SEC arbitration

Another Regulator has hit a Wells Fargo Trading Unit

Wells FargoThe Securities and Exchange Commission (SEC) entered a cease and desist order against Thomas Muldoon, who traded municipal bonds for more than a decade at Wells Fargo. 

According to the filing, here is what the SEC accuses Muldoon of doing

“These proceedings arise out of a fraudulent scheme carried out by Muldoon, a former Wells Fargo Clearing Services, LLC (‘Wells Fargo’) trader, to evade the retail order period restrictions in municipal bond offerings. Municipal issuers hold retail order periods to prioritize the sale of bonds to retail investors, typically providing retail investors the first chance to obtain bonds in a primary offering. This retail priority is important because municipal offerings are often over-subscribed, meaning not all orders will be filled. Broker-dealers such as Wells Fargo who want bonds for their own dealer inventory do not qualify for retail priority. Broker-dealer orders for inventory typically receive the lowest priority in municipal offerings and are therefore unlikely to be filled.

“Muldoon knew and exploited these priority rules by submitting fraudulent retail orders in primary offerings in order to obtain bonds for Wells Fargo’s inventory. Muldoon submitted these fraudulent orders through ‘friendly’ sales representatives at underwriting firms, who submitted his fraudulent retail orders on behalf of Wells Fargo to the senior managing underwriter and/or the issuer.

“Between January and October 2017 (the ‘relevant period’), Muldoon placed fraudulent retail orders in at least sixteen primary offerings and received bonds for Wells Fargo’s inventory in fifteen of those offerings. Submitting orders for Wells Fargo’s inventory as retail orders operated as a fraud on issuers and senior managing underwriters, who were deceived into allocating bonds to Wells Fargo instead of to legitimate retail investors.”

Muldoon had been a municipal bond trader since 1975 and from 2004 to December 2017, Muldoon was as a trader and in various other roles at Wells Fargo, according to the filing. 

“Part of Muldoon’s trading involved purchasing new issue municipal bonds in primary offerings from other dealers serving as underwriters. Because Muldoon was trying to buy bonds for Wells Fargo inventory, the proper way to place his order was as a stock order. But, as discussed above, dealer stock orders generally receive the lowest priority and so are unlikely to be filled. Knowing this, Muldoon did not submit his orders properly as stock orders.” The filing stated further. “Instead, Muldoon reached out to sales representatives at other dealers serving as underwriters to ask if they would accept retail customer orders from Muldoon. Muldoon knew that retail orders would get the highest priority and likely be filled. Finding sales representatives at underwriting firms who would enter his orders as retail was therefore critical to Muldoon’s scheme. During the relevant period, Muldoon found three sales representatives willing to place his orders for Wells Fargo’s inventory as retail orders.”

The order, among other things, bars Muldoon from municipal bond trading. 

In August, the National Futures Association (NFA) sanctioned Wells Fargo for futures transactions. 

“On August 9, 2019, the Committee issued a complaint against Wells Fargo, a provisionally registered swap dealer and NFA member with its main office located in San Francisco, California.” The NFA stated in that filing. “The complaint alleges Wells Fargo violated NFA Compliance Rule 2-49 (a) by failing to communicate with a counterparty in a fair and balanced manner as required under Commodities Futures Trading Commission Regulation 23.433.”

Wells Fargo issued this statement regarding Muldoon to The Industry Spread, “At Wells Fargo Advisors we hold our team members to the highest professional standards. The trader involved in this matter is no longer with the company.”