Wells Fargo Compliance Officer Charged With Altering Document

"...SEC v. Prado, Civil Action No. 12-CIV-7094 (S.D.N.Y. Sept. 20, 2012); see also U.S. v. Prado, Case No. 13-mg-2201 (S.D.N.Y. Sept. 13, 2013).

...the [Securities and Exchange Commission brought an action against Wells Fargo for failing to establish and enforce procedures to prevent the misuse of material, non-public information. In the Matter of Wells Fargo Advisors, LLC., Adm. Proc. File No. 3-16153 (Sept. 22, 2014).

Now the Commission has instituted an administrative proceeding against a former Wells Fargo compliance officer for altering a record produced to the staff in connection with its investigation of the broker. In the Matter of Judy K. Wolf, Adm. Proc. File No. 3-016195 (October 15, 2014).

Ms. Wolf was a compliance consultant for Wells Fargo Advisors prior to her termination in June 2013. In 2009 she drafted the firm’s policies and procedures governing how “look back” reviews would be conducted. Ms. Wolf was the sole compliance officer conducting these reviews. Most of her reviews closed with “no findings.” A log of those inquiries was maintained, although it did not specify the reason for terminating the inquiry.

On September 2, 2010, the day the Burger King deal was announced, Ms. Wolf began a look back review of the trading surrounding the deal. She concluded that: 1) Mr. Prado and his customers represented the top four positions in Burger King securities firm-wide; 2) Mr. Prado and his customers purchased Burger King stock within 10 days of the announcement; 3) Mr. Prado and his customers each had profits that exceeded the $5,0000 threshold specified in the look back review procedures; 4) Mr. Prado and Burger King were located in Miami; and 5) Mr. Prado, his customers and the acquiring company were all Brazilian. News articles about the event were not printed and included in the file despite a provision in the procedures requiring this step. The review was closed and therefore not forwarded to the branch manager. Supervisors at Wells Fargo did not learn about the review until two years later when the SEC filed its insider trading action against Mr. Prado.

In July 2012 the Commission requested as part of its on-going investigation, that Wells Fargo produce its compliance files relating to Mr. Prado. Although the production was eventually certified as complete, it did not include Ms. Wolf’s file. When a second request was made in January 2013, that file was included in the production. Ms. Wolf’s log stated “09/02/10 opened 24% higher@$23.35 vs. previous close of $18.86. Rumors of acquisition by a private equity group had been circulating for several weeks prior to the announcement. The stock price was up 15% on 9/1/12 [sic], the day prior to the announcement.”

Ms. Wolf provided contradictory testimony during the investigation. Initially, she testified that the file had not been altered. She claimed that the date of 9/1/12 in the sentence quoted above was a typo. In addition, Ms. Wolf stated that the news articles were a primary reason for closing the file. Later Wells Fargo produced documents indicating that the Burger King log entry had been altered on December 28, 2012. A prior version of the log was produced that did not contain the sentence quoted above along with the metadata.

Following her termination from Wells Fargo the Commission took Ms. Wolf’s testimony a second time. During the testimony she admitted altering the log.

The Order alleges violations of Exchange Act Section 17(a) and the related rules. The proceeding will be set for hearing."

Section 17(a)

It shall be unlawful for any person in the offer or sale of any securities or any security-based swap agreement by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
Janus and the Scope of Section 17(a)(2)

One of the most hotly contested questions in Section 17(a) litigation is what level of responsibility a defendant must have for a misstatement to be liable under Section 17(a)(2). In Janus Capital Group, Inc. v. First Derivative Traders 6, the U.S. Supreme Court held that the only party that may be held liable for a false or misleading statement under Rule 10b-5(b) is “the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” The question with respect to Section 17(a) is whether Janus’s “ultimate authority” standard applies to misstatement liability under Section 17(a)(2) as well.

...In SEC v. Kelly, the court reasoned that, “[a]lthough the language of subsection (2) of Section 17(a) is not identical to that of subsection (b) of Rule 10b-5, both provisions have the same functional meaning,” in that “[t]o succeed on a misstatement claim under either Rule 10b-5(b) or Section 17(a)(2), the SEC must prove that the defendant made materially false statements or omissions.” 9

Section 17(a)(2) imposes liability on anyone who directly or indirectly obtains money or property by means of a misrepresentation or omission, including those who profit legally, i.e. through bonuses or pay raises.18

A third question that comes up in litigation involving Section 17(a) is what distinguishes a misstatement claim under Section 17(a)(2) from a claim for scheme liability under Section 17(a)(3). Courts have generally adopted the rule from the Rule 10b-5 context that, to state a claim under Section 17(a)(3), the SEC must allege a deceptive scheme or course of conduct that goes beyond any misrepresentations alleged under Section 17(a)(2).26  Indeed, in the context of private litigation, it is well established that “[c]laims for engaging in a fraudulent scheme and for making a fraudulent statement or omission are ... distinct claims, with distinct elements,” 27 and that the same set of facts may give rise to liability under both subsections only where the defendants allegedly both made misrepresentations and “undertook a deceptive scheme or course of conduct that went beyond the misrepresentations.” 28


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