INITIAL DECISION RELEASE NO. 851 ADMINISTRATIVE PROCEEDING FILE NO. 3-16195 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 In the Matter of JUDY K. WOLF INITIAL DECISION August 5, 2015 APPEARANCES: Donald W. Searles and David S. Brown for the Division of Enforcement, Securities and Exchange Commission Steven M. Salky and Steven N. Herman, Zuckerman Spaeder LLP, for Respondent Judy K. Wolf BEFORE: Cameron Elliot, Administrative Law Judge Summary This Initial Decision finds that Respondent Judy K. Wolf (Wolf) willfully aided and abetted and caused Wells Fargo Advisors, LLC’s (Wells Fargo), violations of Securities and Exchange Act of 1934 (Exchange Act) Section 17(a) and Rule 17a-4(j) and Investment Advisers Act of 1940 (Advisers Act) Section 204(a). I decline to impose any sanctions. I. Introduction A. Procedural Background On October 15, 2014, the Securities and Exchange Commission (Commission) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (OIP) against Wolf, pursuant to Exchange Act Sections 15(b) and 21C and Advisers Act Sections 203(f) and (k). Wolf filed her Answer on November 5, 2014. A hearing was held on February 23 and 24, 2015, in Washington, D.C. The admitted exhibits are listed in the Record Index issued by the Commission’s Office of the Secretary on June 30, 2015. The Division of Enforcement (Division) and Wolf filed post-hearing opening briefs on March 23, 2015, and their reply briefs on April 6, 2015. 1 1 Citations to the transcript of the hearing are noted as “Tr. ___.” Citations to the parties’ Stipulated Facts are noted as “Stip. ___.” The parties filed a J oint Exhibit List, and citations to
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INITIAL DECISION RELEASE NO. 851
ADMINISTRATIVE PROCEEDING
FILE NO. 3-16195
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
In the Matter of
JUDY K. WOLF
INITIAL DECISION
August 5, 2015
APPEARANCES: Donald W. Searles and David S. Brown for the Division of Enforcement,
Securities and Exchange Commission
Steven M. Salky and Steven N. Herman, Zuckerman Spaeder LLP, for
Respondent Judy K. Wolf
BEFORE: Cameron Elliot, Administrative Law Judge
Summary
This Initial Decision finds that Respondent Judy K. Wolf (Wolf) willfully aided and abetted
and caused Wells Fargo Advisors, LLC’s (Wells Fargo), violations of Securities and Exchange Act
of 1934 (Exchange Act) Section 17(a) and Rule 17a-4(j) and Investment Advisers Act of 1940
(Advisers Act) Section 204(a). I decline to impose any sanctions.
I. Introduction
A. Procedural Background
On October 15, 2014, the Securities and Exchange Commission (Commission) issued an
Order Instituting Administrative and Cease-and-Desist Proceedings (OIP) against Wolf, pursuant
to Exchange Act Sections 15(b) and 21C and Advisers Act Sections 203(f) and (k). Wolf filed
her Answer on November 5, 2014.
A hearing was held on February 23 and 24, 2015, in Washington, D.C. The admitted
exhibits are listed in the Record Index issued by the Commission’s Office of the Secretary on
June 30, 2015. The Division of Enforcement (Division) and Wolf filed post-hearing opening
briefs on March 23, 2015, and their reply briefs on April 6, 2015.1
1 Citations to the transcript of the hearing are noted as “Tr. ___.” Citations to the parties’
Stipulated Facts are noted as “Stip. ___.” The parties filed a Joint Exhibit List, and citations to
2
On March 23, 2015, the Division moved for leave to supplement the record with
additional evidence (Motion). The Division sought admission of a one-page Wells Fargo
business record consisting of an email chain dated December 28, 2012, with the subject line
“SEC Request for Burger King.” Motion at 1. The Division represented that it inadvertently
failed to produce the document to Respondent, which it had extracted from Respondent’s hard
drive. Id. On March 26, 2015, Wolf filed an Opposition to the Motion and a Motion to Dismiss
(Opp.), noting that she would be prejudiced by the admission of the document. Wolf argues that
by attaching the email in question to its Motion, the Division “tainted the neutral fact-finder to a
degree that Ms. Wolf may no longer be able to receive a fair hearing,” such that the proceeding
should be dismissed. Opp. at 2. On April 1, 2015, I issued an Order deferring decision on the
Motion until the Initial Decision. Judy K. Wolf, Admin Proc. Rulings Release No. 2481, 2015
SEC LEXIS 1184. I find that the Division’s failure to timely produce the document was not in
bad faith and the interests of justice warrant admission of the document. Therefore, I GRANT
the Division’s Motion and admit the document into the record as Exhibit 535.
