Wells Fargo Lending Program Didn’t Cheat Investors

Wells Fargo & Co. (WFC) didn’t withhold material information about its securities-lending program from institutional investors and isn’t liable for any losses, a lawyer for the bank said at the end of a trial.

Blue Cross Blue Shield of Minnesota and 11 other plaintiffs sued Wells Fargo in 2011, alleging the company marketed a risky program as safe and cost investors millions of dollars. Wells Fargo has denied misleading the investors and blamed any losses on the financial crisis.

“Nothing Wells Fargo did or did not do harmed investors in this case,” Bart Williams, an attorney for the bank, said in closing arguments today in federal court in St. Paul, Minnesota. “You can find yourself in a position, as Wells Fargo did, where all of a sudden your securities are illiquid, you can’t sell them.”

Wells Fargo misrepresented the risk and breached its fiduciary duty to the institutional investors, causing $8.2 million in losses, Mike Ciresi, an attorney for the plaintiffs, said in his closing argument today.

“These are nonprofits who have missions and $8 million is an enormous loss,” he said. Wells Fargo “put its own interest ahead of the plaintiffs,” Ciresi said.

Jury Deliberations

The jury is set to begin deliberating tomorrow. A separate phase on punitive damages will follow if the jury finds against Wells Fargo on the claims of breach of fiduciary duty, fraud or deceptive trade practices.

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

Wells Fargo is scheduled for a third trial on the same claims in March in a class action brought in federal court on behalf of about 100 other institutional investors. Two more cases are pending in federal court, including one by Minnesota Life Insurance Co. seeking $40 million in damages. Those cases are also set for trial next year.

Nonprofit Groups

The trial before U.S. District Judge Donovan W. Frank involves allegations by Blue Cross Blue Shield of Minnesota, the El Paso County Retirement Plan and 10 other nonprofit groups seeking reimbursement of losses and punitive damages. Frank will hold a separate nonjury hearing to determine losses to retirement funds operated by the nonprofits.

“The allegations made by the plaintiffs are without merit,” Laura Fay, a spokeswoman for the bank, said in an e-mailed statement when the trial opened in June. “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 most of its securities-lending program to Citigroup Inc. in 2011, Fay said. Wells Fargo remains liable for any damages awarded in the lawsuits, she said.

Under the securities-lending program, Wells Fargo held its clients’ securities in custodial accounts and made temporary loans of the instruments to brokers.

Recall Right

The brokers used the securities to support 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. Brokers borrowing the securities were required to post collateral, primarily cash, to use the instruments, court filings show.

“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.

Wells Fargo “heavily invested” the collateral in risky or highly illiquid securities such as structured investment vehicles and mortgage-backed assets. The investors contend that instead of making a small profit, they lost money.

‘Unlawful Conduct’

Wells Fargo engaged in “systematic, intentional and unlawful conduct -- including breaches of fiduciary duty, breaches of contract, and fraud,” the plaintiffs said in the complaint. Wells Fargo continued to pursue the investments as they began to falter, they claimed.

“Wells Fargo said it would only invest in the safest securities,” Ciresi said in his closing argument today. “It was supposed to be like a money-market fund.”

The allegation of consumer fraud “is simply not supported by the evidence,” Williams, the Wells Fargo lawyer, told the jurors today.

“Wells Fargo did not commit fraud or negligence,” Williams said. “Care and prudence was exercised every step of the way.”

The lawsuit particularly targets Wells Fargo’s investments in structured investment vehicles and Lehman Brothers Holdings Inc. Two of the SIVs in which Wells Fargo had heavily invested, Cheyne Finance SIV and the Stanfield Victoria SIV, went into default and subsequently into receivership. Lehman sought bankruptcy protection from creditors in 2008 partly as a result of losses tied to subprime mortgages.

“All of these securities, Cheyne, Lehman and Victoria, had the highest ratings they could have,” Williams told jurors today. “The notion that Lehman Brothers, that had been around for more than 100 years, was going to disappear, occurred to no one.”

The Minnesota 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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