Wells Fargo Settles Securities Fraud Charges

Earlier this week,  Wells Fargo (along with the Bank of America, regarding Auction Rate Securities) reached agreements to settle securities fraud charges with state and federal regulators. Wells Fargo’s settlement involves its Boston-based mutual fund Evergreen Investment Management.  Wells Fargo will pay $40 million dollars in the agreement with the Securities and Exchange Commission and the Massachusetts Securities Division.  According to the regulators, Evergreen lied to investors about the value of securities it sold and disclosed this information to a select group of people.  Although the behavior occurred while Evergreen was owned by the Wachovia Group, Wells Fargo has to bear the cost.

The value of the Evergreen Ultra Short Opportunities Fund, a group of mortgage-related securities that Evergreen controlled, was inflated 17% between February 2007 and June 2008, the SEC reports.  The SEC states that its valuation committee learned of this when portfolio managers knew about problems regarding mortgage-backed securities but knowingly failed to disclose the mortgage-backed issues.  Mutual funds must treat its clients equally, and hence, when Evergreen repriced the holdings in the fund, they informed only a few investors who were able to significantly reduced their losses.

This is a classic example of preferential treatment that is ever present in our market today.  As the financial crisis looms, it is hard to see when such offenses will become less frequent, to say the least.

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