash and people could get their money back in eight days," Atty. Gen. Jerry Brown said in an interview. "Now, it turns out they were not like cash and people can't get their money back even after many, many months, and they're mad as hell."
The lawsuit, filed in state court in San Francisco, seeks to recover money invested in what are known as auction-rate securities, which Wells Fargo subsidiaries sold to Californians. As the name implies, interest rates on auction-rate securities are reset in periodic auctions. Billions of dollars worth of the securities were sold to investors nationwide in recent years.
Regulators have charged that many investors were misled into believing the securities were safe and the equivalent of cash. But when the $330-billion market for auction-rate securities collapsed early last year, many investors couldn't sell the securities, or could only sell them at a loss.
About 2,400 Californians bought auction-rate securities from Wells Fargo, according to the attorney general's office.
Brown's lawsuit names Wells Fargo Investments, Wells Fargo Brokerage Services and Wells Fargo Institutional Services as defendants.
Wells Fargo disputed the state's allegations, saying that it had taken steps to help customers hit by the collapse of the auction-rate securities market, including offering loans to tide them over.
"We fully understand and deeply regret the effects this prolonged liquidity crisis has had on our clients," Charles W. Daggs, chief executive of Wells Fargo Investments, said in a statement.
"Wells Fargo could not have predicted these extraordinary circumstances, and even with the benefit of hindsight is not responsible for them."
Several financial services companies that marketed auction rate debt to investors have agreed to repurchase billions of dollars worth of the devalued securities.
Last month, Wachovia Corp., the bank acquired by Wells Fargo last year, agreed to repurchase $1.5 billion of the securities from California investors in a settlement with regulators. Brown said that case didn't involve the securities at issue in the lawsuit he filed today.
Last June, the attorney general sued Countrywide Financial Corp., accusing the mortgage lender of causing thousands of home foreclosures by deceptively marketing risky loans to borrowers. That suit, which sought restitution for borrowers who were deceived by Countrywide, was settled in October when the lender agreed to reduce loan payments and provide other benefits that could total as much as $8.7 billion nationally.
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