NASAA Statement on Wachovia Capital Markets LLC Settlement

WASHINGTON, DC. (July 5, 2006)—North American Securities Administrators Association (NASAA) President and Wisconsin Securities Administrator Patricia D. Struck, released the following statement today after state securities regulators announced a $25 million multistate settlement of enforcement actions against Wachovia Capital Markets LLC involving allegations of potential conflicts of interest between the firm’s research and investment banking operations.

“The settlement announced today by state securities regulators is a positive step in our ongoing efforts to strengthen investor confidence and foster fairness in our capital markets.

“A multistate team of investigators worked long and hard on this investigation, uncovering yet another example of the potential conflicts of interest between research analysts and investment banking that has undermined investor confidence.

“Today’s multistate agreement is a reflection of the ongoing efforts by state securities regulators to help restore investor confidence in our financial markets by ensuring that they are treated fairly and provided with objective research. It also should serve as an important reminder to the securities industry of the significance regulators place on the proper supervision of employees.

“This agreement is the result of months of intense negotiations and many thousands of hours of dedicated effort by state securities regulators, led by officials in Nebraska, Virginia, North Carolina, with significant assistance from Utah and Alabama, and contributions from Georgia, Maine, Connecticut, and New Jersey.”

–NASAA–

Background

The settlement results from allegations of potential conflicts of interest between Wachovia Capital Markets’ research analysts and investment bankers. The settlement effectively resolves a 28-month multistate investigation of Wachovia Capital Markets, which operates Wachovia Corporation’s institutional brokerage and capital markets businesses. The settlement, the allegations of which were neither admitted nor denied by Wachovia Capital Markets, includes the following charges:

  • State investigators determined that Wachovia Capital Markets failed to supervise its employees in connection with potential conflicts of interest between equity research and investment banking as evidenced by research analysts’ participation in certain presentations with potential investment banking clients.  In addition, research analysts’ evaluations sought information regarding their interaction with investment banking and regarding the investment banking activity in their sector.  Moreover, on occasion, Wachovia Capital Markets considered whether companies were potential clients in determining to provide research coverage on those companies.
  • Wachovia did not keep certain electronic communications as required by state securities laws. Wachovia Capital Markets’ e-mail system and procedures were inadequate to ensure all electronic mail communications were retained and readily accessible. As a result, 20 percent of the e-mail folders requested in November 2002 could not be produced and 42 percent of the e-mail folders requested in January 2003 were not produced promptly. Wachovia Capital Markets also failed to maintain a system that allowed it to locate and retrieve back-up tapes for its e-mail system.

The multistate settlement is related to the April 2003 Global Settlement that 12 other investment banks have reached with the state, federal and industry regulators. Under the terms of the settlement, Wachovia Capital Markets will pay a total of $25 million, including: $20 million in penalties for failing to supervise its employees in connection with potential conflicts of interest between equity research and investment banking; $1.65 million in penalties for failing to preserve required books and records;  $3 million to be used for investor education, as designated by the Board of Directors of the North American Securities Administrators Association, Inc. (NASAA); and $350,000 for costs associated with the investigation, which will be paid to NASAA.

The settlement follows a 28-month investigation of the firm led by state securities regulators from Nebraska, Virginia, and North Carolina, with significant assistance from Utah and Alabama, and contributions from Georgia, Maine, Connecticut, and New Jersey.

For More Information:
Bob Webster
Director of Communications
202-737-0900

2006 Headlines, Newsroom