Wells Fargo & Co. (NYSE:WFC) was fined $2 million Thursday by the Financial Industry Regulatory Authority, a regulatory group that oversees investment advisers and other finance professionals, for neglecting to discipline an investment manager who became the top firm’s top salesman of a certain kind of exotic investment instrument by forcing it on unwilling, elderly clients.
According to the complaint released by the regulatory body, Wells Fargo allowed Alfred Chi Chen, an investment adviser in Sacramento, Calif. to place nearly all the assets in hundreds of accounts he was managing into reverse convertibles, a complex structured instrument that combines a convertible bond and stock put option into one bundled product.
"Wells Fargo failed to review reverse convertible transactions to ensure they were suitable and also did not provide sales charge discounts to eligible customers purchasing unit investment trusts, both serious failings that harmed investors," Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said in a statement.
From the details that can be gleaned in the complaint, the story went something like this:
Alfred Chi Chen was a retail investment adviser at a Wells Fargo bank branch in Sacramento. Despite having spent seven years as a licensed financial adviser, he appeared to be floundering professionally.
Instead of gladhanding and closing deals with the aggressive high-net worth clients that a private banker needs in order to advance his career, the FINRA complaint said “he got most of his customers through referrals from Wells Fargo bank personnel.”
In other words, while his peers got fat commissions from big investors, he got to deal with the small fry: the retirees living on tiny pensions who, after a lifetime of hard work and thrift, managed to sock away enough money for a decent nest egg. These were the kind of clients who would approach a bank branch, perhaps seeking to put their savings into a savings account, only to be directed toward Chen.
As the story went, while sitting with elderly clients -- many of whom told him not to put their money on risky stock market bets -- the adviser allegedly pulled a fast one: selling them an investment vehicle that technically was not based on equities (although it carried the same risks as holding equities). Dealing with retired store clerks, bartenders and nurses, some of whom were in their 70s and 80s and had no investment experience, he sold them on a financial product normally reserved for daredevil millionaires and risk-loving hedge funds.
Chen allegedly went further than that, buying reverse convertibles for clients after they instructed him not to, even changing the “risk preference” they had stated on their initial customer assessment so as to not raise a fuss from his supervisors. He is also accused of buying them for clients who could not have instructed him one way or another, having died shortly after opening an account with him. The complaint also noted that after some clients began to suffer losses from his trades, he took their money and doubled down on his bets on their behalf.
For what the FINRA complaint called “relentless,” “indiscriminate” and “aggressive” action, Chen was handsomely rewarded, pulling in $1.2 million in commissions between 2006 and 2008, before he was fired from the bank. He was the institution’s second-leading salesman of the esoteric financial instrument in 2007, and the top salesman in 2008.
"Wells Fargo Advisors will continue to support the processes and procedures in place to prevent this kind of activity from happening," Vince Scanlon, a Wells Fargo spokesman in Winston-Salem, North Carolina, told Bloomberg News. "We are glad to have this behind us."
FINRA’s action today, which settled with Wells Fargo but continues against Chen, is only the latest in the regulatory body’s effort to prevent and penalize investment advisers from offering inappropriate investment instruments to their clients.
In June of this year, the authority joined the Securities and Exchange Commission in warning investors about the risks of structured notes. In April, it fined Spanish bank Banco Santander $2 million, also for improper sales of reverse convertibles. The organization has made it an enforcement priority to make sure these types of investment products, which carry considerable risks and exposure to equity swings, are not being forced on unsuitable clients.