Wells Fargo & Co.
) has agreed to pay $6.5 million in an effort to settle charges
levied by the Securities and Exchange Commission (SEC) against its
brokerage unit and a former employee for not making adequate
disclosures about the risks associated with mortgage-backed
securities while selling them to investors.
Wells Fargo's former executive in question, VP Shawn McMurtry,
has been suspended for six months from the securities industry and
a penalty of $25,000 has been imposed on him. In addition to paying
a $6.5 million to resolve the charges, Wells Fargo has agreed to
pay $81,571 in disgorgement and prejudgment interest. Neither Wells
Fargo nor McMurtry admitted or denied the findings of SEC but
consented to such penalties.
The SEC Charges
According to SEC, asset-backed commercial papers structured with
high-risk mortgage-backed securities and collateralized debt
obligations were irresponsibly sold by Wells Fargo's unit in 2007,
prior to the bursting of the housing bubble. Later, investors such
as municipalities, non-profit institutions, and other customers
suffered severe losses for negligence on the part of Wells Fargo's
Instead of acquiring adequate information on such investment
products, Wells Fargo's representatives relied mainly on their
credit ratings. As a matter of fact, prior to a proper
understanding of such products and their risk profile, these
products were recommended to investors who normally had
conservative investment goals.
Others in the Same Pool
Wells Fargo is not the only company to face such charges and
penalties. In fact,
Goldman Sachs Group Inc.
JPMorgan Chase & Co.
Royal Bank of Canada
) also faced SEC's ire and paid millions as settlement charges, as
these firms didn't make adequate disclosures while selling such
risky products tied to mortgages.
In fact, consequent to the burst of the housing bubble and the
financial crisis that followed, regulators have beefed up their
investigations and found a number of firms to be at fault.
Settling of such charges would fundamentally dent Wells Fargo's
funds, but simultaneously lessen the company's litigation overhang
to some extent. However, the money could have been capitalized
towards the company's growth initiatives, had it not been imposed
with such fines. On the other hand, the investors can now breathe a
sigh of relief as the penalty amount can now be well
Yet, it is encouraging to note that post-2007, Wells Fargo has
taken enough measures to ensure that its representatives are armed
with proper know-how regarding such securities prior to proposing
these investments to the customers.
Also, steps have been taken to make sure that enough disclosures
regarding the product and its risk profile are made to customers.
Such efforts would encourage the investors and in turn help enhance
business with the customers and reap profits.
The shares of Wells Fargo retain a Zacks #3 Rank, which
translates into a short-term Hold rating. Considering the
fundamentals, we also have a Neutral recommendation on the
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