Wells Fargo Advisors LLC a securities broker dealer headquartered in Saint Louis Missouri has been censured and fined $350,000.00 based upon findings that it failed to supervise two stockbrokers who made unsuitable recommendations to customers regarding energy securities causing customers to experience losses. Letter of Acceptance Waiver and Consent No. 2015045713304 (Aug. 28, 2020).
According to the AWC, from November of 2012 to October of 2015, customers received recommendations from stockbrokers Charles Lynch and Charles Frieda to place most of their assets in speculative energy securities. Customers were advised to purchase four risky energy securities. One of those included a low-priced security.
The AWC stated that in one case, a 38-year-old customer had been steered towards allocating 92.4% of their total household account value in those securities. In another case, a 54-year-old customer was told to invest 55.7% of her total household account value in energy investments. FINRA learned that approximately $46,000,000.00 in these types of securities had been sold to customers by Lynch and Frieda which amounted to nearly 50% of the stockbrokers’ aggregate sales.
The AWC stated that the customers’ risk exposure had been exacerbated by Lynch and Frieda telling them to concentrate their investments in the energy sector. The regulator noted that these recommendations led customers to have more than half of their liquid net worth invested in energy securities. FINRA confirmed that 70 investors fell victim to the bad recommendations made by Charles Lynch and Charles Frieda. Those customers sustained losses exceeding $10,000,000.00 after energy prices took a nosedive in 2014 and 2015.
FINRA stated that Wells Fargo knew about the overconcentration of energy securities in customer accounts being brought on by Frieda and Lynch. They knew that these concentrations were possibly unsuitable. The regulator stated that on 28 occasions, Wells Fargo was alerted to the stockbrokers’ customers having large concentrations in their accounts. Those red flags were not reasonably investigated by Wells Fargo.
The AWC stated that written supervisory procedures used by Wells Fargo dictated that the securities broker dealer was supposed to investigate alerts in detail. Supervisory personnel were also supposed to evaluate trends of concentration problems by looking at other accounts. The stockbrokers’ suitability determinations were supposed to be reviewed and documented. Well Fargo’s written supervisory procedures even called for its customers to be contacted.
FINRA stated that other accounts serviced by the stockbrokers were not reviewed by the securities broker dealer to determine problematic trends. Customers were not contacted by Wells Fargo to ensure that they knew of risks pertaining to energy securities concentrations. The only thing that the securities broker dealer did to resolve alerts is to take the word of the stockbrokers who initiated these problematic transactions.
The regulator indicated that Wells Fargo also knew about the lack of suitability documents for some of the customers who were advised by Lynch and Frieda. This lack of information precluded Wells Fargo from knowing whether transactions were suitable.
The AWC stated that the securities broker dealer additionally knew about energy securities being moved from Lynch and Frieda’s advisory accounts into retail brokerage accounts so that the stockbrokers could evade limits set by Wells Fargo as it pertained to concentration. This type of conduct also signaled unsuitable transactions by the stockbrokers. Wells Fargo failed to act.
Wells Fargo’s written supervisory procedures also called for a daily blotter to be reviewed so that supervisory personnel could determine concentration problems and abnormal trading. The AWC stated that Lynch and Frieda’s trading caused the trade blotters to show that there was a high volume of energy securities transactions. The red flags presented to the securities broker dealer were disregarded.
FINRA found that Wells Fargo failed to supervise its stockbrokers in violation of FINRA Rules 2010 and 3110(a) and National Association of Securities Dealers (NASD) Rule 3010(a).