Has Washington Mutual Been Buying Trouble?

The big bank is facing a pair of class actions

When Helen Wisner got a house call from a Washington Mutual Inc. (XWM ) representative last spring, she opened the door. After all, the 89-year-old had banked with Home Savings of America, bought by WaMu in 1998, for decades. An hour later, a financial adviser from WM Financial Services Inc., WaMu's brokerage arm, left with over $3000 in commissions, she claims. The representative had allegedly moved $70,000 in certificates of deposit--insured by the Federal Deposit Insurance Corp.--from Ms. Wisner's account into riskier bond funds. Wisner says she thought she was buying a no-risk investment from her bank. She isn't alone, according to a suit filed on Dec. 19. The suit alleges that WM Financial agents routinely prey on elderly WaMu customers, using records from WaMu's banking unit to locate customers with big balances. WaMu says it has not yet seen the suit, so it cannot comment.

Such allegations are surprising. On Dec. 5, CEO Kerry Killinger was lauded as "Banker of the Year" by industry trade paper American Banker. And analysts have gone out of their way to praise the bank's customer-friendly attitude and fast-growing revenue stream.

So which view of WaMu is correct? It's clear the company is enjoying phenomenal growth. Nevertheless, a string of disturbing allegations has cropped up recently. As the budding financial services giant has done a flurry of deals to acquire rivals throughout the country, including some with troubled business practices, it appears that problems at those units haven't always been resolved. The company says it has successfully managed its integration challenges.

Buying businesses to acquire customers has been a core strategy for WaMu. Since 1990, it has done more than 20 acquisitions, expanding into everything from lending to insurance to financial advice. In doing so, Killinger has transformed the tiny Seattle thrift into the nation's seventh-largest bank, the No. 1 home lender, and a manager of over 200,000 investment accounts. During that time, assets grew 25-fold, to $225 billion.

But with the expansion, it seems to have have picked up some problems. Allegations like Wisner's mirror ones from a previous lawsuit filed against Great Western, which WaMu later bought in 1997. Although WaMu said it had stamped out such practices against elderly clients, Michael Swick, an attorney from Milberg Weiss Bershad Hynes & Lerach, which is bringing the suit, believes they have been revived.

The complaints are not limited to the company's investment arm. Since WaMu bought Houston-based Bank United this year, Jenelle Welling, a Green Fauth & Jigarjian partner, alleges the bank has continued its practice of over-charging late fees. Her firm expects to file a national class action this month. WaMu spokesman Kevin Horn says the accusations are "inherited issues" that "are not in line with current business practices." Some analysts agree. Lawsuits may be just "one of the pitfalls of being an aggressive acquirer," says Bradley Ball, a financial services analyst with Prudential Securities. Having bought up numerous thrifts in the aftermath of the Savings & Loan crisis, he says, WaMu ended up with purchases that "came with some baggage."

But other glitches have arisen with more recent buys, too. This fall, thousands of former customers of PNC Mortgage, which was bought by WaMu in February, were surprised to receive threatening letters from their local taxman. Most homeowners' property tax is paid from an escrow account maintained by their mortgage lender. But when WaMu bought PNC, it neglected to fill in tax information for some 55,000 customers, so their taxes went unpaid.

According to Horn, the bank has straightened out all but 350 accounts. It has paid back taxes and is refunding customers for penalties. "As a company grows, problems will arise," he says. "What's important is how they solve the problem." True enough. But such recurring problems won't help Washington Mutual's sterling reputation.

By Heather Timmons in New York

Before it's here, it's on the Bloomberg Terminal.