Wells Fargo Pays $6.5M to Settle SEC Charges Tied to MBS

by devteam August 14th, 2012 | Share

The Securities and Exchange Commissionrn(SEC) has just charged that during an eight month period in 2007 a subsidiaryrnof Wells Fargo and one of its former vice presidents sold investments tied tornmortgage backed securities without understanding the complexity and risks ofrnthe investments and not disclosing them to investors.</p

The charges grow out of transactionsrnconducted by the Minneapolis-based Wells Fargo Brokerage Services (now WellsrnFargo Securities) in the period between January and August 2007.  According to SEC court papers, registeredrnrepresentatives in the company’s Institutional Brokerage and Sales Division recommendedrnto institutional customers that they purchase asset-backed commercial paper (ABCP)rnand collateralized debt obligations (CDOs) that were issued by limited purposerncompanies called structured investment vehicles (SIVs) and SIV-Lites.  Wells Fargo and its representatives did notrnreview the private placement memoranda (PPM) for these investments nor thernextensive risk disclosures.  Instead, thernSEC said, the registered representatives relied almost exclusively on therncredit ratings given to the investment instruments even though the PPM warnedrnspecifically against doing that.  Therncompany also failed to establish any procedures to ensure that its personnelrnunderstood the nature and risk of the programs.</p

Inrnaddition to the charges against Wells Fargo Brokerage Services, the SEC alsornnamed former vice president Shawn McMurtry in thernsuit for his improper sale of SIV issued ABCP and exercising discretionaryrnauthority in violation of Wells Fargo’s internal policy to sell securities tornone specific long-term Wells Fargo customer. </p

The court papers single out three SIV-Liternprograms sold by Wells.  Rhinebridge PLC,rnMainsail II Ltd., and Golden Key Ltd. had all received the highest ratings fromrneach of the three major credit rating agencies. rnThe PPMs for all three products stated that the issuers were limitedrnliability companies specifically formed to invest in MBS and other complexrnsecurities, such as CDOs, and that they were issuing asset-backed commercialrnpaper to obtain short-term financing for these securities and derivatives. </p

Thernmarket for asset-backed commercial paper contracted severely beginning inrnmid-August 2007 due in part to the increased market perception of the risk ofrnsubprime mortgages, which formed much of the collateral for a number ofrnSIV-issued asset-backed commercial paper programs. As a result, credit ratingrnagencies downgraded a number of SIV-issued asset-backed commercial paperrnprograms and ultimately many including these three, defaulted in 2007.</p

Wells Fargo agreed to pay more thanrn$6.5 million to settle the SEC’s charges. The money will be placed into a FairrnFund for the benefit of harmed investors.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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