Wells Fargo Sold Risky Program as Safe, Lawyer Says

Wells Fargo & Co. (WFC) marketed a risky securities-lending program as safe and cost institutional investors millions of dollars in losses, a lawyer said at the start of trial.

“Securities lending was represented by Wells Fargo to be a minimal or no-risk investment,” Mike Ciresi, a lawyer for Blue Cross Blue Shield of Minnesota and 11 other plaintiffs, said today in his opening statement in federal court in St. Paul.

The case is one of at least five against Wells Fargo over its securities lending. The suits were brought in Minnesota, where Wells Fargo’s securities-lending program was located. The San Francisco-based bank lost the first to go to trial in 2010, when a state court jury awarded Minnesota Workers’ Compensation Reinsurance Association and three charitable foundations about $30 million. That judgment was upheld on appeal.

Wells Fargo is scheduled for a third trial on the same claims from different plaintiffs in September, brought on behalf of a class of about 100 institutional investors. Two other cases are also pending in federal court, including one by Minnesota Life Insurance Co. seeking $40 million in damages.

The trial before U.S. District Judge Donovan W. Frank in St. Paul covers allegations from Blue Cross Blue Shield of Minnesota, the El Paso County Retirement Plan and 10 other nonprofit groups seeking reimbursement of losses plus punitive damages. A jury of eight women and four men was selected yesterday.

Custodial Accounts

Under the program, Wells Fargo held its clients’ securities in custodial accounts and would make temporary loans of these securities to brokers. The brokers would use these securities to support their trading activities, such as short sales and option contracts. The clients “had the right to recall their loaned securities at any time, for any reason,” according to the complaint. The brokers borrowing the securities posted collateral, primarily cash.

“Wells Fargo promised to invest the cash in conservative investments, which Wells Fargo repeatedly represented would be ‘high-grade money market instruments’ where the ‘prime considerations’ would be ‘safety of principal and liquidity,’” Blue Cross said in court papers filed Sept. 11.

‘Heavily Invested”

Wells Fargo, they claim, “heavily invested” the collateral in risky or highly illiquid securities, such as structured investment vehicles and mortgage-backed assets. Instead of gaining a small profit, the investors lost money, according to the lawsuit.

Wells Fargo engaged in “systematic, intentional and unlawful conduct -- including breaches of fiduciary duty, breaches of contract, and fraud -- in a multibillion-dollar securities-lending program,” the plaintiffs said in the complaint.

The alleged misconduct included “a pattern of improper investments in risky securities,” failure to disclose material information about the investments to the plaintiffs, and a coverup of wrongful actions, the plaintiffs said. They said Wells Fargo continued to pursue the investments as they began to falter.

“Wells Fargo promised a safe and small return to help offset the fees the bank charged as custodian and safekeeper of clients’ assets,” Ciresi told the jury today.

Wells Fargo has denied the claims, blaming any losses on the financial crisis.

‘Highly Rated’

“The allegations made by the plaintiffs are without merit,” Laura Fay, a spokeswoman for the bank, said in an e-mailed statement. “The investments made by Wells Fargo on behalf of clients in the securities-lending program were in accordance with investment guidelines and were highly rated and suitable at the time of purchase.”

The company sold the majority of its securities-lending program to Citigroup Inc. in 2011, Fay said. Wells Fargo remains liable for any damages sought in the lawsuits, she said.

The case is Blue Cross Blue Shield of Minnesota v. Wells Fargo Bank, 11-cv-02529, U.S. District Court, District of Minnesota (St. Paul).

To contact the reporters on this story: Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net; Beth Hawkins in Minneapolis at hawkins@visi.com.

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

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