Securities Industry Commentator by Bill Singer Esq

May 31, 2022






Letter from United States Senate Committee on Banking, Housing, and Urban Affairs Chairman Sherrod Brown to Wells Fargo & Company President/Chief Executive Officer Charles W. Scharf / May 31, 2022
https://www.banking.senate.gov/imo/media/doc/Brown
%20WF%20Scharf%20Letter%2005312022.pdf

Dear Mr. Scharf: 

Recent revelations of racial disparities in mortgage lending, fake job interviews for minority and female candidates, and anti-money laundering violations are troubling as Wells Fargo, unfortunately, continues to demonstrate its inability to address its longstanding risk management failures. These recent problems add to the laundry list of consumer abuses and compliance breakdowns that led to the imposition of a growth restriction on your bank in 2018 until your firm improves its governance and controls.1 Accordingly, I urge you to once and for all address Wells Fargo's governance, risk management, and hiring practices - weaknesses that have plagued the bank for almost a decade. 

First, Wells Fargo has said that it is committed to closing the wealth and income gaps in this country, but it appears instead that your actions and mismanagement help continue racial and economic disparities. In March, my colleagues and I raised concerns about whether Wells' mortgage refinance lending complied with fair lending and housing laws.2 Following our letter, your bank has proposed new programs to refinance mortgages of minority homeowners whose loans you currently service and to provide additional grants; however, I remain concerned that families of color will still - once again - get the short end of the stick. Today, 30-year fixed mortgage rates are 5.25%, up 2.6% from their low at the beginning of 2021. While you have committed $150 million to support the refinance program, it's difficult to see how that amount could pay for reducing interest rates to pandemic lows for the tens of thousands of families who were denied refinancing, let alone make up for the higher payments they've made over the past year or more. Even if borrowers' mortgage payments were reduced to where they would have been if they'd received a refinance loan months ago, this would simply be doing what Wells Fargo should have been doing all along - treating all borrowers equally, regardless of their skin color. 

Concerns about discrimination have also surfaced with respect to hiring. Last week, The New York Times reported your bank conducted fake interviews of Black and female applicants to give the false impression of improving diversity within its ranks.3 This is not the first time Wells Fargo employees have raised concerns about discriminatory treatment. In 2020, Wells Fargo settled a claim with the Department of Labor for discriminating against over 30,000 Black applicants for banking, sales, and support positions.4 In 2017, Wells Fargo settled a lawsuit brought by Black financial advisers for racial discrimination, paying $36 million to hundreds of aggrieved employees.5 

Wells Fargo's ongoing, failed efforts to combat lending discrimination and increase diversity within its ranks raise questions about your ability to fix the myriad internal controls, risk management, and general governance issues that have been a problem for nearly a decade. Last Friday, the Securities and Exchange Commission also fined Wells Fargo's broker-dealer business $7 million for anti-money laundering violations arising from the failure to properly implement and test a system designed to prevent suspicious activity related to money laundering, terrorist financing, and other illegal financial transactions.6 In September 2021, the Office of the Comptroller of the Currency fined Wells Fargo $250 million for failing to pay back wronged customers and take corrective actions to improve the execution, risk management, and oversight of its lending loss mitigation program.7 

Despite these failures, Wells Fargo made $21.5 billion in 2021 and announced a plan to double dividends and buyback $18 billion in stock between third quarter 2021 and second quarter 2022. You received $24.5 million last year in total compensation, which included a 20 percent increase from 2020. As noted in the 2022 Wells Fargo proxy statement, your total annualized compensation exceeded 290 times the median Wells Fargo employee estimated annual total compensation of $73,578. 

Wells Fargo's continued inability to manage the basic requirements of serving its customers means that consumers, investors, and employees continue to pay the price. It is clear that Wells Fargo still has a long way to go to fix its governance and risk management before it should be allowed to grow in size. It is unacceptable that after years of failed attempts, nothing seems to have improved. I expect you to have a plan to finally reform the firm's risk management, internal controls, and governance structures so that your firm rights past wrongs and lives up to the many promises that Wells Fargo has made to its customers and their communities.

Thank you for your attention to this important matter, which has significant consequences for your customers and employees, and ensuring a fair and stable banking system. I look forward to your testimony at our annual Wall Street oversight hearing.

