Advisor barred over outside investments owes back Wells Fargo recruiting loans

Update: Since the publication of this story, former Wells Fargo employee Scott Wayne Reed has been barred from the advisory industry by the SEC. Read about it here.

A former Wells Fargo employee accused of going outside the firm to raise money for a software developer now under SEC investigation owes back more than $1.5 million in recruitment loans.

So ruled a Financial Industry Regulatory Authority arbitration panel in a decision handed down on Sept. 29 against Scott Reed, a now-barred broker and financial advisor who joined Wells Fargo Clearing Services' offices in Scottsdale, Arizona, in 2016. The three-member FINRA-appointed panel ordered Reed to pay Wells nearly $1.46 million in compensatory damages, $76,796.29 in default interest and $2,000 for reimbursement of filing fees over claims that he breached the terms of seven promissory notes he signed between April 2016 and July 2018. On top of that, he'll also owe new interest at a rate of 4.88% on the nearly $1.5 million award until the full amount is paid.

A representative of Reed couldn't be reached. A Wells Fargo spokesperson declined to comment.

As is typical with FINRA arbitration awards, no reasons for the panel's decision were given in the official release. But similar promissory note cases usually involve loans provided as recruitment incentives to new employees. 

As long as the new recruit stays for a set number of years — often between seven and 10 — the loaned amount is forgiven. If they depart sooner, their former employer can drag them into FINRA arbitration to try to reclaim some of the money.

In Reed's case, that departure came in April 2020 with a voluntary resignation following accusations that Reed had been recommending investment opportunities that were not on offer through Well Fargo's advisory arm. Investigators later accused  Reed of encouraging at least two Wells customers to buy securities issued by Pebblekick, a software and web development company in Pasadena, California. 

The firm, which provides streaming entertainment services to prisons and other institutions, itself is under investigation by the Securities and Exchange Commission over allegations that it defrauded investors. Attempts to reach Pebblekick were unsuccessful.

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FINRA found that Reed had arranged the investments away from Wells using emails and text messages and helping the clients transfer money. He received $191,340 from the sales, according to FINRA. Reed accepted a permanent FINRA bar from the industry in February 2021 after admitting that he had helped clients enter into at least $3.5 million in private securities transactions without obtaining Wells' approval.

Adam Weinstein, a partner in the New York office of Gana Weinstein, said he wouldn't be surprised if Wells Fargo had compensated some of Reed's clients and now was trying to press its claims on his outstanding promissory notes to retrieve at least some of that money.

"It's an easy way to try to recoup those losses," he said.

Michael Terrana, the president and CEO of the recruiting firm Terrana Group in Chicago, said he has seen many instances in which advisors are able to negotiate reductions in the amounts they owe on promissory note loans after leaving a firm for a competitor.

"But when there is a violation like this, the advisor doesn't have a leg to stand on," he said. 

Before the allegations involving Pebblekick, Reed was accused In December 2017 by Wells customers of recommending unsuitable investments to them and failing to properly diversify their portfolios. Wells settled the charges for $15,000.

Even before joining Wells Fargo, Reed was named in a customer dispute while at Fidelity Brokerage Services, where he was from February 2001 to July 2010. A client alleged he had made a "terrible" investment recommendation, a claim that Fidelity later denied. Reed went on to work from 2012 to 2015 for Accelerated Capital Group, a Costa Mesa, California-based firm that FINRA expelled from the industry in November 2019 after it failed to pay fines. 

Given that history, said Rick Rummage, the founder and CEO of the Herndon, Virginia-based recruitment firm The Rummage Group, it's somewhat surprising that Wells Fargo brought on Reed in the first place. Far less unusual, Rummage said, is Wells' determination to reclaim money it had provided him as part of a recruitment incentive.

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Not long ago, Rummage said, firms would probably not have bothered trying to reclaim small amounts still owed on promissory notes used for recruiting purposes. Now, though, large brokerage and advisory houses are showing willingness to go after almost anything.

And at more than $1 million, the amount Reed apparently owes Wells is far from "small," Rummage said.

"So if you take the money, you had better not spend it," he said. "And you better have access to it."