B. Summary of Allegations
This proceeding concerns Wolf’s alleged alteration of the records of Wells Fargo. OIP at
1-3. In summary, the OIP alleges that: Wolf worked in Wells Fargo’s compliance department;
in September 2010, Wolf reviewed the trading of Waldyr Da Silva Prado Neto (Prado), a Wells
Fargo registered representative, and generated a document memorializing her review; Prado was
later sued by the Commission for insider trading; in December 2012, Wolf altered her document
to make it appear that her September 2010 review was more thorough than it actually was; and
the altered document was produced to Commission staff without mention of its alteration. OIP at
2, 4-6. The OIP further alleges that Wolf thereby willfully aided and abetted and caused
violations of the securities laws by Wells Fargo’s: (1) failure to produce accurate records of a
broker-dealer to a Commission representative, in violation of Exchange Act Section 17(a) and
Rule 17a-4(j); and (2) production of altered records of an investment adviser to the Commission,
in violation of Advisers Act Section 204(a). See id. at 7. The Division seeks a cease-and-desist
order, second-tier civil penalties, and an associational bar against Wolf. Div. Br. at 40-45.
Although in her Answer Wolf denied numerous allegations, she later stipulated to a large
number of relevant facts. See generally Answer; Stips. Wolf does not dispute altering the
document in question, but denies that she knew or should have known about the Commission’s
document requests when she altered the document. Resp. Br. at 22-26. Wolf also raised three
affirmative defenses. See Answer at 7. Two of the affirmative defenses – essentially, that the
OIP fails to state a claim – are necessarily rejected. Id. However, Wolf’s claim of inability to
pay is more substantial and is addressed below. Id.
exhibits are noted as “Ex. ___.” The Division’s and Wolf’s post-hearing briefs are noted as
“Div. Br. ___” and “Resp. Br. ___”, respectively. The Division’s and Wolf’s reply briefs are
noted as “Div. Reply Br. ___” and “Resp. Reply Br. ___”, respectively.
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II. Findings of Fact
The findings and conclusions in this Initial Decision are based on the entire record. The
parties’ filings and all documents and exhibits of record have been fully reviewed and carefully
considered. Preponderance of the evidence has been applied as the standard of proof. See
Steadman v. SEC, 450 U.S. 91, 101-04 (1981). All arguments and proposed findings and
conclusions that are inconsistent with this Initial Decision have been considered and rejected.
This ID cites to evidence placed under seal, including to testimony under seal, but does not
disclose any confidential information included therein.
A. Respondent and Other Relevant Persons and Entities
Wolf is sixty-two years old and resides in St. Louis, Missouri. Stip. ¶ 1; Tr. 86. She
holds a degree in finance from Washington University in St. Louis and began working in the
securities industry in 1979. Tr. 378, 434, 440; Stip. ¶ 2. Wolf’s first job after graduating from
college was in the research department of Clayton Brokerage, where she worked for roughly nine
years and held a Series 3 license. Tr. 434-35. Wolf then worked for Mark Twain Brokerage,
facilitating trades for brokers, and held a Series 7 license. Tr. 436. Afterward, Wolf moved to
California and worked for Great Western Savings as a broker. Tr. 436. She then worked for
Financial Network Investment Corporation, where she held a Series 24 license and supervised
the trading desk. Tr. 437-38. From 2004 to June 13, 2013, Wolf worked at Wells Fargo and its
predecessor entities as a compliance consultant in the Retail Control Group of the compliance
department, where she eventually earned approximately $61,000 per year. Stip. ¶ 3; Tr. 308,
438. During her time at Wells Fargo, Wolf worked in a cubicle and was supervised by Roseann
St John (St John) and Modesto Moya (Moya), St John’s supervisor. Stip. ¶ 11; Tr. 308. While
associated with Wells Fargo, she held Series 7, 24, 63, and 65 licenses. Stip. ¶ 5. Wolf has been
unemployed since June 2013. Tr. 377.
In 2010, Prado was a registered representative and associated person of Wells Fargo in a
branch office in Miami, and held Series 7 and 65 licenses. Stip. ¶ 22; Ex. 533 at 8. The
Commission filed a complaint against Prado on September 20, 2012, in the United States District
Court for Southern District of New York, charging him with insider trading in Burger King
securities. Stip. ¶ 31; see Ex. 530. The Commission’s complaint charged him with
misappropriating information about the acquisition of Burger King by 3G Capital Partners Ltd.
