Last week, WSJ stoked fears that the Feds might be ramping up another probe into abuse and manipulation in the foreign exchange market when it reported that Wells Fargo had abruptly terminated four bankers from its FX business and transferred another. Now, Wall Street’s paper of record is reporting that Federal prosecutors are investigating Wells for abuses in its FX shop - but the scope of the investigated is limited to one disputed trade.
According to WSJ, prosecutors have subpoenaed information from Wells and from the recently fired bankers as they investigate a trade and ensuing dispute between Wells and one of its clients, Restaurant Brands International Inc.
RBI owns several fast-food franchises, including Burger King, Tim Hortons and Popeyes Louisiana Kitchen. In an amusing twist, both companies count Warren Buffett’s Berkshire Hathaway as one of their largest shareholders.
In a statement, Wells Fargo said it “learned of an issue associated with a foreign exchange transaction for a single client. The matter was reviewed, the client was promptly notified regarding the issue, and Wells Fargo leadership took steps to hold accountable the individuals who were involved. Wells Fargo remains committed to our foreign exchange business, meeting our clients’ financial needs in an ethical way, and ensuring ongoing review of this and all business operations.”
The foreign-exchange issue revolves around a trade made within the past three years that included positions running into the billions of dollars, the people said. The trade resulted in a loss to Restaurant Brands, the people added, which led to a dispute between it and the bank. WSJ pointed out that the investigation into Wells Fargo’s foreign-exchange business, which is housed within its investment bank, are separate from sales-practices issues that rocked the bank more than a year ago. Wells Fargo is planning to refund Restaurant Brands hundreds of thousands of dollars related to the trading loss, WSJ's sources said. The Federal Reserve is also looking into the issue. Specifically, Federal prosecutors are looking into the sequencing of the trade in question and whether it could have involved so-called front-running, some of the people familiar with the matter said. That should send a chill down the spine of the fired bankers, as earlier this week a US jury found a former HSBC currency trader guilty of fraud related to front-running a large trade that netted the bank some $8 million in profits. The US is also in the process of extraditing another UK-based FX trader to face front-running related charges in the US.
Last year, a wide-ranging investigation into abuse and front-running in the global foreign-exchange market led to a rash of settlements worth billions of dollars involving Barclays and a handful of other global banks.
While probes like this are never convenient, the investigation comes at a particularly trying time for the bank and its management. Earlier this month, WFC CEO Tim Sloan received a widely publicized tounge lashing from Massachusetts Senator Elizabeth Warren during Congressional testimony (Sloan became the second straight Wells CEO whom Warren said should resign during a public hearing). He has also participated in a handful of media interviews lately as he tries to burnish the bank's once-wholesome reputation and bolster its lagging share price, which has never quite recovered from last year's cross-selling scandal.
However, as WSJ explains, front-running is often difficult to gauge given the ambiguity around pre-hedging strategies in currency trading. Typically a bank must purchase currency as part of a trade and price it differently than it would price a stock. Wells Fargo’s investment-banking, securities and markets division, known as Wells Fargo Securities, is a fraction of the size of its U.S. big-bank peers, as is its foreign-exchange business. The bank doesn’t break out financial results or metrics for that group or its foreign-exchange business.
And while the investigation is the latest embarassment for the bank, which over the summer disclosed that it had overcharged mortgage and auto-loan borrowers, there is, at least, one mitigating factor: Unlike the retail banking scandal, which stoked widespread public outrage, few Americans understand how the foreign-exchange market works - indeed, many don't even realize that such a market exists. This means that even in the worst-case scenario, Wells's brand should remain untarnished from this latest scandal.
The US Attorney’s Office for the Northern District of California is leading the investigation.
