[Updated through 2020] Brokerage firm giant Wells Fargo Advisors is in the news again. This time the company agreed to settle charges over allegations that it wrongly marketed exotic derivatives to retail customers. As part of the settlement, Wells Fargo will pay a $500,000 fine and $242,000 in restitution to several dozen clients. The derivatives at issue were called “structured repackaged asset-backed trust securities” or STRATS.
It used to be the retail securities market was a quiet place. Customers could purchase stocks, bonds or options. There were few other product choices. Recent years have seen a proliferation of more exotic investments, many illiquid and many tied to derivatives.
So called “structured products” were developed to give retail customers access to derivatives. Structured products generally start with a traditional security, such as a bond, but replace the normal payment or dividend feature. The new product ties return to some other asset or index.
Many structured products and derivatives are relatively illiquid. That means they must often be held to maturity. For retirees and customers who need ready access to their money, they may not be suitable. Many derivatives also carry higher risks of loss.
In our experience, some derivatives have become so complex that even the people selling them can’t fully explain how they work. That is the problem recently faced by Wells Fargo.
The Financial Industry Regulatory Authority – FINRA – claimed that Wells Fargo’s marketing materials failed to warn investors that they could lose money because of certain termination events. According to regulators, even some stockbrokers were left in the dark. According to a statement from FINRA, “Wells Fargo Advisors … failed to educate its registered representatives regarding these risks and its sales force therefore could not inform retail customers who purchased the STRATS that they could suffer significant losses.”
If the brokers selling STRATS didn’t understand them, the public had no chance.
Since this post was first written, Wells Fargo continues to rack up complaints, censures and fines for risky investments. Because these investments pay such large commissions, the lure is simply too great for many stockbrokers.
In 2017, Wells Fargo was ordered to pay $3.4 million in restitution after FINRA found that the firm wasn’t following rules on volatility-linked exchange-traded funds and notes. In our opinion, these investments were not suitable for the customers who purchased them on the recommendations of the firm.
In 2020, Wells Fargo was fined $550,000 for failing to supervise two brokers who were “piling” customers into speculative energy investments.
FINRA has been warning stockbrokers for at least a decade to be very careful in how they sell derivatives and structured products to retail customers. Unfortunately, as the market becomes even more complex we expect more problems.
Fortunately for investors, brokerage firms are ultimately responsible for the products sold by their agents. Stockbrokers have a legal obligation to fully understand their clients’ investment needs and then to only make suitable recommendations. They also have a duty to fully explain how complex investments work and disclose any specific risks like lack of liquidity or risk of loss.
If you lost money because of an unsuitable investment or stockbroker fraud, give us a call. Most cases can be handled on a contingent fee basis and can be completed in about one year from filing.
Need more information? Visit our cornerstone content on alternative investments and derivatives. Ready to see if you have a case? Contact attorney Brian Mahany at or by telephone at (202) 800-9791. All inquiries kept confidential.
MahanyLaw – America’s Fraud Recovery Lawyers