(3G Capital), a private equity firm, from one of his brokerage customers who invested in 3G
Capital. See Ex. 379 at 7-22; Ex. 533 at 8; Stip. ¶ 31. The Commission alleged that Prado traded
Burger King securities through his personal Wells Fargo brokerage account, and that he tipped
several of his other brokerage customers, including at least three tippees who traded Burger King
securities through their own Wells Fargo accounts. Ex. 533 at 8. The Commission accused
Prado and his tippees of reaping over $2 million in total insider trading profits. Ex. 533 at 8.
The Commission obtained a final judgment by default against Prado on January 7, 2014. Stip. ¶
32; Ex. 530. The final judgment permanently enjoined Prado from violating Sections 10(b) and
14(e) of the Exchange Act and Rules 10b-5 and 14e-3, and ordered him to disgorge $397,110.01
plus prejudgment interest of $41,622.90, and imposed civil penalties of $5,195,500. Stip. ¶ 32;
Ex. 530.
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Wells Fargo was a dually registered broker-dealer and investment adviser at all relevant
times. Stip. ¶ 6. Its business focused on providing retail brokerage services. Stip. ¶ 7. On
September 22, 2014, the Commission instituted a settled public administrative and cease-and-
desist proceeding against Wells Fargo, pursuant to Sections 15(b) and 21C of the Exchange Act
and Sections 203(e) and (k) of the Advisers Act. Stip. ¶ 63; Ex. 533. In that proceeding, Wells
Fargo consented to: a cease-and-desist order finding that it had willfully violated Sections 15(g),
17(a), and 17(b) of the Exchange Act and Rule 17a-4(j), and Sections 204A and 204(a) of the
Advisers Act; a censure; a $5 million civil penalty; and an order directing it to comply with
certain undertakings. Stip. ¶ 63; Ex. 533. Wells Fargo “acknowledge[d] that its conduct violated
the federal securities laws,” specifically, Exchange Act Sections 15(g), 17(a), and 17(b) and Rule
17a-4(j) and Advisers Act Sections 204A and 204(a). Stips. ¶¶ 63-67; Ex. 533 at 1. Wells Fargo
also admitted the findings set forth in Section III.C of the order instituting the settled
proceedings, including that it failed to adequately maintain or enforce its policies and procedures
(Policies) and that it had produced an altered document to the Commission in January 2013. Ex.
533 at 1, 4-11.
B. Wells Fargo’s Policies and Wolf’s Responsibilities
By providing retail services to customers and advisory clients who were company
insiders or otherwise had access to material nonpublic information, Wells Fargo registered
representatives and advisory personnel could come into possession of material nonpublic
information. Stip. ¶ 8. Wolf recognized that clients and personnel of Wells Fargo might come
into possession of, and misuse, material nonpublic information. Stip. ¶ 9.
Wells Fargo accordingly had Policies for conducting insider trading reviews. Stips. ¶¶ 9,
10. Wolf, St John, and Moya participated in drafting the Policies, which were approved by
Moya and certified by Wells Fargo’s chief compliance officer for retail compliance. Stips. ¶¶
10, 11; Ex. 533 at 5. The Policies called for “[d]aily review to identify situations when profit or
avoidance of loss could most likely result from trading prior to the public release of confidential
information. Review of trading activity would occur when those situations have been
identified.” Stip. ¶ 13. The Policies specified that “when identifying situations for review, a
security with a price movement of 25% and/or $10 should always receive [consideration].” Ex.
252 at 5. The Policies called for the review to begin with the largest positions in the security at
Wells Fargo. Id.
Then, a “CIBRS 22150 Front Running report” (front running report) would be generated,
starting ten business days before a major announcement and ending with the day prior to the
announcement, showing any trading by Wells Fargo’s employees and corporate insiders. See Ex.
252 at 5; Ex. 255 at 2-6 (of 9 PDF pages); Tr. 114-15. A further review of the account owner
and trading history was required if profits or avoided losses were greater than $5,000, trading in
insider accounts occurred, or trades in any accounts in the same branches as insiders occurred.
Ex. 252 at 5. Then, a determination would be made of whether the trading reflected in the front
running report was out of character for the particular traders. Tr. 115-16.
