The Financial Industry Regulatory Authority (FINRA) has fined Wells Fargo Investments $2 million and ordered it to pay restitution to customers for unsuitable sales of reverse convertible securities, and other misconduct. The reverse convertibles sales involved one broker and 21 customers with 172 accounts. Seventy one percent of the customers were over 80 years old. (See “Wells to pay $2M to settle claims broker sold unsuitable investments to seniors,” Investment News).
FINRA also charged former Wells Fargo registered representative Alfred Chi Chen with recommending and selling the unsuitable reverse convertibles, and making unauthorized trades in the accounts of deceased customers. Chen generated $1 million in commissions from the sales, which resulted in losses for many customers.
Reverse convertibles are notes with above-market yields that are tied to a “reference asset,” such as a stock. The notes contain embedded put options allowing the issuer to return the stock in lieu of principal at maturity if the stock falls below a certain level. The investor, who usually thinks he has purchased a note, not a put option, thus risks sustaining a loss of principal.
As of June 2008, 172 accounts serviced by Chen held reverse convertibles, 148 had concentrations greater than 50 percent of their total account holdings, and 46 had concentrations greater than 90 percent.
Continuing its harmful trick that allows Wells Fargo (and other defendants) to deny everything in arbitration hearings filed by customers, FINRA allowed Wells Fargo buy its peace at a fraction of the actual harm done by “consenting” to its findings without admitting to them.
The misconduct involved “serious failings that harmed investors,” Brad Bennett, FINRA’s enforcement chief said. Then why doesn’t FINRA make a record (proven or admitted) of what those failings were? What good are FINRA’s findings (and what good is FINRA itself) if wrongdoers can deny the findings they consented to at arbitration hearings?
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.