The Financial Industry Regulatory Authority (FINRA) fined Wells Fargo Advisors, LLC of St. Louis, $1 million for its failure to deliver prospectuses in a timely manner to customers who purchased mutual funds in 2009, and for delays in reporting material information about its current and former representatives, including arbitrations and complaints involving its representatives.
Firms’ Failures and Fraud
This is not old news, but a continuing part of Wells Fargo’s failures and fraud in connection with the sale of investment company shares. In 2009, its predecessor, Wachovia Securities paid almost $10 million, consisting of a fine of $4.5 million and $5.4 million in penalties for failures to observe breakpoints and excessive mark-ups in connection with the fraudulent sale of mutual funds and investment company shares.
Also in 2009, Wachovia was fined $1.4 million for seemingly identical conduct and the failure to deliver prospectuses to customers. This is particularly important because in cases where brokers misrepresent the risks associated with certain mutual funds or investment company shares, Wachovia and Wells defends these cases by arguing that the risks were fully disclosed in the prospectuses thereby absolving the firm and its agents from all from all liability. However, in most cases, not even the brokers read the prospectuses and instead rely upon sales materials and other hype (for internal use only) distributed to them by fund wholesalers.
This time, FINRA found that Wells Fargo failed to deliver prospectuses within three business days of the transaction, as required by federal securities laws, to approximately 934,000 customers who purchased mutual funds in 2009. The customers received their prospectuses from one to 153 days late. Wells Fargo had failed to take corrective measures to ensure timely delivery of the prospectuses after its third-party service provider, which Wells Fargo contracted with to mail prospectuses to customers, provided the firm with regular reports indicating that a number of customers had not received the prospectuses on time.
According to FINRA
“Mutual fund prospectuses contain key information about a fund’s performance, risks, strategies and costs. Wells Fargo ignored reports alerting them to serious problems with its prospectus delivery system and, as a result, its customers were deprived of valuable information needed to make informed investment decisions.”
Wells Fargo contracted with a third-party service provider in 2009 to mail the prospectuses to customers. However, after receiving quarterly reports showing that between four percent and nine percent of the firm’s mutual fund customers failed to receive required prospectuses on time and after being notified in daily reports that a number of prospectuses still required delivery, Wells Fargo did not take adequate corrective measures to ensure future delivery of the prospectuses in a timely manner.
FINRA also found that Wells Fargo did not promptly report required information to FINRA regarding its current or former representatives. Under FINRA rules, a securities firm must ensure that information on its representatives’ applications for registration (Forms U4) is kept current in FINRA’s Central Registration Depository (CRD). A firm must also ensure that it updates a representative’s termination notice (Form U5) after the representative leaves the firm. These forms must be updated within 30 days of the firm learning that a significant event has occurred – including notification of a formal investigation, customer complaints or arbitrations filed against the representative. FINRA found that from July 1, 2008, to June 30, 2009, Wells Fargo failed to update 8.1 percent of their Forms U4 and 7.6 percent of the Forms U5 on time. In total, Wells Fargo filed nearly 190 late amendments to Forms U4 and U5.
In settling this matter, as is usually the case, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA’s findings and of course paid $1 million.
If you have been damaged as a result of fraud in connection with the sale of mutual funds or investment company shares by Wells Fargo or Wachovia, contact us for a free evaluation of your claim.
Guiliano Law Firm
If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.