U.S. Investigating Foreign-Exchange Trading at Wells Fargo -- Update

By Emily Glazer and Nicole Hong Features Dow Jones Newswires

Federal prosecutors are investigating foreign-exchange trading at Wells Fargo & Co. and have subpoenaed information from the firm and recently fired bankers in that business, according to people familiar with the matter.

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The investigation, which is in the early stages, is being conducted by the U.S. Attorney's Office for the Northern District of California, some of the people said. The office subpoenaed information in recent days, according to some of the people. Last week, The Wall Street Journal reported that Wells Fargo had fired four foreign-exchange bankers amid an internal investigation.

Issues within the bank's foreign-exchange operation revolve around a single trade and ensuing dispute with one client, Restaurant Brands International Inc., the people said. This company is the owner of Burger King, Tim Hortons and Popeyes Louisiana Kitchen, and -- like Wells Fargo -- counts Warren Buffett's Berkshire Hathaway Inc. as a major shareholder.

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."

A spokesman for the Northern District wasn't immediately available to comment.

Investigations 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. But they come at a sensitive time for the bank: Wells Fargo remains under political and regulatory pressure because of the sales scandal, which remains under separate investigation by the Justice Department and other agencies. The U.S. Attorney's Office for the Northern District also is involved in one of those investigations.

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The foreign-exchange issue revolves around a trade made within the past three years that included positions running into the billions of dollars for Restaurant Brands, 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.

Wells Fargo is planning to refund Restaurant Brands hundreds of thousands of dollars because of the loss, one of the people familiar with the matter said.

In addition to the Justice Department, potential issues around the Wells Fargo trade also are being examined by the Federal Reserve, some of the people said.

The bank recently fired the four foreign-exchange bankers for cause and launched an internal investigation, according to people familiar with the matter. Those fired were Simon Fowles, recently head of foreign-exchange trading; Bob Gotelli, recently head of foreign-exchange sales; Jed Guenther, recently a regional head of foreign exchange; and Michael Schaufler, chief spot dealer, The Wall Street Journal has previously reported.

A spokeswoman for the bank has confirmed that these individuals no longer work for Wells Fargo.

The bankers didn't respond to requests for comment.

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. Front-running typically involves a trader jumping ahead of a client's order, buying or selling for their own account to profit when the larger transaction moves a price.

In its statement, Wells Fargo said, "The departure of these employees was not related to issues involving market collusion, front-running or market manipulation."

Potential 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, say, a stock purchase. In the latter case, the customer is typically charged what the bank pays a broker dealer for the trade.

But with currency trading there are ambiguities around how bankers phrase the pricing to the customer and how the trade is executed.

Earlier this week, a federal jury in Brooklyn found a former high-ranking HSBC Holdings PLC executive guilty on charges that he misused information about a client's $3.5 billion currency trade to make millions of dollars for the bank.

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.

--Julie Jargon and Ryan Tracy contributed to this article.

Write to Emily Glazer at emily.glazer@wsj.com and Nicole Hong at nicole.hong@wsj.com

(END) Dow Jones Newswires

October 27, 2017 12:10 ET (16:10 GMT)