I have worked as a financial advisor since 1993, and have taught financial ethics for CPAs and attorneys in North Carolina for the last 10 years.
I foresaw the worst financial crisis since the Great Depression, as some of the following best un-audited client performance reports illustrate. The solid black line on the performance report charts show how much more some clients made and\or lost compared to the dotted lines below which represent selected indices.
This is part of the story that should be a concern for U.S. citizens.
On 3/31/2009, I managed $35,595,572.83, including both fiduciary and non fiduciary accounts. I had more than 60 Asset Advisor accounts, where financial advisers are legally obligated to act in the best interest of clients.
Wells Fargo’s advisory accounts were/are governed by the Investment Advisers Act of 1940, which requires financial advisers to act solely in the best interest of their clients. By law, advisers must disclose any conflict of interest or potential conflict to their clients prior to and during a business engagement.
On 3/13/2007, I purchased shares of SDS in my personal account. SDS is a leveraged inverse Exchange Traded Fund (ETF), whose objective is to rise 2% for every 1% the S&P 500 falls. In the fourth quarter of 2008 I sold SDS in two blocks, realizing a total gain of about 51%.
“Shorting” means making an investment that increases in value when other “long” investments fall.
In July, 2007, I shorted Bear Stearns and closed the position with a 97% profit on 3/7/2008.
I shorted Pulte Homes, KB Homes and Lennar, and realized about a 65% gain.
During 2008, I executed short trades in Goldman Sachs, Capital One, MBIA, Merrill Lynch, Moody’s and State Street Corporation, as well as buying and selling ETF’s, shorting financial and real estate indices.
On August 22, 2011, Bloomberg News reported on “21,000 transactions” from 2008 and 2009, ...obtained under the Freedom of Information Act” by the late reporter Mark Pittman, including undisclosed Federal Reserve loans, after congressionally mandated legislation and rejected financial industry appeals by the U.S. Supreme Court.
I managed client accounts while unaware of the Fed’s secret loans as the companies I worked for as well as many others did not disclose material information, even though knowing insiders profited from equity and stock option transactions.
An SEC interpretation states: "Many financial institutions, such as thrifts and banks, are receiving financial assistance in connection with federally assisted acquisitions or restructurings...If these or any other types of federal financial assistance have materially affected, or are reasonably likely to have a material future effect upon, financial condition or results of operations, the [Management Discussion and Analysis] should provide disclosure of the nature, amounts, and effects of such assistance..." http://www.sec.gov/rules/interp/33-6835.htm
After the first half of 2009, my personal and client investment performance suffered as markets went relatively strait back up in defiance of fundamentals and common sense, partly in response to massive undisclosed liquidity provided by the Fed and the U.S. Treasury.
As I did not understand what was happening at the time, I took many accounts to cash.
Not reporting Federal Reserve material borrowings, collateral, credit lines, terms and interest rates is a violation of Sarbanes/Oxley laws, and not informing employees who managed advisory accounts was a violation of fiduciary duties within the Investment Advisers Act of 1940.
The Sarbanes-Oxley Act of 2002, which I have taught in ethics courses for CPAs and others over the last 10 years, requires executive officers and directors to personally attest that SEC securities filings have been personally reviewed and financial statements fairly present, in all material respects, a company’s financial condition. Financial information in press releases or other public disclosures must not “contain an untrue statement” or omit a statement of material fact necessary to make statements not misleading.
I found that some banks which received Federal Reserve loans disclosed details in their securities filings, like Union Bank & Trust and Peoples Bank of North Carolina.
On March 27, 2008, Wachovia borrowed $3.5 billion from the Federal Reserve’s Term Auction Facility (TAF), which was not disclosed to the firm’s shareholders or reported within the company’s legally required securities filings.
The CEOs, CFOs and Boards of the largest banks certified their reports didn’t contain any material misstatements or omissions.
External auditors attested to the assessments.
KPMG was/is the auditor for both Wachovia and Wells Fargo.
Wachovia’s, Wells Fargo’s and many other firm's SEC securities filings did not account for the loans, total credit lines, interest rates, collateral pledged or amounts of loans outstanding while some banks did.
On July 9, 2008, Robert Steel became president and CEO of Wachovia after working for Goldman Sachs from 1976 to 2004 and the Under Secretary for Domestic Finance at the U.S. Treasury under former Goldman Sachs CEO Henry Paulson from October 10, 2006, until July 9, 2008. Mr. Steel was “the principal adviser to the secretary on matters of domestic finance and led the department's activities regarding the U.S. financial system, fiscal policy and operations, governmental assets and liabilities, and related economic matters.”
I believe my clients and Wachovia shareholders were misled and harmed as a select few profited from material insider information illegally enabled and consented to by US taxpayer funded regulatory authorities, elected officials and political appointees.
On July 22, 2008, Wachovia’s new CEO Robert Steel purchased 1,000,000 shares of Wachovia’s stock as the company’s Term Auction Facilities (TAF) borrowing reached $12.5 billion, which was not disclosed in securities filings.
If Mr. Steel was “the principal adviser…on matters of domestic finance and led the [U.S. Treasury] department's activities regarding the U.S. financial system, fiscal policy and operations” before becoming Wachovia’s CEO in July, 2008, how could he not have known and acted on undisclosed material information?
After not reporting Federal Reserve loans and purchasing Wachovia’s shares while in possession of undisclosed material inside information, the CEO wrote "I, Robert K. Steel, certify that: I have reviewed this Quarterly Report ...for the quarter ended September 30, 2008 of Wachovia ...this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report..."
