Wells Fargo Reaches $590 Million Settlement in Principle in Wachovia Suit
Wells Fargo & Co. (WFC), the biggest U.S. home lender, said it reached a $590 million settlement in principle with plaintiffs who claimed in a lawsuit that Wachovia Corp. misled investors.
The accord, subject to court approval, is reflected in the bank’s financial statements and “will not have a material adverse effect on Wells Fargo’s consolidated financial position,” according to a regulatory filing today by the San Francisco-based company. Wells Fargo acquired Wachovia in 2008.
Investors had accused Wachovia of making misleading disclosures relating to the sale of securities between 2006 and 2008, according to the complaint. The statements related to the quality of assets linked to the mortgage portfolio of Golden West Financial, a California home lender it had acquired.
“Wells Fargo agreed to this settlement in order to avoid the distraction, risk and expense of on-going litigation,” Mary Eshet, a spokeswoman for the bank, said in an e-mailed statement. “The settlement agreement does not constitute an admission of Wells Fargo of liability or any violation of law by Wachovia.”
Accounting firm KPMG LLP, which did auditing work for Wachovia and was also listed as a defendant, reached a $37 million settlement, according to a statement today from law firms representing the plaintiffs. “We’ve agreed to settle to avoid the cost of litigation and to put this matter behind us,” George Ledwith, a KPMG spokesman, said in a phone interview.
Wachovia, in marketing 30 separate bond and preferred security sales totaling more than $35 billion, referred to the “pristine” quality and conservative underwriting of its Pick- A-Pay portfolio, and the adequacy of loss reserves and capital, which ultimately proved untrue, according to the complaint. Pick-A-Pay loans, or option-ARMs, let homeowners defer some payments on adjustable-rate home loans and add them to the principal.
“We believe that these settlements reflect an outstanding result for bond and preferred-security purchasers who were damaged as a result of false and misleading offering materials,” the attorneys representing investors wrote in their joint statement.
Wells Fargo purchased Wachovia for $12.7 billion in 2008, after surging mortgage defaults brought the Charlotte, North Carolina-based lender to the verge of collapse. Wells Fargo picked up $117.3 billion in Pick-a-Pay loans as part of the deal. More than half of those were found to be credit-impaired, according to the complaint.
The plaintiffs include the Southeastern Pennsylvania Transportation Authority, which manages public transport in Philadelphia and surrounding counties, the Orange County Employees Retirement System in California and the Louisiana Sheriffs’ Pension and Relief Fund, a pension plan for sheriffs and their families in Louisiana.
Wells Fargo also said in today’s filing that it may record losses of $1.8 billion more than its current representations and warranty reserve of $1.2 billion. Losses are dependent upon the economy and “investor demand strategies,” among other factors, the bank said in the filing.
“Because of the uncertainty in the various estimates underlying the mortgage repurchase liability, there is a range of losses in excess of the recorded mortgage repurchase liability that are reasonably possible,” the bank said.
The lender also said that the high end of estimated litigation losses could be $1.6 billion beyond the reserve already set aside, down from $1.7 billion in the first quarter.