Wells Fargo ( WFC) is being sued by the state of California in attempts to recoup $1.5 billion for investors who purchased auction-rate securities.

Attorney General Edmund Brown filed a suit on Thursday against three of the company's broker-dealer affiliates based on "false and deceptive" advice that these financial instruments were "as safe and liquid as cash," according to a statement.

Brown filed his complaint in San Francisco Superior Court on Thursday to restore the cash value of these securities, "force the companies to disgorge any subsequent profits tied to the securities" and obtain civil penalties, the statement said.

The suit contends that three of the bank's affiliates -- Wells Fargo Investments LLC, Wells Fargo Brokerage Service LLC, and Wells Fargo Institutional Securities LLC -- violated California securities law.

"Wells Fargo's affiliates promised investors auction-rate securities were as safe and liquid as cash, when in fact they were not, and now investors are unable to get their money when they need it," Brown said. "This lawsuit seeks to recover $1.5 billion for Californians and holds these companies accountable for giving investors false and deceptive advice."

The market for auction-rate securities froze in February 2008, and investors were no longer able to redeem their securities for cash, as promised. This left approximately 2,400 Californians who had invested with Wells Fargo without access to more than $1.5 billion, Brown's office says.

Banks including UBS ( UBS), Citigroup ( C), Wachovia and Merrill Lynch had agreed last year to refund their clients of the cash value of the securities, but so far Wells Fargo has not, Brown says.

Wells Fargo disputed the claims made by Brown's office.

"In April 2008, Wells Fargo led the industry in helping clients affected by the crisis by voluntarily providing significant liquidity to clients holding ARPs," said Charles W. Daggs, CEO of Wells Fargo Investments LLC. "Since that time, and despite the unprecedented nature and length of liquidity problems in the market, these clients have had access to 90% of the par value of their ARP holdings through non-recourse loans at favorable rates.

"We are not aware of any other similarly situated company that voluntarily provided a comparable loan program or took action on behalf of their clients before Wells Fargo implemented its loan program," Daggs said.

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