Wells Fargo settlement to SEC case costs $6.5 million, bank agrees to pay

By on Aug 15, 2012 in Banking, Business, United States Comments

The Securities and Exchange Commission (SEC) announced on Tuesday, August 14, 2012 that Wells Fargo agreed to a $6.5-million settlement to the charges filed against the brokerage firm; when it allegedly sold troubled mortgage investments without fully researching the products or disclosing the risks to customers.

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Image Credit: WellsFargo.com

According to a press release by SEC on its official website that day, Wells Fargo will pay a $6.5 million penalty, $65,000 in disgorgement, and $16,571.96 in prejudgment interest; while Shawn McMurtry, its former vice president, will be suspended from the securities industry for 6 months and pay a $25,000 fine.

As noted by SEC, Wells Fargo inappropriately sold asset-backed commercial paper (ABCP) structured with high-risk mortgage-backed securities and collateralized debt obligations (CDOs) to municipalities, non-profit institutions, and other customers.

“Broker-dealers must do their homework before recommending complex investments to their customers.” Elaine C. Greenberg, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, was quoted at SEC.gov, with the settlement money to be placed into a Fair Fund for the benefit of harmed investors.

“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.” Greenberg added, with the Wells Fargo case involving investments sold from January to August 2007.

SEC noted that Wells Fargo did not obtain enough information about the said investment vehicles and instead, it only relied almost exclusively upon their credit ratings; and the firm’s representatives have failed to understand the true nature, risks, and volatility behind these products before recommending them to investors.

In addition, Wells Fargo was charged of failing to establish any procedures to make sure that its personnel adequately reviewed and understood the nature and risks of these commercial paper programs. As a result of their act, they were accused of violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

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