From the February 2017 issue of Investment Advisor • Subscribe!

Wirehouses Settle Bias, Fraud and Other Matters

Wells Fargo, UBS and Morgan Stanley grapple with compliance issues in early ’17

Firms are still dealing with the fallout of the financial crisis. Firms are still dealing with the fallout of the financial crisis.

Large financial institutions have dealt with lawsuits and regulatory fallout from the 2008 financial crisis for several years. Today, they are facing a variety of compliance issues, from discrimination cases to charges related to Puerto Rican municipal bonds and fines over excess fees.

Wells Fargo Advisors, for instance, recently reached a preliminary settlement with a group of African-American advisors that awards the registered reps a total of $35.5 million. The deal, attorneys say, should be approved and finalized soon.

“The amount is larger than that of many other settlements, [since] these are high-paying good jobs and involved high rates of attrition and big gaps in pay — with significant disparities in earnings between white and African-American financial advisors who had substantial economic losses,” said attorney Suzanne Bish of Stowell & Friedman. “Also, we have been litigating this case for a long time. It was filed in 2013.”

The class-action settlement, which the law firm representing about 335 registered representatives negotiated with Wells Fargo Advisors, “provides comprehensive programmatic relief designed to increase the representation of and opportunities for African-American financial advisors and FA trainees, as well as substantial monetary relief for settlement class members,” Bish explained in a court filing.

The advisors and licensed trainees affected by the suit include those employed by Wells Fargo's Private Client Group or WFA's bank brokerage channel from September 2009 through December 2016. The number of advisors benefitting financially from the settlement could top 400 as more find out about it, according to the attorney.

(Related: Wells Fargo Advisors Wins $23M in Baird Raiding Case)

She added that Wells Fargo “has agreed to revise its policies and practices, and to take action designed to enhance opportunities for employment, earnings and advancement of African-American FAs and trainees.”

New Fund Will Support Black FAs

In addition, Wells Fargo will set up a $500,000 fund to support these advisors over the next four years and help them grow their practices. Furthermore, Wells Fargo “will not impose mandatory arbitration or class-action waivers on African-American financial advisors and FA trainees for claims of race discrimination and related retaliation,” according to the document. New advisors and trainees will no longer be obliged to reimburse Wells Fargo for any training costs after they leave the company.

“We do not agree with the claims in the lawsuit, but believe that putting this matter behind us is in the best interests of our team members, clients and investors,” a Wells Fargo spokesperson said in a statement.

“Resolving this matter allows Wells Fargo Advisors to continue to focus on providing a diverse and inclusive work environment where all of our team members can thrive. […] We will also update our policies and procedures to provide greater opportunities for inclusiveness,” the spokesperson explained.

Along with the $500,000 Business Development Fund, Wells Fargo says it will: have a recruiting contact whose primary responsibility will be the recruitment of African-American FAs and FA trainees; create two coaching positions to work with African-American FAs and FA trainees, assist them with networking and building relationships, and help them increase productivity and develop their careers; and establish focus groups in the Private Client Group and Wealth Brokerage Services for African-American FAs and trainees to provide feedback to new leadership teams in each business channel, as well as to focus on ideas and initiatives to increase the number of African-American FAs and increase African-American productivity, retention and opportunities.

Not the First Case

In 2013, Bank of America-Merrill Lynch settled a race discrimination suit for $160 million, according to Harvard professor Frank Dobbin. This followed high-profile sexual discrimination cases in the 1990s and 2000s, when Morgan Stanley paid $54 million, and Smith Barney and Merrill Lynch paid over $100 million each; in 2007, Morgan Stanley paid an additional $46 million to settle another class action.

“There's always a need for success stories,” Bish said. If the policies and procedures laid out by the Wells Fargo settlement work effectively, “they could catch on elsewhere.” This would mean that organizations could grow “talent that is now underrepresented in the industry.”

