FINRA Censures Wells Fargo After Broker Churns Elderly Customer’s Account
FINRA, the Financial Industry Regulatory Authority, has censured Wells Fargo Advisors and fined the brokerage firm $175,000 after the firm allegedly failed to supervise a registered representative who churned an elderly customer’s account, according to InvestmentNews.
What allegedly happened in this case? FINRA maintains that, over four years, the Wells Fargo broker executed more than 2,000 trades of equity positions in the elderly client’s three accounts, from March 2012 to March 2016. The broker allegedly engaged in churning, trading excessively in an account to generate more commissions. As a result, the broker reaped $300,000 worth of commissions and other fees. Eventually, following a 2016 investigation, Wells Fargo fired the broker and settled the elderly client’s customer complaint for $1 million. Wells Fargo then entered into an Acceptance, Waiver, and Consent (AWC) with FINRA, consenting to the censure and the $175,000 fine, as well as to FINRA’s findings that the firm did not properly supervise the broker in question, leading to significant customer losses. A copy of the AWC can be viewed here.
How did Wells Fargo not notice what was going on? The firm’s systems detected the excessive trading, but no one investigated the matter further. This demonstrates that Wells Fargo failed to supervise the broker. Why are allegations of “failure to supervise” problematic? In the AWC, FINRA references FINRA Rule 3110(a), which mandates that broker-dealers have a system in place to supervise each registered representative’s activities to make sure that everyone complies with applicable securities regulations. FINRA mandates that each broker-dealer not only “establish” a system, but also “maintain” it. In this case, FINRA alleges that Wells Fargo’s compliance computer system flagged the churning, but Wells Fargo failed to act in a timely fashion, if at all.
According to the AWC, the elderly customer’s accounts were flagged 40 times in four years. Wells Fargo is supposed to contact investors immediately after an account is flagged each month for six consecutive months. Each month from November 2014 to April 2014, the computer system flagged two of the elderly customer’s accounts for high velocity. But Wells Fargo did not contact the customer until May 2014, and when it did, it did not tell the customer that it suspected high velocity trading, nor did it ask the elderly customer whether she understood all these transactions. Elderly customers are at a high risk for financial exploitation, and often do not understand all components of their investments, so firms should be vigilant in preventing and identifying senior financial exploitation.
The system continued to detect suspicious activity. From July 2014 to February 2015, the computer system flagged one of the elderly customer’s accounts five times. This time, however, Wells Fargo waited even longer to notify the elderly customer that the account was under review, and again failed to tell the customer that the review was for high velocity trading. In August 2015, the computer program yet again flagged one of the elderly customer’s accounts for high velocity trading. However, Wells Fargo waited seven months — until April 2016 — to contact the elderly customer. After an investigation, Wells Fargo terminated the registered representative on September 2, 2016. The elderly customer ultimately filed a customer complaint with FINRA, and Wells Fargo paid her $1 million as part of a settlement.
If you’re an investor who has concerns about failure to supervise, churning, or elderly financial exploitation, don’t hesitate to contact a securities attorney. Call (877) 238–4175, email info@fkesq.com, or visit www.stopbrokerfraud.com for your free case consultation with the securities attorneys of Fitapelli Kurta.
