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Archive for the ‘Wells Fargo’ Category

Wells Fargo under investigation by DOJ and SEC

With Wells Fargo’s credit card and savings divisions already disciplined by the Federal Reserve over a fake account scandal during which the bank opened bogus accounts on behalf of its customers, federal officials have begun an investigation into Wells Fargo Wealth Management to determine whether Wells Fargo’s investment wing inappropriately sold clients in-house investments using tactics similar to the illicit conduct that permeated the aforementioned credit card and savings scandal.

In its investigation of Wells Fargo Wealth Management, the Department of Justice and SEC seek to determine whether the firm breached its duty to investors and used incentives that were inadequately disclosed in order to sell in-house products that were more profitable for the firm, at the expense of its clients’ interests.

According to an InvestmentNews report, as recently as in 2016, Wells Fargo incentivized its advisers through quotas and bonus pay to steer investment clients into fee-bearing loans and brokerage accounts. The report states that Wells Fargo Wealth Management’s quotas and representative incentives were similar to the illicit scheme previously employed by the credit card, savings, and banking division in the company’s prior scandal, which had produced approximately 3.5 million potentially fake or otherwise improperly opened banking accounts.

Specifically, investigators will reportedly seek to determine whether Wells Fargo made inappropriate or unsuitable recommendations involving 401(k) rollovers, alternative assets, estates, and trusts. Investigators will also look into rewards and referral incentives, such as an alleged 15%-of-first-year-revenue reward in multi-million dollar accounts offered to some retail bank employees for referring wealthy clients to the firm’s brokerage arm.

Officials expressed concern that Wells Fargo’s investment business improperly steered clients toward in-house investments that may have been more profitable for the firm, at the expense of its clients’ best interests. In addition to suitability violations, this could possibly point to a widespread breach of fiduciary duty involving Wells Fargo Advisors and other related Wells Fargo Wealth entities.

For example, a Bloomberg review indicated that Wells Fargo Advisors personnel often ran simulations through Envision financial planning software, sometimes without clients present, and by “plugging in numbers they knew would recommend investments that clients already held.”

According to one former adviser, the Envision simulations would then confirm the clients’ investment strategy at Wells Fargo, making the clients much more likely to remain Wells Fargo customers and keep funds invested in products preferred by the firm. Wells Fargo disputes that charge, claiming that Envision did not disadvantage clients.

As a historical note, the SEC and US Commodity Futures Trading Commission in 2015 charged JP Morgan Securities and JPMorgan Chase Bank with improperly marketing JP Morgan-managed mutual funds to retail customers through a Chase Bank program, failing to disclose this practice and the associated conflict of interest to its clients.

Like Wells Fargo, JP Morgan stood accused of inappropriately recommending in-house investments that were more profitable for the firm, at the expense of its customers’ best interests.

JP Morgan and Chase Bank ultimately agreed to settle the charges by paying over $300 million in penalties, disgorgement, and interest.

SEC Charges Rhode Island Agency and Wells Fargo With Fraud in 38 Studios Bond Offering

The Securities and Exchange Commission today charged a Rhode Island agency and its bond underwriter Wells Fargo Securities with defrauding investors in a municipal bond offering to finance startup video game company 38 Studios.

The Rhode Island Economic Development Corporation (RIEDC, now called the Rhode Island Commerce Corporation) issued $75 million in bonds for the 38 Studios project as part of a state government program intended to spur economic development and increase employment opportunities by loaning bond proceeds to private companies.

According to the SEC’s complaint filed in federal district court in Providence:

  • The RIEDC loaned $50 million in bond proceeds to 38 Studios.  Remaining proceeds were used to pay related bond offering expenses and establish a reserve fund and a capitalized interest fund.
  • The loan and, in turn, bond investors would be repaid from revenues generated by video games that 38 Studios planned to develop.
  • The bond offering document produced by the RIEDC and Wells Fargo failed to disclose to investors that 38 Studios had conveyed it needed at least $75 million in funding to produce a particular video game.
  • Therefore, investors weren’t fully informed when deciding to purchase the bonds that 38 Studios faced a funding shortfall even with the loan proceeds and could not develop the video game without additional sources of financing.
  • When 38 Studios was later unable to obtain additional financing, the video game didn’t materialize and the company defaulted on the loan.

