The Securities and Exchange Commission (SEC) has just charged that during an eight month period in 2007 a subsidiary of Wells Fargo and one of its former vice presidents sold investments tied to mortgage backed securities without understanding the complexity and risks of the investments and not disclosing them to investors.

The charges grow out of transactions conducted by the Minneapolis-based Wells Fargo Brokerage Services (now Wells Fargo Securities) in the period between January and August 2007.  According to SEC court papers, registered representatives in the company's Institutional Brokerage and Sales Division recommended to institutional customers that they purchase asset-backed commercial paper (ABCP) and collateralized debt obligations (CDOs) that were issued by limited purpose companies called structured investment vehicles (SIVs) and SIV-Lites.  Wells Fargo and its representatives did not review the private placement memoranda (PPM) for these investments nor the extensive risk disclosures.  Instead, the SEC said, the registered representatives relied almost exclusively on the credit ratings given to the investment instruments even though the PPM warned specifically against doing that.  The company also failed to establish any procedures to ensure that its personnel understood the nature and risk of the programs.

In addition to the charges against Wells Fargo Brokerage Services, the SEC also named former vice president Shawn McMurtry in the suit for his improper sale of SIV issued ABCP and exercising discretionary authority in violation of Wells Fargo's internal policy to sell securities to one specific long-term Wells Fargo customer.

The court papers single out three SIV-Lite programs sold by Wells.  Rhinebridge PLC, Mainsail II Ltd., and Golden Key Ltd. had all received the highest ratings from each of the three major credit rating agencies.  The PPMs for all three products stated that the issuers were limited liability companies specifically formed to invest in MBS and other complex securities, such as CDOs, and that they were issuing asset-backed commercial paper to obtain short-term financing for these securities and derivatives.

The market for asset-backed commercial paper contracted severely beginning in mid-August 2007 due in part to the increased market perception of the risk of subprime mortgages, which formed much of the collateral for a number of SIV-issued asset-backed commercial paper programs. As a result, credit rating agencies downgraded a number of SIV-issued asset-backed commercial paper programs and ultimately many including these three, defaulted in 2007.

Wells Fargo agreed to pay more than $6.5 million to settle the SEC's charges. The money will be placed into a Fair Fund for the benefit of harmed investors.