Wells Fargo & Co. agreed to settle charges that its brokerage and a former vice president sold securities it didn't understand to municipalities, non-profit organizations and other customers.
The 160-year-old San Francisco-based company agreed to pay $6.5 million in a case involving highly structured securities and its Minneapolis-based Wells Fargo Brokerage Services unit. That unit is now known as Wells Fargo Securities.
The Securities and Exchange Commission said, in announcing the settlement, that "the firm's representatives failed to understand the true nature, risks, and volatility behind these products before recommending them to investors with generally conservative investment objectives.''
The SEC charged former vice president Shawn McMurtry for his improper sale of asset-backed commercial paper.
McMurtry did not obtain sufficient information about the investment and relied almost entirely upon its credit rating.
Wells Fargo and McMurtry were, at a minimum, negligent in recommending the relevant programs, the SEC said, without obtaining adequate information about them without disclosing the material risks to customers.
According to the SEC, the improper sales occurred from January 2007 to August 2007. The implosion of mortgages and mortgage-backed securities led to the credit crisis of 2008 and 2009.
Here's what Wells Fargo's brokerage sold:
Asset-backed commercial paper (ABCP) structured with high-risk mortgage-backed securities as well as collateralized debt obligations (CDOs), whose value and payments are derived from a portfolio of underlying fixed-income assets.
"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."
"These issues occurred more than five years ago and pertain to a part of the firm that was completely revamped after the merger with Wachovia'' at the end of 2008, said Wells Fargo communications manager Elise Wilkinson. "We are pleased to put this matter behind us.''
Wells Fargo has taken a number of remedial measures, the SEC said.
All told, Wells Fargo agreed to pay a $6.5 million penalty, $65,000 in disgorgement, and $16,571.96 in prejudgment interest. McMurtry agreed to be suspended from the securities industry for six months and pay a $25,000 penalty.
Tom Steinert-Threlkeld writes for Securities Technology Monitor.