[ by Melanie Gretchen ]

Wells Fargo Advisors was found liable for civil fraud, misrepresentation, breach of contract and other misdeeds, according to a FINRA arbitration panel on Wednesday.  A California couple filed a complaint against the Wells Fargo Corp unit in 2011 for losses tied to a strategy that included a $5 million loan and a risky type of exchange-traded fund.

FINRA Findings and Allegations. Hooman Moshar, an engineer and his wife, May,were clients of Wachovia Securities, now part of Wells Fargo Advisors.  During they stock market decline of 2008, the couple took out a $5 million loan with the Wachovia Bank to invest in real estate, using the brokerage account as collateral – part of an overall investing strategy outlined by their financial representatives.

Mr. Moshar's trust in his broker began to sour when the the value of his investment portfolio, once $7 million, began to decrease.  When the account declined to about $5 million, the broker began to buy ETFs to make up some of the losses, including some highly volatile and risky leveraged ETFs, which amplify short-term returns by using debt and derivatives.  These, too, produced losses totaling $200,000.  By 2009, the bank called the Moshars' loan and liquidated his account to pay off the balance.

What was left of $7 million: $23,000.

To add insult to injury, the Moshars missed out on an ensuing market upswing because there was little left to invest, said Marc Zussman, a Los Angeles-based lawyer who represented the investors.  The portfolio, if not tied to the loan, would have made about $2 million as the stock market improved:

"The outcome was correct. The issue was an unsuitable investment strategy."

FINRA Sanctions. The unit must pay the couple $1.3 million – $0.6 million less than what they initially sought in damages.  In addition, Wells Fargo must pay a total of $24,000 in FINRA hearing fees, usually shared by both parties.  As usual, the panel did not explain the reasons behind its decision.  Wells Fargo also declined to comment.

For further details, go to [Reuters, 1/10/13].