SAN FRANCISCO–Wells Fargo is again being accused of misconduct, this time over the alleged use of allegedly complex financial investments to take advantage of small investors.
According to the Securities and Exchange Commission, between 2009 and 2013 Wells Fargo generated significant fees by "improperly encouraging" brokerage clients to actively trade high-fee debt products that were intended to be held to maturity.
The SEC’s allegations relate to Wells Fargo Advisors, its brokerage division, which has agreed to pay a $4 million penalty over its handling of the products, known as market-linked investments. Wells Fargo must also return $930,377 of ill-gotten gains — plus $178,064 of interest. The total comes to approximately $5.1 million.
In a statement, Wells Fargo said it has "cooperated fully" with the investigation.
Even though the bond-like investments were designed to be held, the SEC said Wells Fargo pushed its clients to sell them before maturity. The bank then directed its clients to invest the proceeds into new ones.
‘Did Not Reasonably Investigate’
The SEC said Wells Fargo’s financial advisers "did not reasonably investigate or understand the significant costs of the recommendations,” and in addition alleged that supervisors at Wells Fargo "routinely approved" these transactions despite internal policies that banned the "flipping" of such complex products.
As a result, Wells Fargo's actions simultaneously generated "substantial fees" for the bank and "reduced" returns for investors, the SEC said.
In other words, Wells Fargo made more money and its clients lost, according to the SEC.
"It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products," Daniel Michael, an SEC official, said in a statement.
Bank’s Response
In its statement, Wells Fargo said that it "previously made policy and supervision changes related to this matter to improve internal controls." The bank also pointed out that just two of its financial advisers were identified by the SEC as having "engaged in a systematic practice of soliciting customers."
This is the second time in recent years that Wells Fargo Advisors has been in hot water with the SEC. In 2017, the SEC said the unit had pushed clients into dangerous and volatile investments that were almost guaranteed to lose money, even as it told clients the investments were a good way to protect their portfolios.
As CUToday.info has reported, the charges are only the latest in a long series of scandals involving multiple areas of the bank, the biggest of which involves the creation of more than three-million bogus customer accounts as employees struggled to meet aggressive cross-sales goals. That scandal led to the firing of more than 5,000 employees.
Wells Fargo has also forced auto borrowers to pay for insurance they didn't need and charging homebuyers for mortgage fees they didn't deserve.
Wells Fargo has paid more than $1 billion in fines and its assets are currently limited by the Federal Reserve until it demonstrates it has improved its practices.