It will be up to 11 jurors to determine if Wells Fargo & Co. (WFC) is guilty of grossly mismanaging a securities lending program and lying about the degree of risk involved or whether the economic crisis was actually at fault. The program was marketed to institutional clients, including pension funds. According to investors, the bank committed fraud by taking huge risks with what they were under the impression was a conservative program. Nearly 15% of the portfolio’s by 2007’s fall season had defaulted or was distressed. (Citigroup (C) has since bought most of Wells Fargo’s Clearland securities lending business.)
The plaintiffs contend that rather than investing money in higher grade market instruments and other safe investments, which is what they thought was being done), managers bet on structured investment vehicles and other high-risk financial instruments. Cheyne Finance, one SIV involving subprime mortgages that the bank invested in, was placed in receivership. The securities case, filed in 2011, focuses on cash collateral investments primarily made by Wells Fargo between 2005 and 2008.
Wells Fargo denies the allegations. Contrary to the attorneys for the investors, the bank’s lawyers are arguing that the securities lending business’s investments were conservative and safe and that it’s track record was pretty solid until the economic crisis. Even then, contend the attorneys, the losses suffered were not a big portion of the program. Also, claims Wells Fargo, the securities lending program was overseen at a level that was “extraordinarily high” and the investors’ best interests were primary. The banks’ legal team noted that investors were given written warnings that losses were likely.
This securities lending lawsuit is one of a number of cases against Wells Fargo in Minnesota alone. In an identical securities case against the bank in 2010, jurors found that the bank committed fraud and breached its duty. Four charitable foundations were awarded $30 million. Add another damage award, legal fees, and interest, and the total Wells Fargo was ordered to pay was $57 million.
Wells Fargo’s Former Securities Lending Program
This program involved securities of institutional investors. The securities were in custodial accounts at Wells Fargo. Customers gave the bank permission to loan the securities. Borrowers typically were third-party brokers that traded the shares and paid cash collateral to Wells Fargo that the latter would invest. This would go on until the securities that had been borrowed were given back to the bank’s clients and brokers got back their collateral. There were over a dozen institutional investor plaintiffs to this securities lending case including the Jerome Foundation, St. John’s University Endowment, the St. John’s Abbey Endowment, Blue Cross Blue Shield of Minnesota Pension Equity Plan, and Trust, Meijer Inc. pension plans.
Throughout the US, contact our institutional investor lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP today.
Wells Fargo securities lending case goes to trial, Star Tribune, June 18, 2013
Wells Fargo Must Face Class Action Over Securities Lending, Bloomberg, March 27, 2012
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