Wells Fargo Fined for Selling Unsuitable Investments to Municipalities and Non-Profits


Wells Fargo agreed to pay more than $6.5 million to settle SEC charges that it sold commercial paper backed by mortgage securities and collateralized-debt obligations to municipalities, nonprofit institutions and other customers without first understanding the substantial risks of those securities. The securities were unsuitable because the investors had a low risk tolerance. Three of them defaulted in 2007.

The SEC essentially alleged that Wells Fargo had no idea what it was selling. The brokers allegedly ignored offering documents that explained the risks and based their sales pitches on flawed credit ratings. See “Wells Fargo reaches $6.5M settlement over sales of investments to municipalities,” InvestmentNews.

Brokerage firms and their brokers owe a number of duties to their customers. One of the requirements is that brokers must perform due diligence to understand the material facts and risks of the investments they recommend, and communicate them to the customer prior to the sale. This is true for all investments, and is especially important for complex investments, such as the paper sold by Wells Fargo.

When brokers are derelict in one or more of their duties, customers who have lost money may have valid grounds to recover their losses.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.