by T. GormanPosted on Posted in SECActions

Barclays took a double hit from regulators yesterday. First the Financial Conduct Authority in the UK fined Barclays Bank Plc, about £38 million for putting £16.5 billion of client assets at risk. Then the SEC imposed a $15 million penalty on Barclays Capital Inc. In the Matter of Barclays Capital Inc., Adm. Proc. File No. 3-16154 (September 23, 2014). Both sanctions are based on inadequate procedures.

The FCA’s action follows 16 instances in which the regulator or its predecessor imposed sanction on the firm relating to client assets or client money. This action is predicated on what the FCA called a “significant weakness” in the systems and controls in Barclay’s investment banking division between November 2007 and January 2012. FCA rules require firms to protect client assets if a firm becomes insolvent. Barclays failed to properly apply these rules when opening 95 accounts in 21 countries. As a result the firm did not establish the appropriate legal arrangements with these companies. The failings also resulted in assets being listed at times under Barclay’s name rather than that of the client. The fine imposed reflects the violations and the firm’s regulatory history. It is also the largest imposed by the FCA or its predecessor for client asset breaches.

The SEC’s action centers on the failure of Barclay’s to properly enhance its internal procedures after acquiring Lehman Brothers Inc. advisory business in September 2008. Prior to that time Barclays operations in the United States were comprised largely of broker-dealer functions. After the September 2008 acquisition the firm created what is now called the Barclay’s Wealth and Investment Management, Americas division. Despite the growth of the advisory business, Barclays Wealth failed to build the appropriate infrastructure. That contributed to deficiencies which include:

  • Engaging in principal transactions without making the required written disclosures and obtaining consent in violation of Advisers Act Section 207(3). As a result the firm received compensation of $2,853,119.62 which, along with interest, has been credited to the impacted clients.
  • Commissions and fees were charged and earned revenue that was inconsistent with its disclosures to certain advisory fees. This occurred from September 2008 through December 2011 and violated Advisers Act Section 206(2).
  • The custody rule was violated. Rule 206(b)-2 under the Advisors Act requires that Barclays ensure customer funds and securities are subject to verification by an annual surprise examination by an independent public accountant. The firm had inadequate procedures which caused it not to identify more than 800 advisory accounts to the independent accountant.
  • The firm failed to adopt and implement written policies and procedures designed to prevent violations of the Advisers Act. Although the firm had written compliance policies and procedures they had deficiencies and weaknesses.
  • Barclays also failed to make and keep certain books and records as required by Section 204(a) of the Advisers Act and violated Section 207 of that act by making materially inaccurate disclosures in it Form ADV.

To resolve the proceeding the firm agreed to implement a series of remedial measures. The Barclays reimbursed or credited affected clients about $3.8 million, including interest. It also developed and implemented an action plan in consultation with outside experts. Finally, the firm consented to the entry of a cease and desist order based on Advisers Act Sections 204(a), 206(2), 206(3), 206(4) and 207 and to a censure. Barclays also agreed to pay a penalty of $15 million.

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by T. GormanPosted on Posted in SECActions

Wells Fargo was named by the Commission in a proceeding for failing to establish, maintain and enforce policies and procedures to prevent the misuse of inside information. The firm added to its difficulties during the investigation by failing to timely produce records regarding an instance of insider trading by one of its representatives and producing an altered document. In the Matter of Wells Fargo Advisors, LLC, Adm. Proc. File No. 3-16153 (September 22, 2014).

Wells Fargo Advisors is a registered broker-dealer and investment adviser. In 2012 one of its registered representatives, Silva Prado Neto, was charged by the Commission in an insider trading action. SEC v. Prado, Civil Action No. 12-CIV 7094 (2012). The action alleged that in September 2012 Mr. Prado traded in the securities of Burger King in advance of the September 2, 2010 announcement that 3G Capital Partners Ltd., a private equity firm, would acquire the company and take it private. At the time of the trades Mr. Prado had inside information about the acquisition from one of his brokerage customers who invested in 3G Capital. The trades were placed through Mr. Prado’s personal brokerage account at Wells Fargo. He also tipped several of his other brokerage customers. The action claimed that Mr. Prado and those he tipped obtained over $2 million is illegal profits. The case concluded with the entry by default of a permanent injunction prohibiting Mr. Prado from committing future violations.

After the filing of the action, Wells Fargo conducted a review. The reviewer determined that: 1) Mr, Prado and his customers represented the top four positions in Burger King securities firm-wide; 2) Mr. Prado and his customers bought Burger King securities within 10 days before the announcement of the deal; 3) the profits by Mr. Prado and his customers were at least $5,000; 4) Mr. Prado and Burger King were both located in Miami; and 5) Mr. Prado, his customers and the company acquiring Burger King were all Brazilian. The inquiry was closed without contacting the branch manager.

Other compliance units at Wells Fargo had information regarding the insider trading incident. For example, the AML unit examined a $50 million wire transfer request by Mr. Prado’s customer to make his private equity investment in the Burger King acquisition. During the review Mr. Prado provided the unit with copies of the offering documents dated before the public announcement regarding the investment by the customer. The AML unit did not question how Mr. Prado obtained the offering documents or consider if he or his customers possessed or misused material nonpublic information.

In another supervisory unit, two different supervisors separately reviewed concentrations in the accounts of Mr. Prado’s customers. One reviewer examined an account in which 47% of the holdings were Berger King securities. Another reviewer examined an account in which 45% of the securities were Berger King. No action was taken.

When the Commission’s inquiry began a request was made for all of the documents of reviews related to Mr. Prado. Initially, the documents relating to the review by the compliance official were not produced. Six months later after another request the documents were produced. Later the staff learned that one document had been alter by adding the statement that “Rumors of acquisition by a private equity group had been circulating for several weeks prior to the announcement. The stock price was up 15% on 9/1/12, the day prior to the announcement.”

The Order finds that Wells Fargo had inadequate policies and procedures to prevent the misuse of inside information. Although a review was conducted after the trading by Mr. Prada, the information was not shared with senior managers or other compliance groups that were aware of issues relating to the trading. The policies and procedures of the firm gave virtually sole authority to conduct the compliance review to one unit but did not provide for any coordination of information that other units had relating to the subject of the review. In addition, the firm inconsistently enforced its policies.

The Order alleges willful violations of Exchange Act Section 15(g), 17(a) and (b) and of Advisers Act Section 204A and 204(a).

To resolve the proceeding Wells Fargo agreed to implement a series of of undertakings. Those included the retention of an independent consultant who will compile a report and make recommendations which will be adopted. The firm also admitted to the facts set forth in the Order and acknowledged that its conduct violated the federal securities laws. Wells Fargo consented to the entry of a cease and desist order based on the Sections cited in the Order, to a censure and to pay a $5 million penalty.

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