FINRA fines Wells Fargo Clearing Services for failure to supervise representatives
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.
