FINRA’s Department of Enforcement investigated Wells Fargo’s sale of STRATS to retail customers and found numerous sales misconduct and supervisory failures. As a preliminary matter, STRATS is a complex structured product that paid a floating rate of periodic income up per a minimum or maximum rate, based on the STRATS Trust’s interest in a capital security issued by JP Morgan Chase (“JP Morgan”) and the STRATS Trust’s interest in an interest rate swap contract. One of the primary risks associated with STRATS involved redemption of the underlying JP Morgan capital security, which upon liquidation could trigger a swap termination fee, thereby exposing customers to a large principal loss.
According to FINRA, Wells Fargo sold approximately $12 million worth of the STRATS to its retail customers, in both primary and secondary markets. Despite Wells Fargo’s sale of this product, FINRA alleged Wells Fargo lacked a reasonable basis for recommending the STRATS to retail customers because it failed to educate its registered representatives regarding the unique features and risks of the STRATS. In particular, Wells Fargo failed to educate its sales force hat the STRATS were based on an underlying derivatives transaction involving a swap, a feature which had the effect of placing a customer’s principal investment at risk if the STRATS’ underlying bonds were redeemed.
Moreover, FINRA alleged that Wells Fargo’s sales literature of the STRATS was false and misleading and failed to disclose the risks of investing in the product. Specifically, according to FINRA, these documents did not contain adequate descriptions of the product, nor did they disclose the degree to which STRATS customers could lose principal if the underlying capital security was redeemed. FINRA alleged that Wells Fargo’s failure to educate its sales force and adequately disclose the risks associated with investing in the STRATS also constituted a supervisory failure(s).
Based upon the foregoing alleged misconduct, FINRA alleged Wells Fargo violated several federal and states securities laws, including NASD Conduct Rules 2211(d), 2110, 2310(a), 3010(a) and FINRA Rule 2010. For example, NASD Rule 2310(a) requires members, in “commending to a customer the purchase, sale or exchange of any security” to have “reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.” Here, FINRA alleged, inter alia, Wells Fargo did not have reasonable basis for recommending the STRATS to retail customers because it failed to educate its registered representatives regarding the unique features and risks of the STRATS.
Lufrano Law, LLC is a national securities litigation firm and has experience representing investors who have investment disputes with brokers and broker-dealers. If you suffered investment damages investing in STRATS through Wells Fargo, you may be able to recover your losses through FINRA arbitration. Our firm only receives a fee if you recover money. Please contact one of our attorneys at (800) 627-2179 to schedule a free consultation.