Wells Fargo Admits Violating Law, Pays SEC $5 Million Penalty
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.