Wells Fargo & Co. ( WFC ) is in the headlines and this time for a penalty. The company has agreed to pay $148 million to settle charges brought by federal and state authorities that its acquired unit - Wachovia Bank N.A. participated in fraudulent activities. Wachovia was allegedly involved in bid-rigging for winning business from municipalities.
According to the Securities and Exchange Commission (SEC), Wachovia rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico during an eight-year period from at least 1997 to 2005 and prior to its acquisition by Wells Fargo in 2008. Former employees of Wachovia were involved in the bid-rigging process.
Wachovia won some bids with information from the bidding agents about competing bids, a practice known as "last looks". In some other cases, the company won bids through "set-ups" whereby the bidding agent intentionally obtained losing bids from other providers so as to rig the process in favor of Wachovia. Again in some other cases, Wachovia purposely submitted losing bids, facilitating others to win.
As a result of these fraudulent practices the competitive bidding process was not only destabilized, the prices that the municipalities paid for reinvestment products were also negatively impacted.
Under the settlement terms, Wells Fargo will pay $8.9 million to the Internal Revenue Service; $46.075 million to the SEC, $34.518 million to the Office of the Comptroller of the Currency; and an additional $58.75 million to the state Attorneys General.
Investigations into the corruption in the municipal reinvestment industry have resulted in $673 million in settlement amount being paid by financial institutions. Besides Wells Fargo's Wachovia, the other three Wall Street biggies that have already been charged include JPMorgan Chase & Co. ( JPM ), UBS AG ( UBS ) and Bank of America Corp. ( BAC ). While J.P. Morgan cleared its case with a $228 million payment, UBS and Bank of America paid $160 million and $137 million, respectively.
Reaching a settlement reduces the litigation overhang on Wells Fargo. Yet, the company's financials will be impacted to some extent. Going forward, we believe that expense management, improved credit quality, strong capital position and expanded business through the Wachovia acquisition and its integration will support its profit figures. However, a protracted economic recovery and its impact on revenue will somewhat limit its growth.
Wells Fargo currently retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating. We also have a Neutral recommendation on the stock.