A wealthy client transferred a stock fortune. Wells Fargo owes $3.4M for not stopping her

Wells Fargo has to pay nearly $3.4 million to the estate of an elderly investor who accused the firm and one of its advisors of failing to prevent the client from being taken advantage of by her nieces.

Last Thursday, a Financial Industry Regulatory Authority arbitration panel hit Wells Fargo Clearing Services — the official name of Wells Fargo Advisors — and its advisor Stephen L. Smith with a roughly $3.37 million award over alleged breaches of fiduciary duty and contract, negligence and other violations. The complaints against Wells were brought by the estate of Genell Mathis, a wealthy client who built much of her fortune through early investments in the insurance giant Aflac. Mathis, a lifetime resident of Columbus, Georgia, died in 2020.

Mathis's lawyers, Tyler Pritchard and Rhett Owens of the Bodewell Injury Group law firm in Birmingham, Alabama, said the claims arose after Mathis was convinced by her two nieces that she could lower her estate taxes by transferring to them and other relatives more than 70,000 of her Aflac shares. After learning the transfers would not have the promised benefits, Mathis sought to reclaim the stock only to see her requests refused.

The lawyers said the share transfers were uncharacteristic of Mathis and, at the very least, should have been given close scrutiny by Wells Fargo and Smith. Instead, the firm and advisor allowed the transactions to proceed as if nothing was amiss.

"Wells Fargo contemplated a number of facts that were suggestive of the exploitation of an elderly client and ignored those facts," Pritchard said.

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Owens said Wells Fargo has policies listing telltale indicators of likely elder fraud.

"A family member suddenly becomes interested in a client's finances or there are some large sudden transactions that don't make business sense," he said. "These are the warning signs of financial exploitation, and yet Wells Fargo didn't do anything about it."

A Wells Fargo spokesperson said, "We take the protection of our clients seriously, and we respectfully disagree with the panel's decision."

Pritchard said Mathis was a wealthy woman who got her start in the grocery business. She was an early investor in Aflac, which has its headquarters in Columbus, Georgia, buying shares from the firm's founder in the 1970s when he was selling them from his truck.

"She knew a good deal when she saw one and liked the stock and held onto it," Pritchard said. "It made her wealthy."

Pritchard and Owens said Mathis had apparently not included her nieces — whom they declined to name — in her will. Mathis was also known to be averse to paying taxes, making her susceptible to ploys ostensibly aimed at lowering her tax burden.

"She unequivocally loved and trusted these nieces," Owens said. He said the nieces used the trust placed in them and their knowledge of their aunt's aversion to taxes "to try to enrich themselves."

Pritchard and Owens said Mathis's estate was able to recover about 26,000 Aflac shares in a lawsuit filed in state court in Georgia and settled in February 2023. That left roughly 28,800 shares still in the nieces' possession, the lawyers said.

All told, Pritchard said the estate sought $4.1 million on the behalf of Mathis. That figure was based partly on the current value of the Aflac shares still with the nieces. Also included was $68,000 in capital gains taxes Mathis had to pay after her nieces initiated sales of Invesco mutual funds she held in her account, as well as $350,000 in dividends she forfeited through those sales.

In the end, the three-member FINRA arbitration panel ruling on the case provided the Mathis estate with nearly $3.3 million in compensatory damages, $17,500 to cover expert fees and $625 to cover an initial filing fee. As often happens in such cases, the arbitrators did not explain the reasons for their decisions or the award amounts they approved.

Investor advocates often warn of the dangers of so-called affinity fraud. This occurs when ill-intentioned parties use something they have in common with an intended victim — such as a familial relationship or racial or ethnic ties — to gain trust in a way that may not be granted a perceived outsider.

In an investor alert dating back a decade, the Securities and Exchange Commission listed some of the hallmark signs of affinity frauds.

"Even if you know the person making the investment offer, be sure to research the person's background, as well as the investment itself — no matter how trustworthy the person who brings the investment opportunity to your attention seems to be," the SEC warned.

One particularly susceptible group, according to the SEC, is the elderly. Many infamous cases of affinity fraud involve relatives or supposed friends of older investors who exploit the trust that has been placed in them to pursue nefarious purposes.

The larger plague of elder fraud has been estimated by the AARP to cost people 60 and older $28.3 billion annually. Wells Fargo, Charles Schwab and other large firms have been accused in recent years of ignoring obvious red flags that their elderly clients were being defrauded and of failing to take simple steps to prevent investor harm.

"In the grand scheme of things, this is a judgment concerning elder financial exploitation," Owens said. "Wells Fargo had policies and procedures to help prevent this. But those policies and procedures need to be followed and followed strictly as it relates to these elderly investors, for the firms' own protection."

Pritchard and Owens noted that FINRA rules allow brokerage clients to designate trusted contact persons who can be consulted should concerns about fraud arise. In Mathis's case, her son, Tony, was named as that type of a contact. But Wells had apparently not placed his name on every account she had at the firm and did not reach out to him.

Separately on Thursday, the FINRA arbitration panel denied Smith's request that a record of the complaint be removed from the information appearing on FINRA's online BrokerCheck database. Smith has 13 years of industry experience, having begun his career at Wells in 2011. Besides the complaint stemming from the Mathis case, he has no other disclosures on his record.

- This article has been revised with a comment from Wells Fargo.