Wachovia Securities has stopped an arbitrage trading practice at a Los Angeles-area office, according to Reuters. The news organization reports that the halt is in place while Wachovia probes allegations of misconduct that might have violated securities industry rules. The NASD is also examining trading at the office and allegations that brokers used fake accounts to reap short-term gains.
“We have no plans to restart this particular style of business,” Wachovia Spokesman Tony Mattera said, referring to the trading practice. The office is one of two it has in Westlake Village, California. He added that he is unaware of other Wachovia offices where the practice might have taken place.
Brokers allegedly created the fictitious accounts to benefit from company stock purchase plans in which shares are sold directly to investors at up to 5% below the market price, a person familiar with the matter told Reuters. The brokers would buy the discounted shares, quickly sell them at market prices, and profit from any differences. This violates industry fairness rules.
Wachovia Securities, the third-largest U.S. retail brokerage, is majority-owned by Charlotte, North Carolina-based Wachovia Corp., the No. 4 U.S. bank. Prudential Financial Inc. of Newark, New Jersey owns a 38% stake. The Los Angeles Times last week reported that an anonymous letter sent to Wachovia described the brokers’ activities. The brokers used the fake accounts to buy and sell stocks in volumes exceeding typical discount program limits, the newspaper said, citing unnamed people with knowledge of the matter. Wachovia’s own investigation into the office predated the anonymous letter, Mattera said. The NASD was formerly known as the National Association of Securities Dealers. Wachovia shares fell 23 cents to $52.47 in Thursday trading on the New York Stock Exchange.