updated 2/28/2008 11:03:57 AM ET 2008-02-28T16:03:57

Wachovia Corp., the nation's fourth-largest bank, said Thursday the Department of Justice is investigating two company employees it did not identify for possible misconduct related to competitive bids in the municipal derivative markets.

The Charlotte-based bank also said it expects to set aside more money in the first half of 2008 to cover troubled mortgage loans.

Wachovia said the DOJ and Securities and Exchange Commission have advised the bank that they believe some of the company's employees engaged in "improper conduct" in connection with certain competitively bid transactions.

The company disclosed the investigation in its annual report filed with the SEC. According to the filing, Wachovia was notified that the two employees, who are on administrative leave, were under investigation in November.

The company noted that the DOJ and SEC began requesting information regarding competitive bids from several financial institutions, including Wachovia, in Nov. 2006.

Wachovia said it has received subpoenas from both the DOJ and SEC for documents and information from its municipal derivatives group.

Wachovia spokeswoman Christy Phillips-Brown said the bank "is cooperating with the investigation" but had no further comment beyond the filing.

Also in the filing, Wachovia said it expects to set aside more money for bad loans.

The bank took more than $3.2 billion write-downs in the second half of 2007 because of the falling value of certain complex investments, as a housing slump and weakening credit markets ensued. Those investments included collateralized debt obligations, a complex security often backed by subprime mortgage loans — or those given to customers with poor credit histories.

Citing "rapidly changing conditions in the housing markets," the bank said Thursday its expense for bad loans will likely be more than .75 percent of average net loans in the first half of the year. It had previously estimated an expense below this level.

"The fair values of these investments in future periods and their effect on our financial results will depend on future market developments and assumptions," the filing said.

Chief executive Ken Thompson has faced scrutiny for expanding his company in the mortgage business at the peak of the housing market. In 2006, he acquired California-based mortgage specialist Golden West Financial Corp. for $24 billion.

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