WASHINGTON (Legal Newsline) -- The Securities and Exchange Commission has charged Wells Fargo's brokerage firm and a former vice president for selling mortgage-backed securities investments without "fully understanding their complexity or disclosing the risks to investors."
Wells Fargo and former vice president Shawn 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 said the SEC.
According to the SEC, Wells Fargo improperly sold asset-backed commercial paper structured with high-risk mortgage-backed securities and collateralized debt obligations to a variety of investors that included municipalities, non-profit institutions, and other customers. Wells Fargo, allegedly, did not obtain sufficient information about these investment vehicles and relied almost exclusively upon their credit ratings. Representatives allegedly failed to understand the investment risk of these products before recommending them to investors whose investment objectives were oriented to investments that were less risky.
The improper sales occurred from January 2007 to August 2007. Registered representatives in Wells Fargo's Institutional Brokerage and Sales Division made recommendations to institutional customers to purchase the investments. But neither Wells Fargo nor its registered representatives reviewed the private placement memoranda (PPMs) for the investments and the extensive risk disclosures in those documents. They considered almost exclusively the credit ratings of these products despite various warnings against such over-reliance in the PPM and elsewhere. Wells Fargo also did not establish procedures to ensure that its personnel knew the risks.
The money will be placed into a Fair Fund for the benefit of 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."
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