Wells Fargo Must Face Class Action Over Securities Lending

Wells Fargo & Co. must face a group lawsuit by institutional investors that claim the bank marketed a risky securities-lending program as safe.

U.S. District Judge Donovan W. Frank in St. Paul, Minnesota, certified the suit as a class action today, finding that common issues predominated, including whether Wells Fargo “knew or should have known that the investments it selected did not comport with investment mandates.” These issues “will likely turn on substantially the same evidence for the class as a whole,” Frank said in a 21-page decision.

The lawsuit, filed in 2010 by the City of Farmington Hills Employees Retirement System, a Michigan pension fund, on behalf of more than 100 other institutional investors, claimed breach of fiduciary duty and fraud. The investors sought permission to pursue the case against Wells Fargo as a group.

Wells Fargo “touted” its securities-lending program “as a highly-secure way for its institutional clients to maximize portfolio returns,” according to the complaint. Instead, the pension fund said, “Wells Fargo invested a substantial portion of the collateral in extremely risky securities.”

The investors also claimed that Wells Fargo concealed investment performance from class members to prevent them from exiting the securities-lending program.

‘Categorically Denies’

Wells Fargo will “appeal the decision immediately,” Laura Fay, a spokeswoman for the San Francisco-based company, said in an e-mail. “Wells Fargo categorically denies the allegations made in this lawsuit and will vigorously defend.”

Securities lending is a practice whereby investors lend stock or other investments to banks or brokers. In return, the bank places cash collateral on behalf of the investor into short-term investments until the shares are eventually returned. It had been traditionally viewed by pension funds and foundations as a low-risk investment.

The securities lending program had 132 participants, Peter Binkow, lead attorney for the plaintiffs, said in an interview. Several are suing on their own, he said.

A class action is superior to multiple individual suits in promoting “the interests of judicial economy and efficiency,” Frank said today. “Class members who may not otherwise have the means to litigate their claims will likely benefit greatly from a class action, and a class action will ensure that class members who are otherwise unaware that they possess a claim will have their rights represented.”

Lost Verdict

Wells Fargo lost a jury verdict in 2010 of about $30 million to four Minnesota nonprofits making similar claims about the securities-lending program. The St. Paul state court verdict has been appealed, Fay said.

In that case, the Minnesota Workers’ Compensation Reinsurance Association and three charitable foundations sued in 2008, claiming the bank failed to disclose the deteriorating value of the investments until it was too late and blocked them from getting out of the program.

The class action is City of Farmington Hills Employees Retirement System v. Wells Fargo Bank NA, 10-cv-04372, U.S. District Court, District of Minnesota (St. Paul).