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Wells Fargo Advisors, LLC is Ordered to Repurchase Fannie Mae Preferred Shares in FINRA Arbitration

On February 6, 2013, the Financial Industry Regulatory Authority (FINRA) announced that a public customer was awarded an award of full rescission against Wachovia Securities, LLC, doing business as Wells Fargo Advisors, LLC (“Wells Fargo”) for the entirety of Fannie Mae Preferred shares recommended by Wells Fargo. By awarding full rescission, the arbitrator required Wells Fargo to repurchase the Fannie Mae Preferred shares at the same price they were sold to the customer. The arbitration award is attached here.

According to the award, the arbitrator found that Wells Fargo was liable for negligence, negligent supervision, fraud and breach of contract as a result of the sale of the Fannie Mae Preferred shares. Billions of dollars of Fannie Mae Preferred shares were sold by broker-dealers like Wells Fargo to investors before the U.S. Government placed Fannie Mae in conservatorship and stopped payments of preferred dividends to investors, but after we believe such broker-dealers were aware that those preferred shares were much riskier than how they were promoted to investors.

In our opinion, Fannie Mae Preferred shares were often endorsed as a safe investment by brokers and broker-dealers, especially given that Fannie Mae was considered a quasi-governmental entity. However, as early as February 2008, we believe many broker-dealers were well aware of Fannie Mae’s exposure to real estate liabilities. On March 10, 2008, Barron’s reported that Fannie Mae’s solvency would be tested by a growing number of mortgage defaults and falling home prices. Despite these in-house understandings of the risky nature of Fannie Mae Preferred shares, many broker-dealers continued to promote the investment as safe, and provided their brokers with research material to further promotion of the shares. Like many other broker-dealers, Wells Fargo, recommended the Fannie Mae Preferred shares to investors who sought safe investments, according to the award.

The arbitrator in the February 6, 2013 award made a point of describing how the broker was not at fault. The broker acted based on research she was provided by Wells Fargo, so Wells Fargo was found solely liable for the investor’s losses. Essentially, the award states that Wells Fargo caused the recommendation of unsuitable investments to the investors.

If you believe you have lost money as a result of Fannie Mae Preferred shares, or because of some other investment, please contact an attorney at Malecki Law to determine if you may be able to recover some of your losses.

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