A community watchdog group expressed outrage and Wells Fargo said it was launching an investigation after a newspaper reported that a senior exec threw lavish parties at a beachfront Malibu house owned by the bank.

This is the ultimate example of dancing on the shattered dreams of the millions of Americans who've lost their homes. They should be ashamed of themselves, said Association of Community Organizations for Reform Now spokesman Scott Levenson.

According to the Los Angeles Times, residents said Cheronda Guyton, a Wells Fargo senior vice president responsible for foreclosed commercial properties, spent weekends in the Malibu Colony house throwing eye-catching parties, one of which had guests arriving in a yacht.

Guyton was also issued the same parking permit as is given to Colony residents, the Times reported.

Guyton's alleged personal use of the property incensed advocacy groups and drew scrutiny from the lender's internal checks.

Wells Fargo said in a statement it took possession of the Southern California property in May and withheld it from the market for an agreed-upon period of time, adding that company policy prohibits personal use of properties held by the bank.

The bank has launched a full internal investigation of allegations that a team member was improperly using a bank-owned residential property in Malibu, California, Wells Fargo said in a statement.

We are thoroughly investigating this situation and will take decisive action with respect to any team member who may have violated Wells Fargo's policies, it said.

The bank declined any further comment.

U.S. lenders that have received taxpayer money under the Troubled Asset Relief Program have faced increased scrutiny from politicians, shareholders and watchdog groups for what critics say are spending excesses, inflated compensation and irregular business practices.

Wells Fargo, which received a $25 billion bailout from the U.S. government, also did not return phone calls from a real estate agent looking to show the two-story, modern style house to prospective buyers, the Times reported.

The 3,800 square foot house purchased for $12 million is in one of Los Angeles' most chi-chi neighborhoods, whose residents include movie star Tom Hanks, according to the Times.

The house is owned by Collin Equities, a division of Wells Fargo that liquidates foreclosed properties. Guyton worked in the California state controller's office under former governor Gray Davis prior to coming to Wells Fargo, the report said.

Wells Fargo in February canceled employee events in Las Vegas after reports that it had booked expensive hotels, but defended the events, saying they were part of its culture.

Insurer American International Group Inc, which got $40 billion of TARP money, scrapped some events after lawmakers railed against its spending $440,000 for a retreat at a California spa and resort.

Citigroup Inc, which took $45 billion of TARP money, decided not to take delivery of a new corporate jet, and faces growing pressure to end a $400 million sponsorship for the New York Mets baseball team's Citi field park.

Shares of Wells Fargo closed down 1.54 percent at $27.43 on the New York Stock Exchange.

(Reporting by Clare Baldwin)