FINRA fines Wells Fargo Clearing Services for failure to supervise representatives

Maria Nikolova

For a three-year period, Charles Frieda and Charles Lynch recommended to customers to invest in high-risk energy securities, triggering losses of more than $10 million for the customers.

Wells Fargo Advisors, LLC (n/k/a Wells Fargo Clearing Services, LLC) has agreed to pay $350,000 as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA). The fine stems from rule violations that occurred between November 2012 and October 2015.

During the relevant period, two former firm representatives, Charles Frieda and Charles Lynch, recommended that many of their customers invest a substantial portion of their assets at Wells Fargo in four high-risk energy securities. The representatives’ conduct generated multiple red flags regarding overconcentration in their customers’ account that raised suitability concerns that Wells Fargo failed to reasonably investigate.

Thus, the firm failed to reasonably supervise the activities of the two representatives, violating NASD Rule 3010(a) and FINRA Rules 3110(a) and 2010.

In particular, the representatives’ recommendations resulted in a 38-year-old customer holding 92.4% of her total household account value in these high-risk securities and a 54-year-old customer holding 55.7% of her total household account value in these securities. The two representatives sold approximately $46 million of these securities to their customers, representing about half of their overall sales.

Frieda and Lynch exacerbated risk of investing in these securities by recommending that customers purchase shares of other energy securities. In many instances, their customers’ investments in energy-sector securities exceeded 50% of their liquid net worth.

Because of Frieda and Lynch’s recommendations, 70 of their customers lost a total of more than $10 million when prices of energy securities prices plummeted in 2014 and 2015.

Wells Fargo compensated 67 Frieda and Lynch customers more than $9.7 million based on losses related to these four securities. Three customers were not compensated, and the firm will provide restitution to them in line with its settlement with FINRA.

FINRA stresses that Wells Fargo had multiple red flags about overconcentration in Frieda and Lynch’s customers’ accounts that raised suitability concerns. Yet, Wells Fargo failed to reasonably investigate certain of these red flags. Between September 2013 and April 2014, the firm’s trade-review system issued 28 alerts that four customers of the representatives were concentrated in a low-priced, energy security. The alerts noted concentration levels ranging between 35.18% and 86.95% for these accounts, which was above the firm’s threshold for triggering a security concentration alert.

In addition to the fine, the firm has agreed to a censure and the payment of restitution of $201,498 to customers who were not compensated previously.

Read this next

Digital Assets

OneCoin founder Ruja Ignatova is selling penthouse in UK

OneCoin founder Ruja Ignatova, who steered one of the world’s biggest cryptocurrency frauds, is back into the spotlight more than five years after vanishing from the public eye.

Digital Assets

Bitpay taps MoonPay to offer access to +60 cryptocurrencies

Crypto payment service provider Bitpay said it’s partnering with exchange and web3 infrastructure provider MoonPay to provide its users with easier access to buy cryptocurrency instantly.

Digital Assets

New York investigates Gemini over FDIC insurance claims

New York regulators are investigating Gemini over “false and misleading” claims the Winklevoss-owned exchange had made about whether client funds are insured by the government.

Digital Assets

Binance launches Mastercard-backed crypto card in Brazil

In partnership with Mastercard, crypto giant Binance is launching its pre-paid card offering cryptocurrency “rewards” on customers’ purchases.

Digital Assets

Circle publishes a breakdown of USDC reserves for December

Boston-based stablecoin issuer Circle has revealed a breakdown of its reserves for December 2022, as well as a complete list of USDC reserve custodians.

Retail FX

Monex reports lower revenues as crypto downturn bites

Monex Group has reported its Q3 2022 financial metrics, which saw a reversal in terms of its revenues as TradeStation was grappling with a crypto market crash that has tanked the profitability of its crypto business.

Inside View

Broadridge report finds 27% of firms’ overall IT budget goes to digital transformation

“A new chapter in digital transformation is emerging. In our work with clients across the financial services industry we see leading firms are already reaping the benefits from digitalization and the use of technologies such as AI and blockchain/DLT, as they adapt to economic headwinds and new competitive dynamics”

Executive Moves

Ripple announces Monica Long as President

“I’m incredibly honored to take on the role of President at Ripple as we expand deeper into crypto-enabled services like liquidity, settlement and custody.”

Executive Moves

Arabesque AI appoints Carolina Minio Paluello as CEO

“Arabesque AI is uniquely positioned to service the asset management industry’s need to meet the growing market demand for hyper customised portfolios.”

<