By Caitlin Nish

Of Dow Jones NEWSWIRES

NEW YORK -(Dow Jones)- An arbitration panel has told Wells Fargo & Co. (WFC) it must buy back roughly $2.2 million in auction-rate securities from two investors who claimed the firm misrepresented the investments.

Richard Wagner, on behalf of a family trust, and Donna Wagner alleged that Wells Fargo Brokerage Services LLC breached its fiduciary responsibility when it sold them the securities and later wrongly excluded them from a settlement with California's attorney general, according to documents from the Financial Industry Regulatory Authority arbitration panel.

A Wells Fargo spokesman declined to immediately comment.

Auction-rate securities are debt instruments whose interest rates are meant to be reset at daily, weekly or monthly auctions. Several auctions failed in early 2008, leaving investors locked into a product that some firms had promoted as safe and liquid.

"Richard and Donna were led to believe that these were investments that would be liquid in 28 days. It was only after the market crashed that they learned these were long-term debt securities that reset every 28 days," alleged their attorney, James R. Ebert of California-based firm Kitagawa & Ebert.

He further claimed that Wells Fargo construed the 2009 California settlement to exclude the Wagner living trust.

In that settlement, Wells Fargo affiliates agreed to 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 from California investors. The California attorney general had sued Wells Fargo, contending the firm routinely marketed and sold auction-rate securities as safe, liquid and cash-like investments.

The arbitration panel said in its decision, dated Tuesday, that the evidence didn't support the investors' claim of fraud. But it found that they weren't treated fairly, according to the documents. The panel found that Wells Fargo committed a breach of fiduciary duty and breach of contract by excluding the investors from participating in the California settlement.

The panel said Wells Fargo Brokerage Services and its successor by merger, Wells Fargo Institutional Securities LLC, must repurchase the $2.2 million of various auction-rate securities within 30 days. It denied the investors' request for punitive damages.

-By Caitlin Nish, Dow Jones Newswires; 212-416-2076; caitlin.nish@dowjones.com