- - - - -
4 Id. 
5 Id. 


https://www.justice.gov/usao-sdny/pr/manhattan-man-pleads-guilty-defrauding-victims-millions-dollars-through-offering
Ephraim Joseph Ullmann pled guilty in the United States District Court for the Southern District of New York to one count of conspiracy to commit wire fraud. As alleged in part in the DOJ Release:

From at least in or about November 2014 through at least in or about 2020, ULLMANN participated in a scheme to defraud investors by falsely telling them that they could obtain letters of credit or loans if they provided initial funds as collateral for the loans. ULLMANN told one group of victims who had started a home building company that he had been hired by an American Indian tribe to use tribal bonds as collateral to obtain large loans for companies seeking financing. ULLMANN told these victims to send hundreds of thousands of dollars to a bank account he provided them, which he described as "seed capital" to obtain the tribal bond-backed loan. In reality, ULLMANN had not been hired by the tribe and there was no loan available for the victims. ULLMANN also sent multiple forged bank documents to the victims to deceive them into thinking that the promised financing was being provided.

In addition to the tribal bond scheme, ULLMANN told a separate group of victims who were involved with starting a new oil company that he could obtain a multi-million dollar letter of credit for the company if the victims provided initial funding. In reality, there was no letter of credit available, and the victims were fraudulently induced to wire millions of dollars to bank accounts identified by ULLMANN and his co-conspirators.

SEC Charges Former Astrazeneca Employee with Insider Trading (SEC Release)
https://www.sec.gov/litigation/litreleases/2022/lr25401.htm
In a Complaint filed in the United States District Court for the Southern District of New York
https://www.sec.gov/litigation/complaints/2022/comp25401.pdf, the SEC charged Hugues Pierre Joublin with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Without admitting or denying the allegations in the SEC Complaint, Joublin agreed to the entry of a final judgment enjoining him from violations of the charged provisions, ordering disgorgement and prejudgment interest, and imposing a $10,601.37 civil penalty. As alleged in part in the SEC Release:

[T]wo weeks before the public announcement, Joublin, then Global Head of Corporate Affairs for Oncology for AstraZeneca, learned that the company was involved in confidential negotiations with Daiichi to enter into a global development and commercialization agreement for Daiichi's targeted antibody cancer-treating drug. On March 12, 2019, while in possession and on the basis of the material nonpublic information, and in breach of his duties to AstraZeneca and its shareholders, Joublin purchased 500 American Depository Shares of Daiichi. The day following the announcement, Daiichi shares closed at $49.97, an increase of $9.78 (24%) from the prior day's closing price. As alleged in the complaint, Joublin obtained illicit profits of approximately $4,995.

https://www.sec.gov/litigation/litreleases/2022/lr25400.htm
In a Complaint filed in the United States District Court for the Southern District of California
https://www.sec.gov/litigation/complaints/2022/comp25400.pdf, the SEC charged:

(i) Cornerstone Acquisition & Management Company LLC, its chief Executive Officer/Portfolio Manager/Chief Compliance Offier Derren Lee Geiger, and its Chief Financial Officer She Hwea Ngo with violations of the antifraud provisions of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder; 
(ii) Cornerstone and Geiger with violations of Advisers Act Sections 206(4) and Rule 206(4)-8 thereunder and 207; 
(iii) Cornerstone with violations of Advisers Act Sections 204 and Rule 204-2 thereunder and 206(4) and Rule 206(4)-7 thereunder; 
(iv) Geiger with aiding and abetting Cornerstone's violations of Advisers Act Section 206(4) and Rule 206(4)-7 thereunder; and 
(v) Ngo with aiding and abetting Cornerstone's and Geiger's Advisers Act violations except for Advisers Act Section 206 and Rule 206(4)-7 thereunder. 

As alleged in part in the SEC Release:

[C]ornerstone, Geiger, and Ngo engaged in a scheme to deceive investors in Cornerstone's private funds, including the Caritas Royalties Fund (Bermuda) Ltd. (the "Bermuda Fund"), which had U.S. tax-exempt and non-U.S. investors. The complaint alleges that their deceptive conduct included misstatements concerning the ownership of Cornerstone, the existence of collateral, and other material issues. The complaint also alleges that Cornerstone and Geiger failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and that Cornerstone and Ngo created inaccurate books and records.

