Wells Fargo Advisors has agreed to pay a $2 million fine to settle regulator allegations that a former broker bilked more than 20 elderly clients by selling them unsuitable investments that generated more than $1 million in commissions for him and losses for many investors.
The firm, known as
Wells Fargo Investments LLC before merging with Wachovia Securities LLC in March, also agreed to repay an unspecified amount to clients for losses caused by that broker and, in an unrelated charge, for not giving certain customers a volume discount that they were due.
The
Financial Industry Regulatory Authority Inc. alleged that
Wells Fargo representative Alfred Chi Chen bought reverse convertible notes for 21 customers, none of whom had ever invested in such a complex product, and most of whom were retired, including many investors in their 80s and 90s.
He built up the concentration of these investments within customers' accounts until most had nearly all their assets in reverse convertible notes, Finra said in its separate complaint against Mr. Chen. The transactions from January 2006 through July 2008 helped him become the firm's highest RCN producer in 2008, the self-regulator said.
In April 2007, Mr. Chen was promoted to senior financial consultant, according to the Finra complaint.
The broker also made trades in the accounts of two dead customers and bought $75,000 worth of the complex structured notes for another customer who specifically told him not to buy anything because she needed the funds in her account to pay quarterly taxes, Finra said.
In July 2008,
Wells Fargo told Mr. Chen to reduce his customers' concentrations in the reverse convertible notes, and it fired him four months later after he had worked for the firm for eight years, according to Finra.
In addition to not sufficiently supervising him,
Wells Fargo failed to give certain customers who purchased unit investment trusts appropriate discounts on transactions that exceeded certain thresholds between January 2006 and July 2008, the Finra complaint against
Wells Fargo said.
Both the firm's breaches were “serious failings that harmed investors,” said Brad Bennett, Finra's enforcement chief.
Wells Fargo neither admitted nor denied the allegations in settling the complaint.
“The issue involves conduct at a legacy firm which has been merged into
Wells Fargo Advisors,” the firm said in a statement. “
Wells Fargo Advisors will continue to support the processes and procedures in place to prevent this kind of activity from happening.”
Finra is asking for Mr. Chen, who didn't return a phone call or e-mail seeking comment, to return his ill-gotten gains with interest.
Reverse convertible notes are structured products that usually consist of a high-yield, short-term note of the issuer that is linked to the performance of an unrelated asset, which can be a single stock or a basket of equities such as an index.
In this case, the notes were mostly linked to single equities and sold by ABN Amro Bank NV,
Barclays PLC and
Wells Fargo Bank NA, Finra said.
