Tuesday, August 14, 2012
The SEC and Wells Fargo settled charges that Wells Fargo’s brokerage firm and a former vice president sold investments tied to mortgage-backed securities without fully understanding their complexity or disclosing the risks to investors. Wells Fargo agreed to pay more than $6.5 million to settle the SEC’s charges. The money will be placed into a Fair Fund for the benefit of harmed investors.
According to the SEC, Wells Fargo improperly 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. Wells Fargo did not obtain sufficient information about these investment vehicles and relied almost exclusively upon their credit ratings. 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.
According to the SEC’s order instituting settled administrative proceedings, the improper sales occurred from January 2007 to August 2007. The SEC’s order finds that Wells Fargo and its registered representatives failed to have a reasonable basis for their recommendations and 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.
The SEC also 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.
Wells Fargo and McMurtry consented to the SEC’s order without admitting or denying the findings. 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.