Articles Posted in Wells Fargo

$165M Class Action Settlement Reached in MBS Fraud Case Involving NovaStar Securities
Royal Bank of Scotland Group Plc (RBS), Wells Fargo & Co. (WFC), and Deutsche Bank AG (DB) have reached a $165M with investors in their class action mortgage-backed securities case involving underwriting for NovaStar Mortgage Inc., a former subprime lender. The lead plaintiff in the case is the New Jersey Carpenters Health Fund.

NovaStar, which filed for bankruptcy last year, had specialized in low quality residential mortgages. Many of these were bundled into risky securities that were issued prior to the 2008 financial crisis. The class action settlement resolves claims contending that the offering documents put together by the banks misled investors into thinking that the loans underlying about $7.55B of NovaStar MBSs were safe and had been underwritten properly.

A district court judge must still approve the settlement. Meantime, despite the resolution, the banks continue to deny wrongdoing.
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A Financial Industry Regulatory Authority securities arbitration panel ruled that Wells Fargo Advisors (WFC) must pay investor Anthony J. Pryor $357K related to purportedly unsuitable housing and energy investments. In his securities fraud claim, Pryor alleged negligent misrepresentation, negligent supervision, breach of fiduciary, and other causes. Wells Fargo denies Pryor’s allegations.

His advisor, Jeff Wilson, who was not named as a party in the securities arbitration case, has three customer disputes on his BrokerCheck record. One of the other claims that were settled for $250K also allegedly involving unsuitable investments.

Unsuitable Investments

Not every investment is suitable for every investor. Some investments may too be risky for certain investors or are not in alignment with their investment goals or financial needs. For example, many older retail investors that are about to retire will likely require a more conservative investment plan that a much younger, single investor.

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The Financial Industry Regulatory Authority is ordering 12 firms to pay a collective total of $14.4M in fines over deficiencies involving the way they preserved customer and brokerage firm records. The firms who are subject to these sanctions include:

· RBS Securities (RBS) for $2M
· LPL Financial (LPLA) for $750K
· Wells Fargo Prime Services and Wells Fargo Securities (WFC) for a collective $4M fine
· Wells Fargo Advisors, First Clearing LLC, and Wells Fargo Advisors Financial Network for a joint fine of $1.5M
· RBS Capital Markets Arbitrage and RBC Capital Markets for $3.5M
· SunTrust Robinson Humphrey for $1.5M
· PNC Capital Markets for $500K

Under FINRA rules and federal securities laws, electronic records that are business-related have to be maintained in WORM format so that they cannot be modified. According to the US Securities and Exchange Commission, this is necessary to protect investors because monitoring compliance by firms occurs primarily through their records and books.

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This week, Prudential Financial Inc. (PRU) announced that is no longer distributing certain term life insurance policies, including its My Term product, through Wells Fargo’s (WFC) retail bank. The decision comes after Prudential employees filed a complaint claiming they were let go because they reported certain sales practices related to insurance policies. The insurer says it intends to probe the “full extent of abuses” that may have resulted from the Wells Fargo-related transactions. Prudential sold about 15,000 My Term accounts through the bank.

The employee lawsuit is Julie Han Broderick et al v. The Prudential Insurance Co. of America et al. The three plaintiffs, which include Han Broderick, Thomas Schreck, and Darron Smith, are seeking unspecified damages for wrongful termination. Prudential, however, claims that the reasons they were let go have nothing to do with its business with Wells Fargo but, rather, were related to an ethics complaint.

According to the NY Times, the ex-employees filed their complaint against Prudential and a regulatory officer, contending the following:

  • They were let go as retaliation for their whistleblowing activities involving Wells Fargo’s allegedly fraudulent practices around the sales of My Term insurance policies
  • The plaintiffs (formerly supervisors in Prudential’s investigative division of its legal department) believe the purported fraud was due to Wells Fargo cross-selling programs
  • They were fired because they would not take part in PRudential’s alleged cover-up of fraudulent and unlawful business practices it engages in with Wells Fargo Bank

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Wells Fargo Fined $1M Over Supervision of Consolidated Client Reports

The Financial Industry Regulatory Authority says that Wells Fargo (WFC)  must pay a $1M fine for not having reasonable supervisory systems in place to oversee the generation of consolidated reports for clients. The broker-dealers that were specifically cited were Wells Fargo Advisors Financial Network (WFAFN) and Wells Fargo Advisors (WFA), also referred to as Wells Fargo Clearing Services.They agreed to settle but did not admit or deny the settlement’s findings.

FINRA’s rules mandate that consolidated reports, which are documents that include information about a customer’s financial holdings, even if they are held in different places, must be accurate, clear, and not misleading.  According to the regulator, between 6/2009 and 6/2015, the brokerage firms did not enforce supervisory systems for the use of consolidated reports that registered representatives generated via a specific application. During the relevant period, Wells Fargo advisers used the application to create over five million company reports.