Section 206 of the Investment Advisors Act of 1940 states "It shall be unlawful for any investment adviser, …to employ any device, scheme, or artifice to defraud any client or prospective client; to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; or... to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative."
Wachovia shareholders lost as insiders gained from material undisclosed information.
The Fed approved Wachovia’s merger with Wells Fargo on October 12, knowing of unreported Fed loans to both companies.
Robert Steel was at least aware of Federal Reserve loans since becoming Wachovia’s CEO on July 9, 2012, and likely multitudes of undisclosed loans to multiples of other firms. If Mr. Steel purchased more than $16 million of Wachovia shares on July 22, 2008, the five year statute of limitations for prosecution expires on July 22, 2013.
The Wall Street Journal reported "about $100 billion in wealth disappeared from the Carolinas alone when Wachovia collapsed."
I believe Wachovia, Wells Fargo, accounting firm KPMG, the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and the Federal Reserve amongst others, illegally misled Wachovia’s and other firm’s shareholders.
I believe I disseminated inaccurate advice to clients whose accounts were governed by the Investment Advisors Act of 1940, based on information audited by KPMG and withheld by Wachovia and Wells Fargo’s executive management.
I believe my clients and Wachovia shareholders lost money as a select few profited from material insider information, enabled and consented to by US taxpayer funded government regulatory authorities, political appointees and employees.
On December 31, 2009, less than a month after announcing Wells Fargo was to pay off TARP, and stating that “our capital ratios are growing organically …as Wells Fargo’s business model continues to generate capital internally as we historically have, Wells Fargo & Company’s (NYSE: WFC) board of directors approved a grant of retention performance shares for President and CEO John G. Stumpf and three other executive officers.”
After most of Wachovia’s shareholders were locked into losses on completion of the merger, On June 22, 2010, Steel was appointed Deputy Mayor for Economic Development by New York City Mayor Michael Bloomberg.
Mr. Steel appears to have ended up far better off knowing what most didn’t. Mr. Steel owned 601,903 shares of Wells Fargo in 2010, which was worth more than $20 million
on October 26, 2012.
On Nov 28, 2011, Bloomberg published “Secret Fed Loans Gave Banks Undisclosed $13B,” which stated “The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. ...Bankers didn't mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy.”
Bloomberg estimated the profits from the undisclosed Federal Reserve Loans was $878.2 million for Wells Fargo, and $149.4 million for Wachovia.
After reviewing the Bloomberg article, I reported the information through Wells Fargo’s internal anonymous/confidential ethics line in early December, 2011, with an external email address and phone number, after which I was contacted on multiple occasions by investigators on my company email and phone.
On January 4, 2012, an email in response to my ethics line complaint from a Senior Investigative Agent and Vice President from Wells Fargo Corporate Investigations said “Please confer with your manager if you feel the need, but our case is closed.”
Realizing my anonymity was compromised and my family’s safety at risk after the first internal ‘investigation’ was ‘closed’, I took the issues to my local manager, after which Wells Fargo's executive management enlisted an outside ‘independent’ investigator who promptly found no merit to my assertions.
Thinking I could mitigate personal risk by contacting regulatory authorities, I filed with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) DC Office of the Whistleblower amongst others which went nowhere. I then filed with the NC Secretary of State Securities Division, who investigated and referred files to Atlanta's SEC and FINRA offices.
And then nothing.
Regulatory authorities will not say whether a case exists or if a case is opened or closed, even though I contacted the government during and after interactions with Wells Fargo management, leaving myself and loved ones at risk of reprisal.
I was terminated by Wells Fargo on Monday, October 8, 2012 in direct retaliation for disseminating whistleblower information the U.S. government seems unwilling to act upon.
I believe Wachovia and Wells Fargo’s executive management misled taxpayers, shareholders and Congress concerning material information. In doing so, fiduciary duties to the firms financial advisers and their clients were violated while executive compensation was gamed at the expense of shareholders.
On January 4, 2013, I collaborated with Rolling Stone’s Matt Taibbi who published “Secrets and Lies of the Bailout”, which stated “The federal rescue of Wall Street…created a permanent bailout state…and the worst may be yet to come... Money wasn't the only thing the government gave Wall Street – it also conferred the right to hide the truth from the rest of us... There were lies told in the first moments of their inception, and others still being told... The lies, in fact, were the most important mechanisms of the bailout... Wall Street used the funds to make the economy more dangerous... The broader and more pressing concern is the clear implication that by failing to act, federal regulators have tacitly approved the nondisclosure. ...The bailout has ...made lying on behalf of our biggest and most corrupt banks the official policy of the United States government." And “The stock purchases by America's top bankers raise serious questions of insider trading.”
On January 22, 2013, PBS's Frontline reported on the government's failure to prosecute the big banks for the 2008 financial meltdown, Lanny Breuer, Assistant Attorney General for the Department of Justice’s Criminal Division, admitted to purposefully not pursuing illegality stating "If I bring a case against institution A, and as a result of bringing that case there's some huge economic effect... If it creates a ripple effect...it's a factor we need to know and understand," after choosing not to criminally indict HSBC executives for laundering drug money and enabling terrorist financing.
George Hartzman
Registered Investment Advisor
President and Chief Economist: Think Professional Education
Former Wells Fargo Advisors Vice President/Investments
& Fundamental Choice Portfolio Manager
Greensboro, North Carolina
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