Foreclosure Defense: Wachovia Knows About Fraud








Wachovia Corporation

JB Reed/Bloomberg News

The Wachovia Corporation was formed through a series of mergers over the years that not only made it one of the country’s largest financial institutions, but earned it a reputation as an acquisition machine. In 2006, it bought Golden West Financial, one of the last major independent banks on the West Coast, in a $26 billion deal. In May 2007, it swallowed up A. G. Edwards in a $6.8 billion deal that made Wachovia Securities the country’s second-largest retail broker after Merrill Lynch.

The month before the A.G. Edwards deal, an article in The New York Times detailed how Wachovia had provided bank services to fraudulent telemarketers who bilked the elderly of hundreds of millions of dollars. When the company was accused in a lawsuit of allowing such firms to use the bank’s accounts to steal the money, bank executives said they had been unaware of the thefts.

But documents from that lawsuit released in February 2008 showed that Wachovia had long known about allegations of fraud and that the bank, in fact, solicited business from companies it knew had been accused of telemarketing crimes.

Internal Wachovia e-mail, for example, showed that high-ranking employees at the nation’s fourth-largest bank frequently warned colleagues about telemarketing frauds routed through its accounts.The documents also showed that Wachovia was alerted by other banks and federal agencies about ongoing deceptions, but that it continued to provide banking services to multiple companies that helped steal as much as $400 million from unsuspecting victims.

–Feb. 6, 2008

The settlement, one of the largest penalties ever demanded by the federal Office of the Comptroller of the Currency, concludes an 18-month inquiry into Wachovia’s relationships with schemes that investigators say stole from thousands of victims, many of them elderly.

Though Wachovia did not admit or deny wrongdoing, the investigation found that Wachovia, one of the country’s largest banks, engaged in unsafe practices — failing to conduct suitable due diligence, failing to monitor accounts used by telemarketers and failing to follow normal procedures that would probably have uncovered the thefts.

The bank’s actions were “part of a pattern of misconduct” that resulted in Wachovia’s collecting millions of dollars in fees, regulators wrote.

Wachovia has agreed to pay a $10 million fine, contribute $8.9 million to consumer education programs and make restitution to victims that could top $125 million. In a statement, the bank said this “situation was unacceptable and we regret it happened.”

Last summer, after The New York Times reported the telemarketing schemes, Wachovia introduced fraud protections that now preclude the company from working with most telemarketers, a spokeswoman said.

The settlement on Friday does not cover a pending lawsuit against Wachovia filed by plaintiffs who said they were victims of the frauds.

Internal Wachovia e-mail messages and documents collected as part of that lawsuit showed that high-ranking employees long knew about accusations of fraud, but that some bank workers continued to solicit business from the telemarketing companies accused of crimes.

“YIKES!!!!” wrote one Wachovia executive in 2005, warning colleagues that an account used by telemarketers had drawn 4,500 complaints. “DOUBLE YIKES!!!!” But Wachovia continued processing fraudulent transactions for that account and others.

The settlement also does not preclude the United States attorney in Philadelphia, Patrick L. Meehan, from prosecuting Wachovia or bank employees. Mr. Meehan’s office is considering a criminal investigation, according to two people close to the matter who spoke on the condition of anonymity because they are not authorized to speak to the media.

A representative for Mr. Meehan said his office did not confirm the existence of investigations. In 2006, Mr. Meehan prosecuted one of the companies that had relied on Wachovia to commit fraud. That action did not name Wachovia as a defendant, but did show that the bank had received and ignored thousands of warnings.

“This is an important development, and it will have an effect on the industry,” said Tom Miller, the attorney general of Iowa, who also helped expose the crimes as part of a statewide investigation into telemarketing frauds. “These types of crimes are still occurring every day.”

On Friday, the Office of the Comptroller of the Currency also released new guidance to banks on monitoring accounts used by telemarketers. In particular, the agency said that banks should scrutinize so-called payment processors, companies that criminal telemarketers rely upon to make unauthorized withdrawals from victims’ accounts.

The settlement, however, was not wholly greeted with applause.

Some critics of the settlement’s structure — including Representative Edward J. Markey, a Massachusetts Democrat and a senior member of the House Energy and Commerce Committee — complained that the agreement contained no guarantee that victims would be paid.

Under the terms of the settlement, victims will not automatically receive compensation from Wachovia. Instead, they will have to submit claims through a complicated bureaucracy. Because many of the victims are elderly or poorly educated, it is likely many of them will stymied by these obstacles, Mr. Markey said.

In previous cases, the comptroller’s office, also known as the O.C.C., has mailed checks to victims of fraud, rather than requiring them to file claims.

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