Wells Fargo Advisors has repeatedly been caught pushing unsuitable investments on their clients. One would think that after all the scandals that have engulfed the beleaguered bank, senior management would start taking their customers more seriously.
Our first post on Wells Fargo selling unsuitable investments was in 2011. It’s now 2021 and we are still re-writing this post.
In 2011, we first wrote that Wells Fargo’s brokerage arm agreed to pay $2 million to settle charges that one of its brokers sold unsuitable investments to clients in their 80’s and 90’s. The Financial Industry Regulatory Authority (FINRA) claimed Alfred Chen sold reverse convertible notes to many of his elderly clients. Reverse notes (RCN’s) are a complex investment vehicle not usually found in the portfolio of older and retired persons.
Why RCN’s? According to Investopedia, these notes carry high commissions meaning the broker pockets more than on routine stock or bond trades. They are often quite risky and “toxic.”
Chen was so successful in selling these exotic securities that Wells Fargo promoted him to a senior financial consultant and a vice president. According to FINRA, he is now out of the securities business. During his tenure as a stockbroker, however, he racked up 23 customer complaints.
In addition to the RCN complaints, FINRA says that Chen traded securities in the accounts of two dead customers. (The Forbes headline said it best, “Despicable Broker Traded Dead Customers’ Accounts.”
Fast forward to 2020 and Wells Fargo got spanked again, this time for $35 million by the SEC.
According to SEC,
From April 2012 through September 2019, Wells Fargo recommended that many retail investment advisory clients and brokerage customers buy and hold single inverse exchange-traded funds without having adequate compliance policies and procedures and without providing financial advisors proper training and supervision of single-inverse ETFs. As a result, certain investment adviser representatives and registered representatives (referred to by Wells Fargo as “financial advisors”) made unsuitable recommendations to certain clients.
Single-inverse ETFs are complex financial instruments that seek investment results that are the opposite of the performance of an index for a stated trading period, typically a single day. When held longer than a day, particularly in volatile markets, investors may experience large and unexpected losses. As disclosed in the prospectuses for single-inverse ETFs, when held for longer than a day, single-inverse ETFs will lose money when the level of the index is flat. Put differently, even if the index performance is zero percent, the single-inverse ETF based on that index will lose money. The prospectuses further disclose that single-inverse ETFs could lose money even if the level of the index falls, and warn that the products may not be suitable for all investors and should be used only by knowledgeable investors who understand the risks. The prospectuses also state that investments in single-inverse ETFs should be actively monitored as frequently as daily.
Wells Fargo recommended that certain retail clients buy and hold, in many cases for months or years, single-inverse ETFs with daily reset features, including in retirement accounts. Some of these clients had little or no relevant investing experience and had been identified to Wells Fargo as clients with moderate or conservative risk tolerances. Moreover, some of these clients did not fully understand the risk of losses when holding these inverse ETFs long term and were not aware of the need to, and therefore did not, actively monitor the positions. Similarly, some Wells Fargo financial advisors who recommended single-inverse ETFs also did not adequately understand the products or properly monitor the positions. During the relevant period, the clients collectively sustained millions of dollars of losses in the product by holding the positions [emphasis added].
Stockbrokers are obligated to make recommendations that are suitable for their clients. Whereas a younger, wealthier client might be willing to accept the high risk of reverse convertible notes or single-inverse ETFs, these investments are not recommended for people living on fixed income who need their investments for living expenses.
Unauthorized trading, especially in the accounts of dead clients, is an obvious violation too.
Did You Get Bad Advice from a Stockbroker (Rogue Stockbroker)?
Claims against stockbrokers are usually handled by arbitration. Although the filing fees can often exceed $1000, the process is generally considered more efficient and much quicker than law suits filed in courts. Typically cases turn around in about a year.
If you received unsuitable investment advice or unauthorized trades were made in your account, contact an experienced securities fraud lawyer. The stockbroker fraud lawyers at Mahany Law have helped many victims of investment fraud get back their hard earned money. For a no obligation consultation, contact attorney Brian Mahany online, by email firstname.lastname@example.org or by phone at 202-800-9791. Cases accepted nationwide.
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