Virginia has joined 11 states investigating sales of a specialized type of investment.

The probe led regulators to Wachovia Securities offices in St. Louis yesterday seeking documents concerning auction-rate bonds.

Missouri Secretary of State Robin Carnahan's office said the visit concerned the collapse of the $330 billion auction rate securities market.

The move was part of a broad investigation of major brokerages involving an investment that, until this year, was considered safe, liquid and easily accessible.

The investigation is being conducted by the North American Securities Administration Association, which is made up of state regulators.

Each state is serving as a lead investigator into at least one brokerage. It could not be determined yesterday which company is being investigated in Virginia.

Ken Schrad, spokesman for the State Corporation Commission's Division of Securities & Retail Franchising, said he could not disclose the identity of the firm.

Virginia was not among the original nine states involved in the investigation, which began looking in the sales of the investments in mid-April.

Bob Webster, spokesman for the securities association, said he did not know when Virginia joined the probe. However, its participation would have been prompted by investor complaints filed with state regulators.

Wachovia Securities was the target of a "special" onsite inspection yesterday, which was part the ongoing investigation, the state secretary of Missouri reported.

More than 70 complaints on auction-rate securities were filed with the Missouri Securities Division in the past four months, representing $40 million in frozen investments.

Wachovia Securities was based in Richmond before its merger Oct. 1 with St. Louis-based A.G. Edwards and subsequent move there.

In a report filed May 12 with the Securities and Exchange Commission, Wachovia Securities stated that it was the target of a probe regarding the sale of municipal auction-rate securities and auction-rate preferred securities. A suit brought against the company seeks class-action status for customers who purchased and continue to hold auction-rate securities based on alleged misrepresentation.

"Wachovia will cooperate fully," according to the report. In a statement issued yesterday, the firm said, "Most securities firms, including Wachovia, are responding to inquires from regulators about the auction-rate securities industry. The discussions that are occurring . . . are part of this ongoing process."

Regulators in Massachusetts filed civil charges in June against UBS Securities for knowingly misleading investors to buy auction-rate securities when it knew the market was disintegrating.

Auction-rate securities had been considered safe investments, but during the credit crisis this year, the market dried up for the securities used to finance municipal projects and agencies.

The securities were promoted as being similar to cash deposits or money-market accounts, according to the securities association. "However, because of tight credit markets stemming from the subprime mortgage crisis, many auctions where auction-rate securities are traded have failed. As a result, many investors are finding that they are unable to access their money."

Complaints filed with state regulators include a wide range of investors, from young families saving for a first home to small-business owners, retirees and people with parents in nursing homes, said Bryan Lantagne, chairman of the 12-state task force and director of the Massachusetts Securities Division. The money they thought was liquid is tied up in this frozen asset, he said.

Michael Jones, chairman and chief investment officer of Riverfront Investment Group in Chesterfield County, said the only way to get out of these securities is to sell them to someone else. The securities were sold at auction, and for 15 years the auctions worked like clockwork, he said.

The investment was riskier than a Treasury bill or money-market account, so it paid more in interest, Jones said.

Regulators are attempting to answer whether investors were informed about the risk, he said. Jones, former chief investment officer at Wachovia Securities, declined to speak about the brokerage or its involvement in the probe, talking instead of the securities in question.

Jones said these investments are not the type that would be hidden in a 401(k) or mutual fund.

"It's the kind of security in which the big New York firms tended to be more active, so they would have bigger exposure," said George Shipp, chief investment officer of Scott & Stringfellow Inc., an investment firm in Richmond.
Contact Carol Hazard at (804) 775-8023 or chazard@timesdispatch.com.