The Policies specified that “red flags” to look for included: whether the account owner is
associated with the company or industry; whether the trades are out of character (e.g., size,
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frequency, types of securities); whether there is a previous trading history in the security; the
physical location of the issuer to the branch or customer; and the business relationship between
Wells Fargo and the issuer, if any. Tr. 116; Ex. 252 at 5-6. The Policies also called for the
reviewer to ask: “[w]as there any public speculation or rumors concerning the company that
might explain these actions? If yes, describe source.” Ex. 252 at 6; Tr. 119. For documentation
purposes, the Policies required that “[o]nce a situation has been identified for review, print the
news stories for the file.” Stip. ¶ 14; Ex. 252 at 5. The Policies further prescribed that certain
materials should be stored on-site for one year and off-site for six years. Stip. ¶ 12.
Wolf was the Wells Fargo compliance department employee responsible for conducting
its insider trading reviews. Stips. ¶¶ 15, 16; Tr. 111-12, 115, 155, 309; Ex. 252 at 5; Resp. Br. at
3. The ten business day “look back” period was selected based on Wolf’s analysis of
Commission insider trading complaints. Tr. 115. Although Wells Fargo’s Policies required
contacting the relevant branch involved and discussing the situation with the branch manager if
any red flags were found, Wolf had the discretion to close a file without further escalation if she
felt no further action was required. Ex. 252 at 6; Ex. 610 at 14.
To initiate reviews, Wolf relied primarily on news stories. See Ex. 252 at 4; Tr. 111, 385.
Wolf would typically print the Yahoo! Finance webpage for the security at issue in each review
she conducted, because the page showed both the stock movement and the news headlines. Tr.
385; Ex. 255 at 9; Resp. Br. at 4. In 2009, St John suggested that Wolf maintain a Microsoft
Excel spreadsheet (the Log) to track her insider trading reviews. Tr. 428. The parties agree that
the Log was not a document that the securities laws required Wells Fargo to create and maintain.
Div. Br. at 10; Resp. Br. at 1. Wolf used the Log “to record the [insider trading] review[s] [she]
did, what companies [she] looked at, what [she] looked at, [and] what findings [she] came to,” so
that if someone asked her about a review, she would be able to determine “when it was done and
if it was done.” Stip. ¶ 17; Tr. 158-59, 381-82. The Log contained various categories of
information, including: the date of Wolf’s review, the security in question, the type of news that
caused Wolf to initiate the review (such as the stock price rising in response to a merger
announcement), Wolf’s findings, and a “Contacts and Notes” section. Tr. 156-58; Ex. 343.
Wolf sometimes included in the Log the reasons for closing an insider trading review. Stip. ¶ 19.
Between 2009 and April 2013, Wolf was responsible for conducting trading reviews in over one
million client accounts, and closed most reviews with “no findings.” Tr. 111, 155; Stip. ¶ 18; see
Ex. 533 at 5.
Wolf understood at all relevant times that the Commission investigates insider trading
and that her reviews could result in an “escalation” by Wells Fargo to the Commission. Tr. 107-
09. Wolf also understood that the Commission investigates brokers, dealers, and investment
advisors, such as Wells Fargo, to determine whether they established, maintained, implemented
and enforced procedures to prevent the misuse of material, nonpublic information. Tr. 109.
Consequently, Wolf was aware at all relevant times that the Commission has the power to
examine documents from Wells Fargo either to determine if insider trading occurred or to
determine if Wells Fargo had adequate policies and procedures in place to detect the misuse of
material, nonpublic information. Tr. 109-10, 260. Wolf further understood at all relevant times
that it is improper to alter or falsify Wells Fargo’s records. Tr. 140-41, 143.
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C. Wolf’s Review of Prado’s Insider Trading
On September 2, 2010, it was publicly announced that 3G Capital would acquire Burger
King and take it private. Stip. ¶ 21. That same day, Wolf began her review of pre-acquisition
announcement trading in Burger King securities at Wells Fargo by Prado and three of his
customers. Stip. ¶ 23. In that review, Wolf determined: (a) Prado and his customers represented
the top four positions in Burger King securities firm-wide; (b) Prado and his customers bought
Burger King securities within ten days prior to the announcement, including on the same days;
(c) the profits by Prado and his customers each exceeded the $5,000 threshold specified in the
Policies; (d) both Prado and Burger King were located in Miami; and (e) Prado, one or more of
his customers, and 3G Capital were Brazilian. Id. Wolf conducted an “enhanced review,” which
included determining if any of Prado’s clients were board members or officers of Burger King.
Tr. 162. Wolf determined there were no “red flags” requiring follow-up and that none of the
trading was out of character. Ex. 521 at 115-16; Ex. 533 at 9; Tr. 162.
