* SEC says Wells Fargo sold products tied to risky mortgage securities
* Former Wells Fargo vice president also settles SEC charges
* SEC says municipalities, non-profits suffered substantial losses
* SEC: Wells Fargo relied too much on credit-ratings; did not read docs
By Sarah N. Lynch
WASHINGTON, Aug 14 (Reuters) - Wells Fargo & Co will pay more than $6.5 million to settle civil charges alleging it sold complex mortgage-backed instruments to municipalities and non-profits during the financial crisis without fully disclosing the risks.
The case marks the latest effort by the Securities and Exchange Commission to hold banks accountable for their actions during the crisis.
The SEC said that Wells Fargo's brokerage unit based in Minneapolis agreed to settle the case without admitting or denying the charges. It will pay a $6.5 million penalty, plus $65,000 in disgorgement and more than $16,000 in prejudgment interest.
The money will go into a fair fund to help harmed investors.
In addition to charging the company, the SEC also charged a former Wells Fargo vice president, Shawn Patrick McMurtry, 42, for his role in selling the products. He settled the charges without admitting or denying them. He will pay a $25,000 penalty and will also be suspended from the industry for six months.
"These issues occurred more than five years ago and pertain to a part of the firm that was completely revamped after the merger with Wachovia. We are pleased to put this matter behind us," said Wells Fargo spokeswoman Elise Wilkinson.
The SEC alleged in its administrative filing that from January to August 2007, Wells Fargo sold customers asset-backed commercial paper that was structured with risky mortgage-related securities including collateralized debt obligations.
The investors later suffered "substantial losses" after the mortgage-backed complex products defaulted.
In selling these risky products to municipalities and non-profits, the SEC said Wells Fargo "relied almost exclusively on the credit-ratings of these products" and did not properly review the private placement documentation to better understand the risks.
Credit-rating agencies such as Standard & Poor's and Moody's have since been blamed by critics for helping to fuel the 2007-2009 financial crisis by giving overly rosy ratings to complex products tied to subprime mortgages that later soured.
The agency said that "multiple registered representatives" at Wells Fargo, including McMurtry, exercised discretionary authority to purchase asset-backed commercial paper on customers' behalf.
The SEC said that McMurtry purchased products tied to mortgage-backed securities for one customer even though the customer had sought to avoid exposure to the housing market and state law also prohibited municipalities from having exposure to high-risk mortgage-backed instruments.
The SEC's case was brought by the agency's enforcement unit that specializes in municipal securities and public pensions.
"Broker-dealers must do their homework before recommending complex investments to their customers," said the unit's chief Elaine Greenberg.
"Municipalities and other non-profit institutions were harmed because Wells Fargo abdicated its fundamental responsibility as a broker to have a reasonable basis for its investment recommendations to customers," she added.
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