News Column

Wells Fargo will pay $62.5 million to settle suit over securities lending

May 30, 2014

By Jennifer Bjorhus, Star Tribune (Minneapolis)

May 30--Wells Fargo & Co. has agreed to pay $62.5 million to settle class action claims by a group of retirement funds that the bank breached its fiduciary duty and engaged in fraud in its securities lending program.

The settlement announced Friday is the latest finale in a series of high-stakes cases against the bank over a largely defunct program that was managed out of Minneapolis.

The agreement now heads to a U.S. District Judge Donovan Frank in St. Paul for preliminary approval. A hearing is set for June 5.

Wells Fargo was accused of playing fast and loose with the multibillion-dollar securities lending program, which the plaintiffs said was sold to them as a very conservative vehicle for making a little extra money to cover expenses. Instead, between 2005 and 2008 Wells Fargo managers were making risky bets on complicated and frequently illiquid investments, parking client money in such things as structured investment vehicles run by hedge funds and pools of subprime mortgages. During the financial crisis, many of the deals went toxic and cratered.

The plaintiffs include the City of Farmington Hills Employees Retirement System, a Michigan pension fund; the board of trustees of the Arizona State Carpenters Pension Trust Fund; and the Arizona State Carpenters Defined Contribution Trust Fund.

Attorneys for the retirement funds have asked for up to one-third of the settlement as payment, plus an additional amount up to $2.45 million for litigation expenses.

In an e-mailed statement, the San Francisco-based bank said it was pleased to reach a settlement.

"Wells Fargo was focused at all times on serving our clients' interests and we worked very hard and responsibly to achieve the best results for all of the participants in the program during very difficult economic conditions," the bank said. "This conservative approach resulted in plaintiffs' Wells Fargo Securities Lending portfolios having minimal losses of five percent or less, compared to substantial losses experienced by other investors during the height of the financial crisis."

Two other investor lawsuits over the bank's program went to trial.

Wells Fargo lost the first in 2012 after a jury trial in Ramsey County District Court and awarded a total of $57 million to a group of Twin Cities charitable foundations. It won the second one last year in federal court in St. Paul following a jury trial.

Wells Fargo marketing its securities lending program for years to big institutional investors, such as foundations, pension funds and insurance companies. In it, the bank would lend out the securities the clients held to third-party broker-dealers. The bank received cash collateral for lending the securities to the brokers, invested the money and split the returns with the clients. It was sold as a way for the institutional investors to make a little extra money to offset the expense of the bank maintaining their portfolios.

As with the previous case, the plaintiffs were divided into two groups: those covered by ERISA and non-ERISA plaintiffs. The ERISA plaintiffs were only allowed to bring one claim, which was breach of fiduciary duty. The non-ERISA plaintiffs brought multiple claims including violating the Minnesota Consumer Fraud Act.

Jennifer Bjorhus -- 612-673-4683


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Source: Star Tribune (Minneapolis, MN)

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