SAN FRANCISCO – California Attorney General Edmund G. Brown Jr. has announced a $1.4 billion settlement with three Wells Fargo affiliates to pay back investors, charities and small businesses that purchased auction-rate securities based on "misleading advice."

"Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold," Brown said. "Based on misleading advice, investors bought these risky securities. Now, retail investors and small businesses are finally getting their money back."

Under the settlement, Wells Fargo will buy back $1.4 billion in non-liquid auction-rate securities from thousands of retail customers, charities, and small businesses nationwide, including about $700 million to California investors.

The company also has agreed to pay $1.9 million in fines and expenses.

“We have been working with ARS issuers since the auction rate market froze, and while there has been progress, redemptions by issuers have not occurred as fast as anyone would have hoped or predicted. We are glad to have resolved this for our customers through an actual repurchase of their ARS,” said Charles W. Daggs, chief executive officer of Wells Fargo Investments LLC.

In February 2008, nationwide auction markets froze, and investors have been unable to sell their securities.

Earlier this year, Brown filed the suit against three Wells Fargo affiliates-Wells Fargo Investments LLC; Wells Fargo Brokerage Services LLC; and Wells Fargo Institutional Securities LLC-for violating California's Securities Law.

Brown's suit contended that Wells Fargo routinely misrepresented, marketed and sold auction-rate securities as safe, liquid and cash-like investments, omitting material facts.

The company also was charged with failing to supervise and train its sales agents and selling unsuitable investments.

The lawsuit alleged that Wells Fargo ignored clear industry and internal warnings about risk and previous auction failure.

In March 2005, the Securities and Exchange Commission (SEC), the "Big 4" accounting firms, and the Financial Accounting Standards Board all determined that auction-rate securities should not be considered "cash equivalents."

Despite these warnings, Brown alleged Wells Fargo continued to aggressively sell and falsely market auction-rate securities as safe, liquid, cash-like investments until the nationwide auction markets froze in early 2008.

In marketing and selling these investments, the Attorney General's Office held that Wells Fargo failed to inform investors about how auction-rate securities or the auction process worked, as well as the risks and consequences of auction failure.

Wells Fargo maintained that, since shortly after the liquidity crisis hit in 2008, and well before any firm agreed to a buyback in connection with an ARS settlement, it has been voluntarily providing significant liquidity to customers who purchased Auction Rate Preferred Securities (ARPs).

The company reported that, since April 2008, these customers have had access to up to 90 percent of the par value of their ARPs through a Wells Fargo loan at advantageous rates that is non-recourse as to principal. The loan was intended to provide temporary liquidity until issuers refinanced their ARS.