Wells Fargo Settles SEC Charges - Analyst Blog

By Zacks Equity Research,

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Wells Fargo & Co. ( WFC ) 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 representatives.

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. ( GS ), JPMorgan Chase & Co. ( JPM ), Royal Bank of Canada ( RY ) 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.

Our Take

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 utilized. 

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 stock.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: GS , JPM , RY , WFC

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