Wachovia agrees to pay a massive fine for multiple violations for allowing telemarketers to use its accounts to steal millions of dollars.  Read more below...

Big Fine Set for Wachovia to End Case
By CHARLES DUHIGG

The Wachovia Corporation agreed on Friday to pay as much as $144 million to end an investigation that accuses the bank of allowing telemarketers to use its accounts to steal millions of dollars.

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.

“This settlement does not reflect how difficult it is for the disabled and elderly to collect as victims, and perhaps the O.C.C. is out of touch with how different their lives are from those of financial institutions,” Mr. Markey said.

A spokesman for the comptroller’s office, Kevin Mukri, said that the claims process was modeled on a system previously approved by a federal court.

The office has also come under criticism for waiting so long to intervene. Critics note that investigations by the United States attorney in Philadelphia and the Iowa attorney general concluded months ago but that the comptroller’s office has remained silent until now.

One victim identified by Iowa regulators, a World War II veteran named Richard Guthrie,
died late last year without receiving full compensation for the thousands of dollars stolen from him.

Some have contended that the office agreed to delay the announcement of the settlement until after Wachovia announced its financial results last week. Wachovia posted a $350 million loss for the first quarter and announced it would ask investors for $7 billion in fresh capital.

Mr. Mukri said the comptroller’s office began looking into the case as soon as it learned about it and did not delay the enforcement action.

Others say that if regulators really wanted to end telemarketing frauds, they should close a loophole in the law. The criminals that stole from Mr. Guthrie took advantage of a rule that permits businesses to submit to banks unsigned checks that automatically withdraw money from accounts. Such checks, once widely used by gyms and other businesses that collect monthly fees, have largely been replaced by computerized payment systems.

In 2005, attorneys general of 35 states urged the Federal Reserve to end the unsigned check system. But the Federal Reserve demurred.

“We really need these unsigned checks to be prohibited completely,” said Mr. Miller, the Iowa attorney general. “There’s still a lot of work to be done.”