Contemporaneously with conducting her Burger King insider trading review in
September 2010, Wolf noted in the “Contacts and Notes” field of her Log, “09/02/10 opened
24% higher @ $23.35 vs. previous close $18.86,” as well as “bot prev” (i.e., bought previously)
on the front running report. Stip. ¶ 24; Ex. 255 at 1, 3; Ex. 525 at 30; Tr. 166, 193, 226-27.
Wolf’s September 2010 Burger King insider trading review file contained a Yahoo! Finance
webpage printed on September 2, 2010, showing Burger King’s stock price movement and
headlines regarding Burger King’s acquisition by 3G Capital. Stip. ¶ 26; Tr. 193-94; Ex. 255 at
9. Wolf did not: follow up with Prado or his branch manager about Prado’s trading; contact the
branch; escalate the review to her manager; or take any further steps. Stips. ¶¶ 25, 27. Wolf
closed the review with “no findings.” Stip. ¶ 25; Ex. 525 at 30; Tr. 165-66. Wolf then stored her
Burger King file in a file drawer in her cubicle, along with other insider trading reviews she had
conducted. Tr. 311. On April 4, 2012, the box containing Wolf’s Burger King review file was
sent to Iron Mountain, an offsite records storage company, in accordance with standard practice.
Tr. 182-83, 216-17; Ex. 516.
D. Wolf’s Review of Buckingham and Janney Orders
Wolf’s review of two unrelated Commission actions following her Prado insider trading
review—but prior to the Commission initiating its investigation into Prado—speaks to Wolf’s
experience and knowledge regarding compliance requirements and the alteration of records. On
November 17, 2010, the Commission instituted cease-and-desist proceedings, made remedial
findings, and imposed sanctions against The Buckingham Research Group, Inc., Buckingham
Capital Management, Inc., and Lloyd R. Karp (Buckingham Order). Ex. 500. That action
involved, among other things, the alteration of compliance documents that were produced to the
Commission. Id. Wolf reviewed and discussed the Buckingham Order with St John a few days
after it was issued. Exs. 501, 503. Wolf and St John prepared an assessment of the Buckingham
Order as applicable to Wells Fargo’s Policies, and provided it to Moya on November 29, 2010,
which concluded that Wells Fargo’s “existing processes and procedures adequately address these
issues/findings.” Exs. 502, 503.
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Similarly, on July 11, 2011, the Commission instituted administrative and cease-and-
desist proceedings, made findings, and imposed remedial sanctions and a cease-and-desist order
against Janney Montgomery Scott, LLC (Janney Order). Ex. 506. That action involved a dually-
registered broker-dealer and investment adviser’s failure to establish, maintain, and enforce
policies and procedures to prevent the misuse of material, nonpublic information. Id. at 2. The
same day the Janney Order was issued, St John asked Wolf to review the Janney press release
and “determine what their deficiencies were and ensure we are covered with our existing
processes and add to your weekly report.” Ex. 507. Wolf reviewed the press release, emailed it
to others, and prepared a table comparing Janney’s procedures with Wells Fargo’s. Exs. 508,
511. Among other things, Wolf noted in the table that Wells Fargo’s “process is to document
everything. This demonstrates how we follow the procedures.” Ex. 511 at 4 (of 4 PDF pages).
E. The Commission’s Investigation and Wells Fargo’s Responses
In 2012, the Commission initiated an investigation into Prado’s insider trading. See Stip.
¶ 28. On June 13, 2012, as part of that investigation, Commission staff requested, pursuant to
Exchange Act Section 17(a) and (b), that Wells Fargo produce, among other things, “[a]ll
documents concerning any inquiry made by any representative of [Wells Fargo], including but
not limited to the compliance department, relating to trades in Burger King securities made by
[Prado] and his response to any such inquiry.” Stip. ¶ 28; Ex. 517. On July 20, 2012,
Commission staff requested, again pursuant to Exchange Act Section 17(a) and (b), that Wells
Fargo produce, among other things, all “compliance files including but not limited to reviews,
inquiries, or complaints” relating to Prado. Stip. ¶ 29; Ex. 518. The request was not limited to
any timeframe. Stip. ¶ 29; Ex. 518. The request also asked for Wells Fargo’s “written policies
and procedures in force and effect in 2010 designed to prevent a financial advisor and/or
registered representative’s misuse of material, nonpublic information, or other policies and
procedures in force and effect in 2010 designed to prevent insider trading by a financial advisor