Research Paper on Fraud

Description of the Fraud Covering the 5 W Questions

Who: The people who are involved in this case are the Wells Fargo representatives, supervisors, and retail customers.

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What: Wells Fargo created large fees by inappropriately encouraging its retail customers on the issue of trading in their products actively that were envisioned to be held until they matured. The trading strategy entailed selling the Market-Linked Investments before they mature and investing their proceeds to new MLIs (Sec.gov, 2018).

Where: The fraud took place in the different branches of Wells Fargo. However, the mainly affected branch is the one situated in San Francisco.

When: The fraud sales practices conducted by the bank took place between January 2009 and June 2013.

Why: The fraud occurred because the representatives of Wells Fargo who are involved did not understand or investigate the significant costs of recommendations (Kelly, 2018). The company wanted to make huge profits, and this made them make fraud sales by convincing the retail customers to reinvest in what they had invested earlier on. Furthermore, the company's supervisors regularly approved the transactions although the firm's internal policies prohibit flipping or short-term trading of its products and services.

How the Fraud Was Accomplished?

The fraud was accomplished by improperly soliciting retail clients to redeem their MILs before they mature and buy new similar products. Market-linked investments (MILs) refers to the fixed maturity products that its interest rate-regulated with the performance of market measure or a particular asset including commodity indexes. Redeeming MILs was the easiest way that the company found it can make profits from the customers as it only entails convincing the consumers (Sec.gov, 2018). The representatives opened about 308 accounts for the customers for them to make profits. The representatives assured the customers before they conducted an adequate analysis of the fees and costs of flipping such kind of investments. It meant that the customers just invested in the company without having sufficient information about The MILs as they have a fixed maturity in which the interest is controlled with the performance of the market measure like commodity index or equity over an item's lifespan (Allocca, 2018). These kinds of investments do have significant upfront fees and limited liquidity making it difficult for the retail customers to get profits from what they invested. However, the bank argued that most of the early redemptions were performed with the prices which led to making profits for the customer.

Actual or Potential Fraud Symptoms That Were or May Have Been Indicators That Fraud Was Possible?

The practice that was conducted by the representatives and supervisors of the company made WFA clients to incur some significant costs meaning that it was not a good investment opportunity for them. One of the things that might have indicated that the fraud was conducted is impairing the client's ability to achieve their investment objectives although they had invested large amounts on their initial investments (Kelly, 2018). It is unique for a company to advise its customers to invest in the same product since it means that there will be no cross-selling, few marketing opportunities, and lack of control. The products that were sold by the company also came with high commissions and fees that made the retail customers be suspicious. The bank should have taken into account the high commissions and fees before advising the clients to sell their investments because they could have invested the money in another investment which could have yielded more returns. Additionally, Wells Fargo Company use of trading raised the alarm to the fraud. The trading strategy entailed selling the MLIs before they mature and investing the gotten proceeds in new MLIs that generates significant fees for the Wells Fargo (Allocca, 2018). The strategy in return reduced the investment returns of the customers. Selling MILs before maturity date indicated that the company wanted quick returns.

What Was the Final Resolution of the Fraud Case?

Without the company denying or admitting the findings, the SEC gave an order in which the company agreed to pay the penalty amounting to $4 million , ill-gotten gains worth $930, 377, and $178, 064 (Sec.gov, 2018). Furthermore, Wells Fargo consented to censure, desist, and cease from causing or committing violations in future and ensuring there are no further violations of the antifraud provisions of federal securities laws. The company has had issues with its customers for the past two years, and in one instance they opened fake accounts without the customer's consent. Therefore, the SEC wanted to ensure that it desist from engaging in fraud. The order that was given with SEC also recognizes the fact that the company took remedial steps in addressing supposedly improper sales practices. Wells Fargo said that it is dedicated to ensuring that the customers cooperate with SEC investigation and achieve their different investment goals. The company spokesman also said that they had made supervision and policy changes which are related to improving the internal controls. The firm also considers restricting its business of wealth management since the bank needs to cut its costs by about $4 billion.

References

Allocca, S. (2018). Wells Fargo fined by SEC for 'flipping' complex investments. [online] On Wall Street. Available at: https://onwallstreet.financial-planning.com/news/wells-fargo-fined-by-sec-for-market-linked-accounts [Accessed 17 Sep. 2018].

Kelly, B. (2018). Wells Fargo Advisors fined $4 million over complex product sales. [online] Investmentnews.com. Available at: http://www.investmentnews.com/article/20180625/FREE/180629947/wells-fargo-advisors-fined-4-million-over-complex-product-sales [Accessed 17 Sep. 2018].

Sec.gov. (2018). SEC.gov | Wells Fargo Advisors Settles SEC Charges for Improper Sales of Complex Financial Products. [online] Available at: https://www.sec.gov/news/press-release/2018-112 [Accessed 17 Sep. 2018].

Stempel, J. and Moise, I. (2018). Wells Fargo fined by SEC over investment sales misconduct. [online] U.S. Available at https://www.reuters.com/article/us-wells-fargo-sec/wells-fargo-fined-by-sec-over-investment-sales-misconduct-idUSKBN1JL2OK [Accessed 17 Sep. 2018].