SEC Sues Wells Fargo for Illegal Sale of Complex Investments

Jack Humphrey, Regulatory journalist
August 14, 2012 /

The Securities and Exchange Commission has charged Wells Fargo’s brokerage firm and a former vice president with unlawfully selling investments tied to mortgage-backed securities without disclosing its risks.

The SEC said Minneapolis-based Wells Fargo sold asset-backed commercial paper (ABCP) structured with high-risk mortgage-backed securities and collateralized debt obligations (CDOs) to municipalities, non-profit institutions, and other customers. The investment vehicles allegedly did not have sufficient information and were solely backed by credit ratings.

The regulator slammed the firm’s representatives for failing “to understand the true nature, risks, and volatility behind these products before recommending them to investors with generally conservative investment objectives.”

Wells Fargo was fined more than $6.5 million to settle the SEC’s charges. The money will be used to compensate harmed investors.

“Broker-dealers must do their homework before recommending complex investments to their customers,” said Elaine C. Greenberg, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit. “Municipalities and other non-profit institutions were harmed because Wells Fargo abdicated its fundamental responsibility as a broker to have a reasonable basis for its investment recommendations to customers.”

The SEC claimed Wells Fargo Brokerage Services (now Wells Fargo Securities) had been selling the investments from January 2007 to August 2007. Registered representatives in Wells Fargo’s Institutional Brokerage and Sales Division recommended that customers purchase ABCP issued by limited purpose companies called structured investment vehicles (SIVs) and SIV-Lites backed largely by mortgage-backed securities and CDOs.

Wells Fargo and its registered representatives allegedly did not review the private placement memoranda (PPMs) for the investments and the extensive risk disclosures in those documents. Instead, they relied almost exclusively on the credit ratings of these products despite various warnings against such over-reliance in the PPM and elsewhere.

Wells Fargo also failed to establish any procedures to ensure that its personnel adequately reviewed and understood the nature and risks of these commercial paper programs, the SEC said.

The SEC’s order finds that Wells Fargo and its registered representatives failed to have a reasonable basis for their recommendations. They also failed to disclose to their customers the risks associated with the complex SIV-issued ABCP investments, including the nature and volatility of the underlying assets. A number of customers purchased SIV-issued ABCP as a result of Wells Fargo’s recommendations, and many of them ultimately suffered substantial losses after three SIV-issued ABCP programs defaulted in 2007.

The SEC charged former vice president Shawn McMurtry for his improper sale of SIV issued ABCP. McMurtry exercised discretionary authority in violation of Wells Fargo’s internal policy and selected the particular issuer of ABCP for one longstanding municipal customer. McMurtry did not obtain sufficient information about the investment and relied almost entirely upon its credit rating.

The SEC’s order finds that Wells Fargo has taken a number of remedial measures since 2007 to ensure that its registered representatives have adequate information about the nature and risk of the securities they recommend to customers, and that relevant information about those securities will be fully disclosed to customers.

The SEC has filed more than 50 enforcement actions related to the financial crisis, charging 33 entities and 79 individuals for monetary sanctions totaling more than $2.1 billion.


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