Overall, the attorney is upbeat about the impact the settlement will have when it is finalized. “Corporations and people change. And individuals who want to work with Corporate America, non-profits and 401(k) plans expect to see all types of advisors,” she added.

UBS Fined Over Puerto Rico Munis

A month after a regulatory panel awarded over $18 million to two clients of UBS over sales of Puerto Rican municipal bonds and closed-end funds tied to these securities, a separate panel issued a similar award to three other clients, including $4 million in punitive damages.

But while UBS is challenging the December award in a U.S. district court with claims that arbitrators failed to disclose key material facts before the case began, attorneys representing the three clients set to benefit from the January award believe the latter judgment will not be challenged.

UBS accepted without objection the decision by the FINRA panel, which included three arbitrators, says attorney Lloyd Schwed of Schwed Kahle & Kress in Palm Beach Gardens, Florida. The panel issued its $18.2 million decision, ruling that the Gomez family — well-known on the island for their car businesses and charitable activities — should receive $9.63 million in compensatory damages, $4 million in punitive damages, nearly $4.5 million in attorneys’ fees, and $86,550 in other costs.

The three members of the Gomez family (parents Victor and Socorro, and daughter Madeline), argued they had been subjected to securities fraud, elder abuse and other violations.

According to their attorneys, this arbitration decision appears to be the first entailing the imposition of punitive damages on UBS in connection with its sales of Puerto Rican municipal bonds and closed-end bond funds; the $70 billion market for these investments collapsed in 2013 and resulted in more than $1.5 billion in customer claims.

The $18.2 million award is among the 20 largest securities arbitration awards given to public clients in the past decade, the attorneys said. (The separate case now being challenged by UBS involves former clients Rafael Vizcarrondo, an attorney and businessman, and his wife Mercedes Imbert de Jesus.)

The Gomez family alleged that former UBS Vice President Jose “Whopper” Ramirez violated both federal and state securities laws and committed fraud through the sale of some $50 million in Puerto Rican closed-end funds and municipal bonds to the family, which lost over $25 million through these investments in 2013, their attorneys said.

In addition, the clients say UBS failed to properly supervise Ramirez and was “reckless” in allowing him to concentrate so much of the family's savings in “unsuitably risky” Puerto Rico closed-end bond funds underwritten, managed and marketed by UBS.

“Although the arbitrators awarded less than the full damages claimants requested, UBS is disappointed and strongly disagrees with the decision to award any damages,” UBS said in a statement.

“Mr. Gomez was an experienced investor who made a fully informed decision to leverage his investments and concentrate his portfolio in UBS Puerto Rico closed-end funds because of their long history of providing excellent returns and substantial tax advantages. UBS is considering its options to overturn the award,” it explained.

Morgan Stanley Billing Errors

The Securities and Exchange Commission announced that Morgan Stanley has agreed to pay $13 million to settle charges that it overbilled advisory clients due to coding and other billing system errors. In addition, the firm violated a custody rule pertaining to annual surprise examinations, according to the regulatory group.

The SEC found that Morgan Stanley overcharged some 149,000 advisory clients “because it failed to adopt and implement compliance policies and procedures reasonably designed to ensure that clients were billed accurately according to the terms of their advisory agreements.”

The SEC says Morgan Stanley received more than $16 million in excess fees from the billing errors, which took place from 2002 to 2016.

“Morgan Stanley Wealth Management is pleased to settle this matter, which included inadvertent billing errors in certain managed accounts. All affected clients have been reimbursed, and the firm has enhanced its policies and procedures, including discontinuing the use of certain legacy systems,” the company explained in a statement.

Recently, New York Attorney General Eric Schneiderman announced that Citigroup had overcharged 47,000 clients of managed investment (or TRAK) accounts to the tune of $22.5 million. The TRAK accounts held by most clients in 2009 moved to Morgan Stanley as part of the Morgan Stanley Smith Barney merger, though Citi kept opening them through 2011.

 

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