Wells Fargo Advisors Pays $5 Million to Settle SEC's MLI Short-Term Trading Charges

Attorney Advising Disclaimer

Having found that Wells Fargo Advisors' improper sales of complex financial products imposed "substantial costs" on the firm's retail customers while generating commissions for the firm, the SEC announced a settlement with Wells Fargo over charges of misconduct pertaining to the firm's sale of market-linked investments (MLIs); Wells Fargo will pay a $4 million penalty, and agreed to return $930,377 of ill-gotten gains, plus $178,064 in interest as part of the settlement.

SEC investigators wrote that Wells Fargo willfully violated the Securities Act by improperly encouraging customers to actively trade MLIs, which were products designed to be held to maturity.

The report states that improperly trading the MLIs actively and ahead of schedule—which investigators say consisted of selling original MLIs and investing the proceeds into new MLIs—caused Wells Fargo customers to incur significant fees and other expenses, which effectively reduced returns and future proceeds for the customers while increasing commissions and gains for the firm.

In short, the SEC accused Wells Fargo of profiting at the expense of its clientele.

Relative to supervision, the investigation found that Wells Fargo representatives that recommended the unsuitable short-selling strategy did not necessarily understand the "significant costs" of their recommendations, nor did they reasonably investigate the MLI transactions.

For example, investigators wrote that Wells Fargo reps failed to consider whether the new MLIs, many of which had similar terms or reference assets to the sold-off MLIs, would be able to realistically overcome the MLI exchange costs, which often totaled 7% or more, thus causing customers to hold a new MLI worth "substantially less" than the original product, all while the representatives and Wells Fargo enjoyed commissions and other gains.

Furthermore, Wells Fargo supervisors purportedly approved the MLI sales despite firm policies that outright prohibited short-term trading or "flipping." Accordingly, the SEC found that Wells Fargo willfully violated provisions of the Securities Act that prohibit selling or offering securities by means of untrue statements of material fact or of an omission to state a material fact, and that prohibit the engagement in any transaction that could operate as a fraud or deceit upon the purchaser.

If you have invested with Wells Fargo Advisors or with any broker or financial adviser in market-linked investments (MLIs) or any other complex product and a representative's unsuitable recommendation that you short-sale a product designed to be held over the long-term has proven harmful to your financial interests when the short-sale has resulted in fees, costs, or other unnecessary liabilities, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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