Legal News

Subprime Legal: Feds and States Probe Wachovia, IndyMac

By Amir Efrati

The race is heating up among regulators and prosecutors to show the public that they’re sorting out the auction rate securities mess.

Here’s the breaking news, courtesy of WSJ’s Liz Rappaport: A team of 10 state securities regulators drove to the St. Louis headquarters of Wachovia Securities yesterday to demand documents and conduct interviews about the firm’s sales and marketing of ARS. The “onsite inspection” occurred after Wachovia hadn’t fully complied with regulator requests, Missouri regulator officials said.

The state investigators came from Missouri, Illinois, New Jersey, Pennsylvania and other states, all of which are part of a task force led by Massachusetts. (Missouri also said it is investigating Commerce Bank N.A.)

For newbies to the auction rate world, a brief refresher: The $330 billion ARS market froze up earlier this year amid the credit crunch (caused in part by the subprime debacle), and investors — individuals, charities and companies, among others — were left unable to easily sell their securities and access their money. Some of these securities are tied to subprime mortgages and have lost much of their paper value.

As you might recall, last month Massachusetts got the party started by suing units of investment bank UBS AG for fraud and dishonest conduct in sales of ARS. The suit alleges that UBS representatives told investors that the securities “were safe, liquid ‘cash alternatives’ when UBS knew they were not.” The bank is defending itself against the suit and recently announced a plan to buy back as much as $3.5 billion in ARS from its customers.

Then last week, the WSJ broke news that the ARS mess has gone criminal, with an investigation into whether two former Credit Suisse brokers who sold many ARS that were backed by subprime-related instruments had deceived investors.

Not to be forgotten, the Securities and Exchange Commission requested information from Wachovia earlier this year and it has been probing UBS, as has New York Attorney General Andrew Cuomo. The FT reported Monday that the SEC is in discussions with Wall Street banks to help unfreeze the market.

In other breaking subprime news, WSJ, following an AP scoop, reports today that failed lender IndyMac Bank, which was seized by the government last week, is under investigation by the Federal Bureau of Investigation for possible mortgage fraud. The FBI said Pasadena, Calif.-based IndyMac is among 21 banks under investigation for such fraud.

Full post as published by Law Blog - WSJ.com on July 17, 2008 (boomark / email).