Multi-million dollar securities lending settlement announced

Wells Fargo & Co. entered an agreement to pay $62.5 million to settle class action claims over a securities lending program that the bank managed out of Minneapolis that was riskier than claimed. A federal district court judge in St. Paul, however, has to provide preliminary approval.

The action, filed by a group of retirement funds, alleged that the bank was reckless with a multi-billion dollar securities lending program. The plaintiffs claim that the program was described as a conservative means for making additional money that would cover the expenses of maintain their investment portfolio.

However, Wells Fargo managers allegedly made risky bets on complex and often illiquid investments such as structure investment vehicles run by hedge funds and pools of subprime mortgages from 2006 to 2008. Wells Fargo marketed this program to foundations, pension funds, insurance companies and other large institutional investors. It would lend out the securities to third-party broker dealers. The financial market and economic crisis made many of these deals toxic.

The plaintiffs were divided into groups comprised of investors covered under the Employment Retirement Security Act and those who were not covered. The 30 ERISA-covered plaintiffs could only file a breach of fiduciary claim. The 62 non-covered plaintiffs filed three claims comprised of violations of the Minnesota Consumer Fraud Act, breach of fiduciary duty and breach of contract.

Wells Fargo denied any wrongdoing. It said that it engaged in a conservative approach that limited portfolio losses to five percent or less as compared to the more substantial losses that other investors incurred during the financial crisis.

The bank lost another 2012 jury trial concerning an investor lawsuit over its program in Ramsey County District Court and had to award $57 million to a group of Twin Cities’ charitable foundations. Wells Fargo won another trial in 2013 in federal court in St. Paul.

Allegations of fraud and deceptive trade practices have significant ramifications for business and consumers. For businesses, planning and information can help prevent these lawsuits. Consumers, with proper representation, have an opportunity to obtain compensation for valid claims.

Source: Star Tribune, “Wells Fargo will pay $62.5 million to settle suit over securities lending,” Jennifer Bjorhus, May 31, 2014

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