Wells Fargo Wins Trial Over Securities-Lending Losses

Wells Fargo & Co. was cleared by a jury of claims it misrepresented a securities-lending program to Blue Cross Blue Shield of Minnesota and other institutional investors and a demand it pay for $8.2 million of losses.

A federal court jury in St. Paul, Minnesota, yesterday returned a verdict rejecting allegations in the plaintiffs’ 2011 lawsuit that the bank marketed a risky program as safe, leading to losses the bank blamed on the financial crisis alone.

“The verdict validates that Wells Fargo was focused at all times on serving our clients’ interests,” the lender said in a post-verdict statement. Wells Fargo sought “to achieve the best results for all participants in the securities lending program during extremely difficult economic conditions.”

Plaintiffs’ lawyer Michael V. Ciresi declined to comment.

The case is one of at least five filed in Minnesota against Wells Fargo over the securities-lending program, which was based in the state. Under the program, Wells Fargo held its clients’ securities in custodial accounts and made temporary loans of the instruments to brokers. The brokers used the securities to support trading activities such as short sales and option contracts.

Recall Right

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, according to court filings.

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.

The current trial before U.S. District Judge Donovan W. Frank involved 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. It began on June 18.

Frank will hold a separate nonjury hearing to determine losses to retirement funds operated by the nonprofits.

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

Illiquid Securities

Wells Fargo instead moved the collateral into risky or illiquid securities such as structured investment vehicles and mortgage-backed assets, generating losses instead of a small profit, Blue Cross said.

The plaintiffs accused Wells Fargo of breach of fiduciary duty, breach of contract and fraud.

The bank said yesterday the program’s losses averaged about 3 percent while markets were down as much as 50 percent during the peak of the financial crisis.

The company sold most of its securities-lending program to Citigroup Inc. in 2011, Laura Fay, a spokeswoman for Wells Fargo, said in June. The bank remains liable for any damages awarded in the lawsuits, she said.

The bank 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.

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).

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