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August 16, 2012
Wells Fargo Settles Mortgage-Backed Securities Charges for $6.5 Million
    by Robert Kropp

The Securities and Exchange Commission charges the bank for selling investments tied to mortgage-backed securities without disclosing the risks to investors.


Less than one week after Goldman Sachs announced that the Securities and Exchange Commission (SEC) had ended its investigation into a $1.3 billion subprime mortgage deal without taking action against the bank, the Commission announced that it has charged Wells Fargo with selling "asset-backed commercial paper to institutional customers without obtaining sufficient information and understanding about the nature and risk of these products."

The improper sales by Wells Fargo occurred between January, 2007 and August, 2007.

Wells Fargo, whose earnings totaled $16 billion in 2011, agreed to pay $6.5 million to settle the charges, although the bank did so without admitting or denying the Commission's findings. The payment by Wells Fargo "will be placed into a Fair Fund for the benefit of harmed investors," the SEC stated.

The Commission took aim especially at the bank's dealings with municipal customers, which, it stated, "placed a high level of trust in and reliance on their registered representatives." Wells Fargo knew that the investment strategies of its municipal customers were conservative, seeking above all the preservation of principal. Yet Wells Fargo "had a practice of exercising discretionary authority to make purchases of asset-backed commercial paper on behalf of certain customers," the Commission found, and recommended investment in risky mortgage-backed securities solely on ratings assigned by credit rating agencies, which since the financial crisis have been thoroughly discredited.

Elaine Greenberg, the Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, stated, "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."

Also as part of the settlement, former Wells Fargo vice president Shawn McMurtry to pay $25,000 and was suspended from investment activity for six months.

Pensions & Investments reported that four of Wells Fargo's clients—the Minnesota Medical Foundation; the Minneapolis Foundation; Robins, Kaplan, Miller & Ciresi Foundation for Children; and the Minnesota Workers' Compensation Reinsurance Association—"were awarded a total of $30.1 million in a separate lawsuit filed in Minnesota state court over complex structured investments made through the firm's securities lending program, and on July 18, the state's supreme court denied an appeal by Wells Fargo."

 

 
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