Wells Fargo Compliance Consultant Charged By SEC In Altered Inside Information Review

October 16, 2014

On October 15, 2014, the Securities and Exchange Commission ("SEC") filed an Order Instituting an Administrative Proceeding ("OIP") against "Compliance Consultant" Judy K. Wolf, who served in the Retail Control Group of Wells Fargo Advisors (or its predecessors)  from 2004 until her June 13, 2013, termination. Wolf was first registered in 1990. This SEC action is apparently a follow-on regulatory filing based upon Wells Fargo previous $5 million settlement of the underlying issues ("WFA OIP").   READIn the Matter of Wells Fargo Advisors LLC, Respondent  (WFA OIP, '34 Act Release No. 73175; Investment Advisers Act of 1940 Release No. 3928;Administrative Proceeding File No. 3-16153  / September 22, 2014). 

Following an internal inquiry by Wells Fargo, Wolf had been initially been placed on administrative leave and subsequently terminated by her employer.  As explained in the OIP:

14. Waldyr Da Silva Prado Neto ("Prado") was a registered representative and associated person of Wells Fargo Advisors in a branch office in Miami. In September 2012, the Commission charged Prado with trading the securities of Burger King on the basis of material, nonpublic information concerning the September 2, 2010 announcement that 3G Capital Partners Ltd. ("3G Capital"), a private equity firm, would acquire Burger King and take it private (the "Announcement").1 The Commission alleged that Prado, who held Series 7 and 65 registrations and while an employee of Wells Fargo Advisors, misappropriated information about the acquisition from one of his brokerage customers who invested in the private equity fund 3G Capital used to acquire Burger King. The Commission alleged that Prado traded Burger King securities through his personal Wells Fargo Advisors brokerage account and that Prado tipped several of his other brokerage customers, including at least three tippees who traded Burger King securities through their Wells Fargo Advisors accounts. The Commission alleged that Prado and his tippees reaped profits of over $2 million in total from their Burger King trades, which included trading through Wells Fargo Advisors and another firm.

1 SEC v. Waldyr Da Silva Prado Neto, Civil Action No. 12-CIV- 7094 (SDNY Sept. 20, 2012); Litigation Release No. 22486 (Sept. 21, 2012). Prado was permanently enjoined from committing future violations on January 7, 2014. Litigation Release No. 22905 (Jan. 14, 2014). Based on the court's entry of the permanent injunction, follow-on administrative proceedings were instituted against Prado. Exchange Act Release No. 71379 (Jan. 23, 2014). The Initial Decision barring Prado was issued on May 20, 2014. Initial Decision Release No. 600 (May 20, 2014). The Initial Decision became final on July 1, 2014. Exchange Act Release No. 72513 (July 1, July 1, 2014. Exchange Act Release No. 72513 (July 1, 2014). Prado was also criminally charged with conspiracy to commit securities fraud, securities fraud, and fraud in connection with a tender offer in USA v. Waldyr Prado, et al., SDNY Case No. 13MAG2201 (Sept. 13, 2013).

Look Back Inside Information Reviews

Among her responsibilities, Wolf was supposed to identify potentially suspicious trading by Wells Fargo personnel or the firm's customers and clients and, thereafter, analyze whether such trades may have been based on material nonpublic information ("Inside Information"). As asserted in the OIP:

11. In early 2009, Wolf drafted Wells Fargo Advisors' policies and procedures governing how she was to conduct look back reviews. In doing so, Wolf was aware of the risk that Wells Fargo Advisors personnel could obtain material nonpublic information from the firm's customers and advisory clients and she understood that conducting effective look back reviews was an important part of Wells Fargo Advisors satisfying its regulatory obligations. Between 2009 through at least March 2013, Wolf was the sole compliance officer at Wells Fargo Advisors responsible for conducting look back reviews. During that period, Wolf conducted look back reviews and closed the vast majority of them with "no findings.

No Findings For Prado

The OIP alleges that in September 2010, Wolf created a document summarizing her "look back" review of Prado's trading - she had closed that review with no findings. As more fully set forth in the OIP:

15. Beginning on September 2, 2010, Wolf conducted a look back review of trading in Burger King securities at Wells Fargo Advisors before the Announcement by Prado and three of his customers. Wolf determined that:
a. Prado and his customers represented the top four positions in Burger King securities firm-wide;
b. Prado and his customers bought Burger King securities within 10 days before the Announcement, including on the same days;
c. The profits by Prado and his customers each exceeded the $5,000 threshold specified in the look back review procedures;
d. Both Prado and Burger King were located in Miami; and
e. Prado, his customers, and the company acquiring Burger King were all Brazilian.

Had It Her Way

The OIP asserts that the above factors were "red flags" but were apparently disregarded by Wolf. Moreover, although procedures in effect at the time required news articles to be printed for the file, Wolf's file did not contain any.   Wolf did note on a log that Burger King was being acquired by 3G Capital for $24 per share and that the stock price opened 24% higher on September 2, 2010 than the previous day's closing price.

After The Fact

About two years after the purported review of September 2010, the OIP alleges that in December 2012,   Wolf altered that document after the SEC ad charged the subject broker with insider trading.   Wells Fargo provided Wolf's summary to the SEC as part of the federal regulator's investigation of the subject broker and trading; and the content altered by Wolf purportedly gave the appearance that her 2010 review was more thorough.   As set forth in the OIP:

4. In particular, Wolf added to the document a statement that rumors about an acquisition had been circulating for several weeks before the acquisition announcement. If Wolf had reviewed news articles during her review substantiating that statement, Wells Fargo Advisers' policies and procedures required Wolf to print and include them in her file. The file did not contain any news articles at all.

SEC Spots Alteration

SEC enforcement staff spotted the alteration and during its questioning of Wolf, she unequivocally denied altering the document after September 2010, but subsequently recanted and admitted to the misconduct. As more fully explained in the OIP:

6. Wolf provided inconsistent information about the document when she was questioned during the Commission's investigation about her review of the trading. In her initial testimony, Wolf said she created the document in September 2010 when she performed the look back review. She also unequivocally denied altering the document after September 2010. In later investigative testimony, however, Wolf testified that she had altered the document after September 2010.

Pointedly, the OIP alleges that:

24. After the termination of her employment, the Commission staff took Wolf's testimony a second time, where she was confronted with the additional documents and metadata produced by Wells Fargo to the Commission. In the face of that additional evidence, Wolf finally admitted that she performed additional work on Burger King in 2012, although no one had asked her to. She also admitted she added the two sentences to the log entry after September 7 2010, but claimed she did not know when she added them. Finally, she admitted that her initial testimony before the Commission, where she had denied altering her records of look back review, was not true and correct.

SEC Allegations

The OIP alleges that Wolf willfully aided and abetted and caused Wells Fargo to violate Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4(j) as well as Rule 204(a) under the Investment Advisers Act of 1940.  

NOTE: The OIP merely contains allegations and Wolf is presumed innocent unless and until she is proven guilty.  

READ Full-Text:  

In the Matter of Judy K. Wolf, Respondent (SEC, OIP, '34 Act Rel. 73350; Investment Advisers Act of 1940 Rel. 3947; Administrative Proceeding File No. 3-16195 / October 15, 2014).