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October 24, 2016 at 08:00 PM
The past month or so has been an incredible period of scandals for the financial sector. Reviewing the details, though painful, is highly instructive. Clearly, politicians and regulators alike will now be watching the big banks, including their wealth-management units and especially cross-selling arrangements, as never before.
The catalyst for this development was the news that Wells Fargo agreed to pay $185 million to the U.S. Consumer Financial Protection Bureau in early September over allegations that it secretly opened about 2 million unauthorized accounts. (Some 5,300 employees were fired for creating them from 2011 to 2014.)
Next, the U.S. Senate grilled then-Chairman and CEO John Stumpf. Sen. Elizabeth Warren said he should resign, which he did several weeks later. (At a second hearing called by the House Financial Services Committee, Stumpf denied that the bank had organized the effort to open fake accounts.)
“The decision is good news in the short term, because it removes a dark cloud of uncertainty that was hanging over the bank,” said Ian Katz, an analyst at Capital Alpha Partners, in a note in mid-October.
But lawmakers say they will push for more investigations of the bank, which includes Wells Fargo Advisors. The bank is now being led by CEO Tim Sloan, after Stumpf stepped down on Oct. 12, and it tapped Stephen Sanger, a former executive at General Mills, to serve as non-executive chairman and vice chair of its board.
Wells Fargo said it has refunded $2.6 million to affected clients and ended the sales incentives tied to the fake accounts. Meanwhile, California and Chicago decided to cut business ties with the bank for one year.
“The damage you have done to the market, to your industry, far exceeds the damage to your own business,” Rep. Mick Mulvaney said during a Sept. 29 hearing. And government entities aren’t the only ones unhappy with the San Francisco-based business.
Angry Advisor Client
Former Wells Fargo investor-client Lacy Harber took out a full-page ad in several newspapers across the country in early October to highlight his displeasure with Wells Fargo Advisors. The ads appeared in The New York Times, Dallas Morning News, San Francisco Chronicle and The Charlotte Observer.
The ads called for Congress to look into Wells Fargo’s brokerage business, which Harber claims cost him about $6 million. The ad’s headline reads: “Greed. Dishonesty. Betrayal.”
The Denison, Texas, resident said he was buying close to $35 million of stocks on margin when the Dow Jones index started declining on Aug. 24, 2015. “But for some reason, somebody panicked because the market opened down 1,000 points. To make a long story short, they forced me to sell my stock. It was either that or they wanted the complete $34.8 million before 3 p.m.,” Harber told The Dallas Morning News.
“I sent them $19 million by noon, and the local broker said, ‘I think that’ll do it.’ He called back and said, ‘No, they want the whole $34.8 million today,’” the businessman, 80, added.
Since Harber did not produce the rest of the amount, Wells Fargo liquidated his account, which cost him more than $5.8 million, he maintains. The company also charged him some $483,000 in brokerage fees.
His complaint, filed before the Financial Industry Regulatory Authority, is pending.
“At Wells Fargo Advisors, we are focused on our clients and on the longstanding relationships we have with them. Mr. Harber has chosen to use the current media focus on Wells Fargo as a means to draw attention to his own lawsuit. Mr. Harber is a highly sophisticated, experienced investor who routinely made his own investing decisions,” the business said in a statement.
“We executed his transactions on a day of extraordinary market volatility that included a 1,000-point drop in the Dow Jones Industrial Average. Mr. Harber’s trades were done on margin. Unfortunately, his trading was affected by adverse market conditions. We’re in litigation with Mr. Harber and are strongly defending against his claims,” it explained.
Morgan Stanley’s Mess
The attention on Wells Fargo has spilled onto its rivals, too, according to one equity analyst. “We should still expect heightened regulatory scrutiny of incentive structures and persistent legislative calls for breaking up the nation’s biggest banks,” wrote Isaac Boltansky of Compass Point.
Activities at Morgan Stanley’s wealth-management business drew the attention of a state regulator and raised plenty of eyebrows on Oct. 3. That’s when Massachusetts Secretary of the Commonwealth William Galvin said the firm’s sales contests tied to securities-based loans (or SBLs) encouraged “dishonest and unethical conduct” and “created a material conflict of interest, which violated the firm’s fiduciary duty.”
The regulator took action aimed at requiring the firm to cease and desist such activities in Massachusetts and Rhode Island, and provide “equitable relief” to clients, and requested an administrative fine be imposed on the firm. Securities-based loans allow clients to borrow against the value of the securities in their investment accounts using their securities as loan collateral.
