FINRA has fined Wells Fargo Investments $2 million for unsuitable sales of reverse convertible securities by a former broker to 21 customers, and for failing to provide sales charge discounts on Unit Investment Trust (UIT) transactions to eligible customers.  FINRA also filed a complaint against Alfred Chi Chen, the broker who recommended and sold the reverse convertibles, and made unauthorized trades in several accounts of living and deceased customers. FINRA Findings and Allegations. Chen allegedly recommended hundreds of unsuitable reverse convertible investments to 21 clients, most of whom were elderly and/or had limited investment experience and low risk tolerance.  As of June 2008, 172 of his custormer accounts held reverse convertibles. Most of these accounts - 148 to be exact - were unduly concentrated in those securities - i.e., in excess of 50% of total account holdings.   About 1/3, or 46, of those customer accounts, held the undue concentrations in excess of 90%.  Fifteen of the 21 customers were over 80 years old.  The reverse convertible transactions exposed these customers to risk inconsistent with their investment profiles, and resulted in overly concentrated reverse convertible positions in their accounts.

[C-I Note: How did Wells Fargo provide Chen the opportunity to stuff his customer accounts with such large concentrations of unsuitable securities.  Chen had joined Well Fargo in 2000 and committed the trade violations from 2006 to 2008.  During theis  time, Chen served as broker in bank branches - which might explain why he was able to get away with this unabated trading activiites.

It's quite possible that Wells Fargo failed to establish adequate supervision over broker-dealer activities at bank locations. If this was the case, it's scary to imagine how how many other potential "Alfred Chens" there were at the firm, at the bank branches.  This presumption would be based on the adage, "Where there's smoke, there's fire."

And consider this last point for a moment.  Created under concentrations in customers accounts, with unsuitable securities, no less, was unspeakable and egregious;  a travesty of customer care and retail supervision.

Now, consider the fact that Wells Fargo was fined just $2 million.  That is absolute too small a fine or sanction and one that cannot possibly deter a large firm like Wells Fargo from committing the same violation in the future.

For all the criticism that the SEC takes, this case study would appear to deserve similar criticism of FINRA.

Problems with Sales of UITs. FINRA also found that Wells Fargo failed to provide certain eligible customers with breakpoint and rollover and exchange discounts in their sales of UITs because the firm had insufficient systems and procedures to monitor for unsuitable reverse convertible sales and to ensure that UIT customers received discounts for which they were entitled. As part of the settlement, the firm is required to pay restitution to customers who did not receive UIT sales charge discounts and to provide restitution to certain customers found to have unsuitable reverse convertible transactions. In concluding these settlements, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA's findings. For further details, go to: [FINRA News Release, 12/15/11]    and [FINRA Disciplinary Proceeding 2008015651902 v. Alfred Chi Chen]   and [FINRA AWC 2008015651901, v. Wells Fargo]