Wells Fargo Will Halt Sale of Gold Securities : Bank Settles Commodity Agency Suit, Agrees to Pay Refunds to Customers

Wells Fargo Bank agreed Thursday to stop selling speculative investments tied to gold prices and pay refunds to customers after a federal regulatory agency charged that the instruments violated commodities laws.

Wells Fargo reached a settlement with the Commodity Futures Trading Commission, which filed a civil lawsuit in federal court in Los Angeles against the bank. A federal judge entered a permanent injunction requiring Wells Fargo to stop selling the investments.

The San Francisco-based bank will be required to return all fees collected from customers who bought the investments and refund any losses suffered by the customers. Wells also must pay interest on the money involved.

A government source said the bank sold “several million dollars” worth of the gold certificates.

The case is the first brought by the commission against a bank as part of an investigation opened in September into off-exchange futures and options trading by banks and other financial institutions.

The case may have an impact on future innovations by banks that are pushing to expand their presence in financial markets by creating novel investment devices.

“There is an ongoing study of these novel investment instruments and each innovation will be looked at on a case-by-case basis,” said Dennis A. Klejna, director of enforcement for the commission in Washington. “This is the first case involving a bank that was addressed by an enforcement action.”

Attempts to reach Wells Fargo for comment were unsuccessful.

Records were subpoenaed a few weeks ago from Wells and Chase Manhattan Bank in New York as part of the overall inquiry. No action has been announced with regard to Chase.

The lawsuit against Wells said certificates tied to the price of gold that Wells sold constituted a commodity option. Federal law requires all types of commodities be sold only on regulated exchanges.

Last July, Wells Fargo began selling what it called “gold market certificates.” Customers could invest between $2,500 and $1 million. Wells promised that the principal invested would not be risked. The return would be either 100% or 50% of any increase in gold prices during the period of the investment, depending on the plan.

Wells charged a fee for each investment, more for investors who chose the 100% return. Wells retained 50% of any increase in gold prices for customers who chose the cheaper plan. The bank assumed the risk of any decline in gold prices by assuring the customers that their principal would be returned even if the price of gold dropped.