“Municipal issuers and underwriters must provide investors with a clear-eyed view of the risks involved in an economic development project being financed through bond offerings,” said Andrew Ceresney, Director of the SEC Enforcement Division. “We allege that the RIEDC and Wells Fargo knew that 38 Studios needed an additional $25 million to fund the project yet failed to pass that material information along to bond investors, who were denied a complete financial picture.”

The SEC also charged Wells Fargo’s lead banker on the deal, Peter M. Cannava, and two then-RIEDC executives Keith W. Stokes and James Michael Saul with aiding and abetting the fraud.  Stokes and Saul agreed to settle the charges without admitting or denying the allegations and must each pay a $25,000 penalty.  They are prohibited from participating in any future municipal securities offerings.  The SEC’s litigation continues against Cannava, Wells Fargo, and RIEDC.

The SEC’s complaint further alleges that Wells Fargo and Cannava misled investors in an additional way in bond offering materials:

  • Wells Fargo disclosed its bond offering compensation as a share of the placement agent fee plus a $50,000 payment from 38 Studios.  No other fees or compensation to Wells Fargo were disclosed, and the bond placement agreement stated that no other money was anticipated.
  • Investors weren’t informed that Wells Fargo had a side deal with 38 Studios that enabled the firm to receive nearly double the amount of compensation disclosed in offering documents.
  • This additional compensation, totaling $400,000 and paid from bond proceeds, created a conflict of interest that Wells Fargo should have disclosed to bond investors.
  • Cannava was responsible for Wells Fargo’s failure to disclose its additional fees.

“An underwriter’s ‘skin in the game’ is material information to investors,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “We allege that Wells Fargo failed to fully disclose its own economic interest in this bond transaction.”

The SEC’s complaint charges the RIEDC and Wells Fargo with violations of Sections 17(a)(2) and (a)(3) of the Securities Act of 1933, and charges Stokes, Saul, and Cannava with aiding and abetting those violations.  Wells Fargo also is charged with violations of Section 15B(c)(1) of the Securities Exchange Act of 1934 and Rules G-17 and G-32 of the Municipal Securities Rulemaking Board (MSRB).  Cannava is charged with aiding and abetting those violations.

In a separate administrative proceeding, the RIEDC’s financial advisor for the bond offering – First Southwest Company LLC – agreed to settle charges that it violated MSRB rules by failing to document in writing the scope of the services the firm was providing in the bond offering until seven months after the financial advisory relationship began.  Without admitting or denying the findings, First Southwest agreed to pay disgorgement of $120,000, prejudgment interest of $22,400, and a penalty of $50,000.

Wells Fargo laying off employees of securities unit

In the latest downsizing move by a big bank, Wells Fargo has started cutting jobs this week in its securities unit, including positions in Charlotte according to reporting by The Charlotte Observer.

The displaced employees include managing directors – high-level jobs that can draw seven figures in compensation, the sources said.

The Wells Fargo unit has become the biggest source of high-paying investment banking jobs in Charlotte, as Bank of America has shifted much of that activity to New York.

Wells Fargo Securities, which employs about 5,000 worldwide, offers Wall Street-style services to corporate clients, including merger advice and stock and bond offerings. Investment banks are known for cutting staff regularly, and turbulent financial markets have made the business more challenging entering 2016.

Wells Fargo on Wednesday said it eliminating positions in Charlotte and Fort Mill, as part of 581 layoffs nationwide. Wells and other banks have been trimming employees which they had bulked up during the financial crisis.

Wells Fargo Securities grew considerably in 2008 when San Francisco-based Wells bought Charlotte-based Wachovia, which had a larger investment banking and capital markets operation. The unit has its largest employee hub in Charlotte, with about 2,400 workers, and trading floors in uptown’s Duke Energy Center.

Overall, Wells Fargo had 264,700 total employees at year’s end, down 500 from the end of September. In the Charlotte area, it has more than 23,000 workers.

Former advisor wins $500,000 FINRA arbitration award against Wells Fargo

A Merrill Lynch investment adviser who handles money for high-profile union pension accounts won a $500,000 arbitration award last month against his former employer whom he had accused of trying to ruin his reputation in the wake of his departure.

The victory comes seven years after the adviser was sued in federal court by Wachovia Securities just after he left the firm for Merrill Lynch, taking with him two employees and roughly $2 million in annual revenue.

Movement between brokerage firms is commonplace in the securities industry, where good advisers are always being recruited by competitors. The disputes that follow typically end up being settled amicably out of court or before an arbitrator.

