Wells to Pay Another $550,000 for Failing to Supervise Ex-Brokers Pushing Energy Stocks
Wells Fargo Advisors has agreed to pay more than $550,000 in fines and restitution for failing to follow up on warnings it received about two now-barred California brokers who piled their customers into speculative energy stocks, the Financial Industry Regulatory Authority said Friday.
The firm failed to investigate trading across customer accounts managed by brokers Charles Frieda and Charles B. Lynch once 28 red flags were raised about overconcentration in the accounts of four customers in a single, low-priced energy stock (ranging from 35.2% to 87.0%), according to a consent letter signed on Thursday by Wells Fargo Advisors CEO Jim Hays.
Seventy customers of the former Irvine, Calif.-based brokers ultimately lost more than $10 million when energy stocks tanked in 2014 and 2015. The advisors recommended four stocks for three years through October 2015, representing a substantial portion of assets for many of the customers, according to the acceptance, waiver and consent letter.
Wells, which fired Lynch in May 2016 and Fried 16 months later, has already paid 67 customers $9.7 million for their losses in the four stocks. (Finra barred them in December 2017.) But Wells agreed this week to compensate three other customers almost $201,500, and accept a censure and fine of $350,000, according to the agreement.
Wells’s written supervisory procedures required it not only to review other customers’ portfolios following the alerts about the four accounts, but to consider client contact and to check whether the brokers documented suitability of client portfolios.
Wells failed to review the other accounts, relied on the brokers’ “uncorroborated assurances that their customers were aware of the concentrations,” and “knew, but did not investigate, that Frieda and Lynch were moving energy securities from customers’ advisory accounts into brokerage accounts to avoid the firm’s concentration limits in advisory accounts,” the consent letter said.
Wells violated Finra’s Rule 3110(a) requiring firms to build and maintain supervisory systems and its broad Rule 2010 requiring members to conduct business with high standards of commercial honor and to maintain just and equitable principles of trade.
Wells’s Hays signed the consent agreement without admitting or denying Finra’s findings, as is typical of acceptance, waiver and consent letters offered by the industry self-regulator.
“Wells Fargo Advisors is committed to helping our clients achieve their investment goals, and we take our supervisory responsibilities seriously,” a spokeswoman said in an e-mailed statement. “The financial advisors involved in this matter are no longer with the firm and we are pleased to have this matter behind us as the conduct at issue occurred between 2012 and 2015.”
She did not comment on whether the firm has acted against any branch or compliance personnel besides Frieda and Lynch.
Frieda, who began his securities career in 2008 with Smith Barney and successor firm Morgan Stanley before joining Wells in October 2012, could not be reached for comment. He has 58 settled customer complaints on his Broker Check record.
Lynch, who first registered as a broker in 1999 with Morgan Stanley and similarly joined Wells in 2012, also has 58 settled customer complaints in his history. He also could not be reached for comment.