Wells Fargo Brokerage Services, LLC n/k/a Wells Fargo Securities, LLC (“Wells Fargo”) and Shawn McMurty of Minnesota, the former vice-president of its Institutional Brokerage and Sales Division, have agreed to settle charges by the Securities and Exchange Commission (“SEC”) relating to the sales of certain asset-backed commercial paper investments to certain institutional customers, including municipalities and non-profit organizations.
According to the SEC’s Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8a of the Securities Act of 1933, Section 15(B) of the Securities Exchange Act of 1934, and Section 9(B) of the Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order dated August 14, 2012 (“Order”), Wells Fargo and McMurty recommended and sold municipalities and non-profit organizations complex mortgage-backed securities (“MBS”) that we unsuitable and inappropriate given the risk tolerance of the customers.
The Order reflects that the SEC found that, from January 2007 to August 2007, Wells Fargo’s representatives, including McMurty, recommended and sold asset-backed commercial paper largely comprised of collateralized debt obligations and high-risk MBS to municipalities and other institutional customers without adequately understanding and disclosing the risk of the investments to the customers.
According to the SEC, Wells Fargo did not have sufficient procedures in place regarding the review of offering memoranda or disclosure documents for the asset-backed commercial paper it recommended to its customers. The SEC claims that, rather than obtain sufficient information about the investments as required by securities regulations, Wells Fargo relied almost exclusively upon the investments’ credit ratings. Because of this, the SEC claims that Wells Fargo’s representatives lacked an adequate understanding of the true nature, risks, and volatility of the investments before they recommended the products to their customers.
The Order also reflects that many of the municipalities and non-profit customers to whom the asset-backed commercial paper in question was sold, had previously indicated to Wells Fargo in account opening documents that they did not want, or were prohibited by state law from investing in, MBS. The SEC alleges that because no one at Wells Fargo read the relevant offering memoranda and disclosure documents for the asset-backed commercial paper in question, Wells Fargo offered customers asset-backed commercial paper programs that contained inappropriate MBS given these limitations.
The settlement agreed upon by Wells Fargo, McMurty and the SEC calls for Wells Fargo to pay a $6.5 million penalty, $65,000 in disgorgement, and $16,571.96 in prejudgment interest. In addition, McMurtry agreed to a six month suspension from the securities industry and to pay a $25,000 penalty.
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