December 15, 2011, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine Wells Fargo Investments LLC for “unsuitable sales of reverse convertible securities through one broker to 21 customers, and for failing to provide sales charge discounts on Unit Investment Trust (UIT) transactions to eligible customers.” The fine totals $2 million; in addition, Wells Fargo must pay restitution to customers who had unsuitable reverse convertible transactions and/or did not receive the sales charge discounts on UIT transactions. Furthermore, the stock broker misconduct of Alfred Chi Chen led FINRA to file a complaint against him.
UITs offer sales charge discounts on purchases that exceed certain thresholds, often called “breakpoints,” or involve redemption or termination proceeds from another UIT during the initial offering period. Wells Fargo’s insufficient monitoring of the reverse convertible sales caused them to fail to provide breakpoint and rollover and exchange discounts in the sales of UITs to eligible customers from January 2006 to July 2008.
The registered representative, who is no longer with Wells Fargo, Alfred Chi Chen, made unauthorized trades in multiple customer accounts. In some cases, the customer accounts belonged to deceased individuals. FINRA filed a complaint against Chen, in addition to its decision to fine Wells Fargo. According to FINRA’s investigation, Chen’s broker misconduct extended to 21 clients, most of which had limited experience in investments, low risk tolerances and/or were elderly. To these 21 clients, Chen made hundreds of unsuitable recommendations for reverse convertible investments. Repayment of reverse convertibles, which are interest-bearing notes, is tied to the performance of a stock, basket of stocks, or another underlying asset. These investments were unsuitable for many of Chen’s low-risk profile clients because they risk sustaining a loss if the value of the underlying asset falls below a certain level at maturity or during the term of the reverse convertible, according to FINRA.
Possible remedies include Chen’s suspension or bar from the securities industry, censure, disgorgement, fine and restitution.
If your broker has made unsuitable recommendations or unauthorized trades and you have suffered losses as a result, you may have a valid securities arbitration claim. To find out more about your legal rights and options, contact an investment attorney at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.