Wells Fargo’s Directors Ordered to Face Foreclosure Claims

Directors of Wells Fargo & Co., the largest U.S. mortgage lender, must face investors’ claims the bank failed to properly disclose details of its foreclosure practices to government investigators, a judge ruled.

U.S. District Judge Susan Illston in San Francisco rejected Wells Fargo’s request to dismiss shareholders’ allegations that directors wrongfully failed to disclose their opposition to a government probe of the bank’s mortgage lending and foreclosure policies.

“The fact that the company was allegedly stymieing the government regulators is certainly material to stockholders when considering whether to authorize a more serious internal investigation,” Illston said in Feb. 9 ruling.

That same day, Wells Fargo and four other banks reached a $25 billion settlement with state and federal officials to end a probe of abusive foreclosure practices stemming from the collapse of the U.S. housing bubble.

The accord included $20 billion in various forms of mortgage relief plus payments of $5 billion to state and federal governments. Wells Fargo officials said the bank’s share of the accord would total $5.3 billion. Other banks involved in the settlement included JP Morgan Chase & Co., Bank of America Corp. and Ally Financial Inc.

“The plaintiff’s allegations are false, said Wells Fargo spokesman Ancel Martinez in an e-mailed message. ‘‘Our directors acted appropriately in all respects and we look forward to our day in court.’’

Continuing Litigation

Even after agreeing to resolve the government’s investigation into banks’ handling of foreclosures, which included so-called robo-signing of mortgage documents, lenders still face years of litigation and billions of dollars in liability over their practices.

Government officials can pursue claims related to the packaging of loans into securities, criminal-enforcement actions and fair-lending violations, U.S. Attorney General Eric Holder said last week. The banks also face lawsuits from state attorneys general and investors.

Lawyers for a pension fund and trust that invested in Wells Fargo filed a so-called derivative suit against the bank alleging directors misled investors about their opposition to the government investigation of the company’s foreclosures and the need for further internal probes of Well Fargo’s practices.

Shareholders don’t seek individual awards in derivative suits. Any recovery in the case from insurance covering directors and officers will go into the bank’s coffers.

Opposition Undisclosed

Wells Fargo officials misled investors in proxy statements about its efforts to cooperate with government investigators to persuade shareholders to vote down a proposal calling for further internal reviews of the bank’s foreclosure practices, lawyers for the funds said in the suit.

The investors’ suit ‘‘sufficiently alleged that defendants breached their duty of loyalty by failing to disclose that, in the course of government investigations, Wells Fargo had opposed” investigators’ requests for information and “refused to provide details concerning the company’s policies,” Illston concluded in her 13-page ruling.

“If, as alleged, defendants did not disclose material information with the board’s control,” directors could be found to have violated their “duty of loyalty to the company,” she added.

Illston dismissed investors’ claims that Wells Fargo officials engaged in “abuse of control” and “gross mismanagement” by failing to disclose their attempts to oppose the government investigation and that bonuses given to executives, such as Chief Executive Officer John Stumpf, amounted to “corporate waste.”

The case is Pirelli Armstrong Tire Corp. Retiree Medical Trust v. John G. Stumpf, C 11-2369-SI, U.S. District Court, Northern District of California (San Francisco).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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