In New York, US District Judge Deborah A. Batts has certified a class of investors to go ahead with fraud claims that they’ve brought against Wells Fargo (WFC), RBS Securities (RBS), and Deutsche Bank (DB). The banks underwrote $7.7B of NovaStar mortgage-backed securities. The lead plaintiff in the MBS fraud case is the New Jersey Carpenters Health Fund. Wells Fargo Advisors LLC was previously Wachovia Capital Markets.

The plaintiffs contend that the defendant banks lied in the securities’ offering documents. Judge Batts held that the fundamental question at issue is whether the bank did, in fact, make the allegedly misleading or materially false statements.

NovaStar issued  six residential mortgage backed-securities that the banks underwrote in 2006. These RMBS collectively held over $7.7B in assets. By mid-2009,  in the wake of the housing collapse, over half the mortgages backing the securities had defaulted. Investors sustained major losses.

The New Jersey Carpenters Health Fund, which sued not just the banks in 2008 but also subprime lender NovaStar and credit rating agencies Standard & Poor’s and Moody’s, had invested $100K in one of the securities. The credit raters are no longer defendants in the case as the claims against them from this mortgage-backed securities case were dismissed in 2011. Because NovaStar’s successor has filed for Chapter 11 bankruptcy protection, the case against the subprime lender has been stayed.

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The U.S. Securities and Exchange Commission is investigating whether Wells Fargo (WFC) violated whistleblower protections, in the wake of allegations of aggressive and illegal sales tactics, and misled investors over these allegations.  The probe comes after Senators Jeff Merkeley (D-Ore), Elizabeth Warren (D-Mass), and Robert Menendez (D-NJ) sent the Commission a letter asking the regulator to examine whether the bank misled investigators over cross-selling claims.

In the letter, the US senators asked the SEC to look into whether Wells Fargo violated  Sarbanes-Oxley’s internal control provisions and whistleblower protection laws by firing employees who attempted to report alleged misconduct involving fake accounts. The three senators also asked the Commission to look at whether the bank failed to properly disclose bogus accounts while marketing high figures related to the creation of accounts.

Wells Fargo recently came under fire for setting up some two million bogus accounts. It settled the case, which was brought by California prosecutors and federal regulators—including the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau— for $185M in penalties and $5M in customer restitution. Questions have since arisen over why the bank did not notify investors about these cross-selling allegations until it settled with regulators, even though Ex-CEO John Stumpf admitted that he knew about the problems going as far back as 2013.

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A plaintiff who is a participant in Wells Fargo’s 401(K) plan is suing the bank. The individual claims that the company’s cross-selling scandal has caused its stock price to drop significantly and this has resulted in hundreds of millions of dollars in damages to the retirement plan.
It was just last month that regulators imposed a $185M fine on Wells Fargo for setting up 2.1 million credit card accounts and unauthorized deposits for banking customers so as to satisfy sales quotas. Some employees allegedly set up debit cards for customers without their knowledge, even assigning them PIN numbers.
Although Wells Fargo is settling with the Los Angeles City Attorney, the U.S. Office of the Comptroller of the Currency, and the U.S. Consumer Financial Protection Bureau, it is not denying or admitting to the allegations. 


Ex-UBS Broker is Accused of Inflating Customer’s Account 
The Financial Industry Regulatory Authority has barred Jeffrey Hamilton Howell from the broker-dealer industry. The former broker is accused of giving  a customer bogus weekly account statements that overvalued an account by up to $3M. The alleged misconduct is said to have occurred between 9/2008 and 11/2014.
According to FINRA, Howell sent the customer over 300 Stock Tracking Reports that misstated the client’s portfolio in amounts ranging from $289K to approximately $3M. He purportedly used his personal e-mail to send the customer some of the fake reports. This left UBS with records and books that were not accurate.

SEC Files Fraud Charges Against Former State Street Executive
The U.S. Securities and Exchange Commission is filing fraud charges against ex-State Street Corp. (STT) executive Ross McClellan. According to the regulator, McLellan was one of a number of people who purposely charged hidden markups on certain transactions to customers, making the bank $20M in extra revenue.

Addressing the charges, McLellan’s lawyer claims that his client did not commit any securities law violations and that all banks charge client markups on bond transactions to make money. The attorney also noted that it was State Street and not the bank that profited from the charges.

The U.S. Department of Justice has charged McLellan with securities fraud, conspiracy, and wire fraud.

Ex-Wells Fargo Broker to Be Barred
Christopher John Pierce, a former Wells Fargo & Co. (WFC) broker, will be barred from working with any FINRA-registered firm and associating with any member of the self-regulatory organization. Pierce agreed to the bar after he was accused of stealing money from the accounts of banking customers.

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