Wells Fargo Fined by Finra Selling Structured Notes to Aged
Wells Fargo Fined $2 Million on Structured Note Sales
Scott Eells/Bloomberg
Wells Fargo & Co. signage is displayed at a bank branch in New York.
Wells Fargo & Co. signage is displayed at a bank branch in New York. Photographer: Scott Eells/Bloomberg
Wells Fargo & Co. (WFC) was fined $2 million by the Financial Industry Regulatory Authority for failing to supervise its top salesman of reverse convertibles as he recommended the derivatives to elderly investors.
Alfred Chi Chen, 64, generated more than $1 million in commissions in 2008 as he sold “hundreds” of reverse convertibles, which are short-term bonds that convert into stock if a company’s share price plummets, according to a complaint released today by Finra, the Washington-based industry-funded brokerage regulator. Chen also made unauthorized trades in several customer accounts, including those of dead people.
“Wells Fargo failed to review reverse convertible transactions to ensure they were suitable,” Brad Bennett, Finra’s chief of enforcement, said in a statement.
The fine comes as regulators increase their scrutiny of sales of structured products to individual investors. Wall Street banks create the investments and recommend them as an alternative to buying stocks and bonds directly, with sales reaching a record $49.5 billion in 2010, according to data compiled by Bloomberg.
San Francisco-based Wells Fargo, which Finra also said failed to provide some customers with discounts on unit investment trusts, didn’t admit or deny the allegations in settling the complaint. The bank also is required to pay restitution to customers who were sold “unsuitable” reverse convertibles between 2006 and June 2008, Finra said.
Top Producer
“Wells Fargo Advisors will continue to support the processes and procedures in place to prevent this kind of activity from happening,” Vince Scanlon, a Wells Fargo spokesman in Winston-Salem, North Carolina, said in an e-mailed statement. “We are glad to have this behind us.”
Chen, who was based in Sacramento, California, for Wells Fargo Investments LLC, was the bank’s top producer of commission revenue from reverse convertibles in 2008, according to Finra’s complaint against him. He was “relentless” as he convinced his customers, many of whom were more than 80 years old, to sell other investments and buy the volatile securities, the regulator said.
In 2007, Chen recommended that an 88-year-old woman sell an annuity and use the money to buy reverse convertibles, ignoring her instructions that she didn’t want to trade stocks, Finra said. When some of the reverse convertibles plummeted, leaving her with devalued stock, Chen told her to sell the shares to buy more of the structured products.
State Probe
Wells Fargo “failed to reasonably supervise” Chen, instead promoting him and citing him as a “successful example of how reverse convertibles” should be sold, according to Finra’s complaint against the firm.
Chen also made unauthorized trades in “several” accounts, including those of customers who had died, Finra said. Wells Fargo fired him in November 2008. The bank ended up paying $1.39 million to settle 21 complaints made by Chen’s customers, according to the broker’s Finra record. Last May, it paid $36,251 to a customer who claimed to have lost $263,869 as a result of his advice.
Ten states including Florida, Texas, New Hampshire and Missouri are examining whether brokers sold the complex products without explaining their risks, Franklin L. Widmann, head of the structured products working group for the North American Securities Administrators Association, said in October.
SEC Investigation
In July, the SEC released the results of an investigation into structured products, saying brokers may have taken advantage of some investors. Carlo di Florio, director of the office of compliance inspections and examinations, said in a statement at the time that the regulator was monitoring the market and “considering additional steps.”
Finra, which is deputized by the SEC to oversee the brokerage industry, fined Banco Santander SA $2 million in April for improper sales of reverse convertibles. Last year, it penalized Ferris, Baker Watts LLC and H&R Block Financial Advisors Inc. over the securities. The brokerages didn’t admit or deny the allegations.
Structured notes are securities created by banks, which package debt with derivatives to offer customized bets to investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, currencies and commodities.
To contact the reporter on this story: Matt Robinson in New York at mrobinson55@bloomberg.net; Zeke Faux in New York at zfaux@bloomberg.net.
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.
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