North Carolina Department of Justice
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Wachovia to pay $58 million for scheme that cost schools, hospitals, universities and local governments, AG Cooper says

Release date: 12/8/2011

Settlement includes restitution for Charlotte, Orange, Dare and Cumberland counties

Raleigh: Wachovia Bank, now Wells Fargo, will pay $58.75 million to North Carolina and 25 other states as part of a multistate settlement for its part in a bid rigging scheme that defrauded local governments, hospitals and schools, Attorney General Roy Cooper said Thursday.
“Rigging the system to prevent fair competition cost taxpayers, local governments and schools millions of dollars,” Cooper said. “I’m pleased that we’ve been able to win money back for those who were harmed here in North Carolina.”
Wachovia has agreed to pay $54.5 million in restitution to affected municipalities, school districts and not-for-profit entities nationwide that entered into municipal derivative contracts with Wachovia between 1998 and 2004. In addition, Wachovia agreed to pay a $1.25 million civil penalty and $3 million for fees and costs of the investigation to the settling states.
The settlement resolves allegations that Wachovia defrauded cities and counties, schools, colleges, hospitals and other entities that purchased a type of investment through the bank called municipal bond derivatives.

Under the settlement, governments and non-profits that were injured by the scheme will get money back, including approximately $2 million to the following in North Carolina: Barton College, Blue Ridge Health System, the City of Charlotte, Dare County, Orange County, Cumberland County, Fayetteville Memorial Hospital, Gardner-Webb University, Goldsboro Housing Authority, Mocksville Housing Foundation, Iredell County, Mooresville Graded School District, Surry County Hospital District, RDU Airport Authority, UNC Pembroke University Foundation, Wake Forest University, and West Jefferson.  
The states’ settlement is part of a global settlement worth $148 million that Wachovia is entering into with the U.S. Department of Justice, the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Internal Revenue Service.
Wachovia is the fourth financial institution to settle in the ongoing municipal bond derivatives investigation following Bank of America, UBS AG and JP Morgan. To date, the state working group has obtained settlements worth almost $310 million.
This is the fourth settlement Cooper’s office has reached regarding municipal bond derivatives as part of an ongoing multistate investigation. In December 2010, Bank of America agreed to pay $3.4 million to North Carolina local governments, schools and non-profits as part of a $67 million multistate settlement. In May 2011, UBS agreed to pay $252,995 to entities in North Carolina as part of a $90.8 million multistate settlement.   In July 2011, JP Morgan Chase (JPMC) agreed to pay $126,326 to Charlotte, Wake County and North Carolina State University as part of a $92 million multistate settlement.

Governments and non-profits use municipal investment derivatives to reinvest the proceeds from tax-exempt bond offerings until the funds are needed or to guard against fluctuating interest rates.  In April 2008, North Carolina and the other states began investigating allegations that some banks, insurance companies, brokers and swap advisors had engaged in deceptive and fraudulent conduct in the municipal bond derivatives market.
The ongoing investigation has so far revealed that Wachovia, JPMC, UBS and Bank of America along with certain brokers kept the process from being fair by rigging bids and submitting non-competitive courtesy bids.
The alleged schemes enriched financial institutions or brokers at the expense of state agencies, towns, cities, school districts, non-profits and the taxpayers who fund them. As a result, governments and non-profits got artificially low rates of return on these investments or paid higher rates than they should have.
“This was not the way to do business,” Cooper said. “We’ll continue our investigation to make sure that those who broke the law are held accountable.”

Contact: Noelle Talley (919) 716-6413