The adviser alleged that Wachovia Securities, which became Wells Fargo Advisors in 2009, went out of its way to paint him as the villain in the lawsuit and a subsequent arbitration case, both of which were dismissed.

He also claimed a Wachovia broker made false statements about his handling of client documents in a meeting with a client days after his departure, in an attempt to try to wrestle the account from him.

The allegations formed the basis for the complaint filed against Wells Fargo in 2009 with FINRA, a non-government group that regulates the brokers and settles industry disputes.

In the complaint, the adviser alleged that he had been subjected to slander and “malicious prosecution” by Wachovia and Wells Fargo.

Wells Fargo Steps Right Up in Compensation ‘Carnival Game’

Wells Fargo is latest to tweak 2015 awards for advisors, making them more complex

Financial advisors at the wirehouse firms are facing more complex compensation plans in 2015, compensation experts say.

“It is becoming close to being like a carnival game – you have to knock down three cans to get the top-shelf prize,” said Andy Tasnady of Tasnady Associates in Port Washington, New York, in an interview.

“Overall, the [wirehouse] plans are getting more complex, especially around deferred bonuses,” Tasnady explained. “There are sharply designed combinations for shaping awards and associated behaviors – with lots of curves and combinations.”

In general, the core pay grids are not being tweaked very much, he notes.

New for 2015 are adjustments to the hurdles. Advisors can lower the 22% compensation hurdle they have to jump over by achieving other objectives, such as revenue growth of 15% or $150,000.

Also, advisors can boost their client-experience results by having 60% of client assets in fee-based advisory accounts or 80% of their monthly fees and commissions tied to fee-based advisory accounts. In addition, lending credits of $6,000 and up will give them higher client-experience results.

As for deferred compensation, Wells Fargo says it has eliminated the rule that advisors have to hit two of three or three of three best-practice goals in order to qualify for best-practice awards. However, advisors can get a bigger best-practice award if they meet all three targets.

Advisors in the $350,000-$499,000 production tier, for instance, can earn $5,000 when they bring in $5 million in net new fee-based advisory flows. They can also receive $5,000 for hitting $6,000 in lending credits and $5,000 for net new assets of $5 million and up. But if reps achieves all three of these best-practice goals, their best-practice award jumps to $25,000.


Wells Fargo Advisors unveils new bonus plan for brokers

In an effort to get its advisers to focus on snagging more of their existing clients’ assets, along with new clients, Wells Fargo Advisors LLC has introduced a new rewards program in its deferred-compensation plan.

Until Jan. 1, the firm’s 12,000 advisers were eligible for a bonus based on growth in revenue. Now the bonus will be based on bringing in new assets. “The focus for this coming year is organic growth and incentivizing FAs for their expertise in gathering assets from new and existing clients,” said Wells Fargo Advisors spokeswoman Teresa Dougherty. “This complements the base award that is production based and the recurring revenue award.” The minimum amount of net new assets to qualify for this award is $500,000, and the incentive is 2 percent of an adviser’s total revenue.

The award is also partially based on the tenure of the adviser. For example, said Ms. Dougherty, an adviser with seven years at the firm who brings in $600,000 in revenue and $750,000 in net new assets would receive a bonus of 2% on that $600,000, or $12,000. Wells Fargo is following the lead of larger broker-dealers that are rewarding their advisers based on new assets instead of growth in revenue, said Danny Sarch, president of Leitner Sarch Consultants. “New assets is the mantra going on in the retail brokerage firm arena,” he said. Broker-dealers have to focus their advisers on grabbing new assets because there are only so many millionaires out there, said Rick Peterson, a recruiter who has an eponymous Houston firm. “It’s going to be a struggle for these firms to grow their businesses going forward, because we have fewer people who technically qualify for high-net-worth society and we have just as many brokers going after that same delta,” Mr. Peterson said.

California Sues Wells Fargo Over Auction Rate Securities

California sued units of Wells Fargo & Co. today, claiming they sold investors $1.5 billion of auction-rate securities and deceptively advertised them as being as safe as cash.

A complaint filed in state court in San Francisco names Wells Fargo Investments LLC, Wells Fargo Brokerage Services LLC and Wells Fargo Institutional Services LLC as defendants.

The complaint wasn’t immediately available to the public, however, the California AG’s office said the lawsuit seeks to recoup losses to investors.

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