In a Complaint filed in the United States District Court for the Southern District of Florida
https://www.cftc.gov/media/7296/enfricocoxcomplaint053122/download, the CFTC 
alleges that Rico Cox fraudulently solicited and accepted funds. As alleged in part in the CFTC Release:

[B]eginning in approximately December 2019 and continuing through the present, Cox persuaded at least 14 individuals to transfer at least $842,900 to him for the purported purpose of trading commodity futures. In reality, Cox misappropriated at least $367,979 of the participant funds for direct personal benefit.

The complaint alleges that Cox knowingly made fraudulent and material misrepresentations and omitted material facts in soliciting participants, including making false claims he was a successful trader with years of experience trading futures contracts.      

According to the complaint, Cox represented that he was profitably trading participants' funds and sent participants false statements including account statements, emails, and screen shots falsely showing profitable trading. In fact, according to the complaint, Cox lost most of the participant funds that he did trade.

Cox also failed to disclose that he was the subject of a previous CFTC enforcement action in the Southern District of Florida which resulted in a $940,000 judgment against him for fraudulently soliciting funds to trade in a managed commodity futures account. [See CFTC Press Release No. 7383-16] 

In a FINRA Arbitration Statement of Claim filed in October 2021, associated person Claimant Kimura sought the expungement of a customer disputes involving two occurrences involving a Customer designated as "Ms.P" and a Customer designated as "Mr. O" from his Central Registration Depository record ("CRD"). Respondent FINRA member firm LPL did not oppose the requested relief. Prior to the expungement hearing, one of Mr. O's daughters (a Ms. K) advised that Mr. O had died after being served with notice of the expungement hearing, and the daughter submitted a statement in opposition to the requested expungement; subsequently, two other daughters of Mr. O, Ms. I.O. and Ms. J.O. submitted statements in opposition. Mr. P did not participate in the expungement hearing.   Ms. K, Ms. I.O., Ms. J.O. and a grandson of Mr. O (Mr. S) participated in the expungement hearing and opposed the requested relief.
  The sole FINRA Arbitrator denied expungement of Mr. O's occurrence but recommended expungement of Ms. P's occurrence. In recommending the expungement of Ms. P's occurrence, the Arbitrator found a FINRA Rule 2080 finding that her claim, allegation, or information was factually impossible or clearly erroneous, and false. As alleged in part in the FINRA Arbitration Award:

On March 7, 2007, Ms. P became a client of Claimant. Claimant made various investment recommendations based on Ms. P's investor profile and investment objectives, including a John Hancock Mutual Life Variable Annuity ("Hancock Annuity"). Claimant explained to Ms. P in detail the terms, risks, costs, fees, features and benefits of the Hancock Annuity. Ms. P received and reviewed the prospectus associated with the Hancock Annuity, which further explained its terms, risks, and costs, as well as the terms of its "free look" period.

In late March 2007, Ms. P purchased the Hancock Annuity, wherein she affirmed her understanding of the risks, costs, fees and features of the Hancock Annuity. On April 6, 2007, Ms. P decided to exercise the free look provision of the Hancock Annuity and withdrew from her policy. The early withdrawal resulted in minor taxable capital gains. 

Ms. P then filed a formal complaint stating Claimant failed to inform her as to the possible tax consequences associated with her purchase and early withdrawal of the Hancock Annuity. 

On September 27, 2008, as a business decision, Respondent settled with Ms. P. Claimant did not contribute to the settlement nor did he review or sign the settlement agreement. Respondent does not oppose expungement in this matter. 

The claim that Claimant failed to inform her as to possible tax consequences associated with her purchase and early withdrawal is clearly erroneous and false and meets both Rule 2080(b)(1)(A) and 2080(b)(1)(C). Claimant is not a tax professional and was therefore unable to provide any tax advice to Ms. P. This dispute did not arise out of any alleged misrepresentation by Claimant. 

As set forth in the "Episode Notes":

Money laundering looks different in the securities industry and that poses its own challenges. But add to that a landscape of constantly evolving threats and it is a lot to keep up with. 

On this episode, Jason Foye, Senior Director of the National Cause and Finance Crimes Detection Program's Special Investigative Unit joins us once again to tell us about the latest trends, emerging threats and how firms can ensure their AML program remains strong and effective.