The SEC brought an interesting case this week against Wells Fargo Advisors LLC for failing to maintain adequate controls to prevent an employee from engaging in insider trading based on a customer’s nonpublic information. The SEC said the case was the first it has brought against a broker-dealer for failing to protect nonpublic information conveyed by its customers.

The SEC filed the case this week as an administrative proceeding, alleging that a broker at Wells Fargo learned confidentially from one of his customers that Burger King was about to being acquired. The broker then allegedly traded on that information ahead of the public announcement (the broker was separately charged with insider trading by the SEC in 2012, and also charged criminally by federal prosecutors in January 2104). According to the SEC, multiple compliance or supervisory groups at Wells Fargo "received indications that the broker was misusing customer information. However, these groups lacked coordination or any assigned responsibilities, and they ultimately failed to act on these indications."

In addition, the SEC charged that Wells Fargo unreasonably delayed its production of documents during the SEC’s investigation, omitted key documents, and produced a document had been altered to include additional language before it was produced to the SEC. Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, stated that Wells Fargo's actions "improperly delayed our investigation, and the production of an altered document interfered with our search for the truth.”

Notably, Wells Fargo admitted the findings stated in the Order and acknowledged it had violated the federal securities laws.  The firm agreed to pay a $5 million penalty and to retain an independent consultant to review its policies and procedures. 

Topics