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Regulators from six states in the U.S. circled around Wachovia Securities Thursday, in a surprise inspection raid connected to the company's sales of auction-rate debt.

Securities regulators raided the affiliate of Wachovia Corp. (NYSE: WB) after it refused to respond to requests for information from securities regulators in Missouri.

Wachovia Securities is the former A.G. Edwards, which Wachovia acquired a 62 percent stake in last October. The other 38 percent is owned by Prudential Financial Inc. (NYSE: PRU).

What's unclear at this time is whether most of the problems connected to the auction-rate debt came with the A.G. Edwards acquisiton.

"What's scary is this is one more piece of evidence that Wachovia may have ignored the best interest of its customers, although this could have gone on before Wachovia bought A.G. Edwards," said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte.

I consider the statement by Wachovia spokeswoman Christy Brown somewhat odd, as she asserted that what was happening with the surprise raid was part of the process of the majority of securities firms in connection to the auction-rate securities industry.

How does a surprise inspection from a number of state representatives because you didn't respond to information requests become part of the process? It doesn't compute.

Either the company doesn't have a handle on its operations, or it was stalling for time. Either way, they don't look good or in control of their business. This really hurts their reputation.

Much of this was instigated by numerous calls from Missouri investors who weren't able to access their money, according to Missouri Secretary of State Robin Carnahan.

"Hundreds of Missouri investors have called my office because of inability to access their money," Carnahan said in a statement. "They were told these investments were safe and easy to cash in, but now they cannot run their business, make medical payments, or pay school tuition."

Over $40 million in investments has been frozen by Wachovia Securities, and more than a dozen agents and executives have been subpoenaed over the situation.

Along with auction-rate securities, other information being sought are marketing strategies, sales practices and internal evaluations.

This is definitely something newly installed Wachovia CEO Robert Steel didn't need. It takes the focus off of ways to cut costs and save capital, to reputation management and government intervention. He has his hands full!