A Look-Back Review Gone Wrong – SEC Charges Wells Fargo Compliance Consultant with Altering Records Related to Insider Trading

October 24, 2014

By: Sara Kropf

The SEC has charged Judy Wolf, a former compliance consultant for Wells Fargo Advisors, with falsifying records that were submitted to the SEC during the investigation of a registered Wells Fargo representative. Ms. Wolf allegedly falsified her internal investigation logs so she would appear to have been a more competent and thorough compliance investigator.

As a result, Ms. Wolf is now the subject of her own SEC investigation for aiding and abetting Wells Fargo’s securities violations.

Because Wells Fargo was a registered broker-dealer and investment advisor, Section 15(g) of the Exchange Act and Section 204A of the Advisors Act require it to have written policies and procedures that are reasonably designed to prevent the misuse of material nonpublic information.

Ms. Wolf was part of Wells Fargo’s efforts to comply with Section 15(g) and Section 204A. According to the SEC, she may have been part of the problem rather than part of the solution.

Ms. Wolf’s Role in Look-Back Reviews

At the time of the initial SEC investigation, Ms. Wolf was no newcomer to the finance world. She had been working in the finance industry since she received her first securities license in 1990 and began working for Wells Fargo in 2004.

As she advanced in her career, Ms. Wolf was moved into the Wells Fargo Advisors Retail Control Group. This was within Wells Fargo’s compliance department.

One of Ms. Wolf’s primary duties was to prevent the misuse of material, nonpublic information to comply with the Securities Exchange Act of 1934 and the Investment Advisers Act. To that end, she would perform “look back” reviews on Wells Fargo advisors and customers. These reviews allowed her to identify suspicious trades and verify that they were not based on insider information.

Ms. Wolf seems to have been a high-enough ranking compliance consultant that she was trusted in 2009 to write the policies governing how she was to carry out look-back reviews.

During this time, Ms. Wolf kept a log of the reviews she conducted and how each was concluded. The SEC alleges that most ended with a conclusion of “no findings.”

The Burger King Trades

Ms. Wolf’s troubles started when she performed a look-back review on a series of Burger King securities trades.

Mr. Waldyr Da Silva Prado Neto worked as a registered representative for Wells Fargo. In 2010, Mr. Prado supposedly misappropriated customer information. The SEC alleges that he learned of 3G Capital’s plan to acquire Burger King in the near future. The SEC also alleges that Mr. Prado then told three of his friends who, along with Mr. Prado, bought Burger King securities.

These sales netted them more than $2 million in profit.

The Look-Back Review

After the Burger King trades, Ms. Wolf performed a look-back review on Mr. Prado’s trading activity. The SEC’s complaint states that her investigation unearthed all of the following information:

  • That Mr. Prado and his customers held the four top positions in Burger King securities at Wells Fargo Advising,
  • That Mr. Prado and his customers bought Burger King securities within 10 days of the 3G Capital acquisition,
  • That the profits from those purchases exceeded the $5,000 threshold that should trigger a look back review, and
  • That Mr. Prado, his three customers, and 3G Capital were all Brazilian.

Despite this information, Ms. Wolf supposedly closed her look back investigation and concluded that nothing suspicious was going on.

The SEC disagreed and instituted proceedings against Prado in 2012. It obtained a final judgment against him in January 2014.

Ms. Wolf Allegedly Changes Her Look-Back Log

The SEC now alleges that Ms. Wolf violated her own look-back review procedure. (Readers might recall other examples of defendants violating the procedures they wrote in the insider trading context.)

When Ms. Wolf learned of the Prado investigation by the SEC, she allegedly went back into the record of her Burger King look-back review.

The SEC maintains that where Ms. Wolf had previously documented a rise in Burger King stock price, she added a line that said

rumors of acquisition by a private equity group had been circulating for several weeks prior to the announcement.

This allegedly new statement would have provided an alternative explanation for the clean look-back review – whereas earlier Ms. Wolf seemed to have performed an inadequate analysis of Mr. Prado’s trading activity, she now had a perfectly plausible, legitimate explanation for his Burger King trades.

Ms. Wolf’s lack of suspicion, then, would not indicate a failure on her part.

SEC Discovers Inconsistent Records

Wells Fargo turned the records of the Prado review over to the SEC.

In the course of its investigation, the SEC took Ms. Wolf’s testimony regarding possible inconsistencies in the logs. Ms. Wolf allegedly chalked the deviations up to human error.

The SEC seems to have accepted Ms. Wolf’s answers for a while. However, its interest in Ms. Wolf was piqued once again when, in 2013, Wells Fargo handed over earlier versions of the look-back records. It also produced metadata showing that Ms. Wolf was the last person to alter the records before they had been produced to the SEC.

The SEC then asked Ms. Wolf to come in for questioning for a second time. When pressed about the two supposedly contradictory versions of the records, Ms. Wolf allegedly admitted that she revisited the records and had not been truthful during the earlier testimony.

The SEC now states that Ms. Wolf confessed to changing a number of aspects of the records and deviating from her own procedures.

The SEC seeks an administrative remedy. It alleges that Ms. Wolf aided and abetted Wells Fargo’s violation of §§17(a) and 17a-4(j) of the Exchange Act and Rule 204(a) of the Advisor’s Act.

Tough Case

When I read a case like this one, I can’t help but think about the lawyer representing the defendant. This is a tough spot.

The client (according to the SEC) is admitting to potentially criminal conduct or, at a minimum, conduct that will expose her to considerable administrative sanctions.  But at least from the SEC’s description, it sounds like a fairly open-and-shut case.

Look, sometimes you just have to take a client into the government to admit they did something wrong. I hate those sessions. It’s hard to watch a client admit they did something wrong and hard to watch all the consequences flow from the admission.

The SEC’s filing doesn’t mention that Ms. Wolf had any other troubling incidents at Wells Fargo and, for all we know, she was a model employee until this incident.

It can be a difficult moment when you are confronted with a mistake. You either need to own up to it or cover it up. Who hasn’t been in that situation?

Assuming these allegations are true, I certainly hope the SEC will consider Ms. Wolf’s whole record when it works to settle the case and not judge her from one mistake.

A pipe dream, I know. The government always judges people based on their worst moments, not their best. It’s the nature of the beast.



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