Wells Fargo & Co. has been ordered to pay tens of millions of dollars to a community foundation and three charitable foundations in Minnesota that claimed the bank marketed a risky securities-lending program as safe and then blocked them from getting out of the investments, Bloomberg BusinessWeek reports.
The plaintiffs — the Minnesota Workers' Compensation Reinsurance Association, the Minneapolis Foundation, the Minnesota Medical Foundation, and the Robins, Kaplan, Miller & Ciresi Foundation for Children — sued Wells Fargo in 2008, claiming the bank failed to disclose the deteriorating value of the investments until it was too late. According to the organizations, the bank promised to invest their funds in safe, liquid instruments, primarily money market funds. But instead, the plaintiffs argued, the funds were invested in riskier assets such as structured-investment vehicles and mortgage-backed scurities. As subprime-mortgage losses mounted in 2007, SIVs found investors increasingly unwilling to buy their debt out of concern it was linked to souring home loans.
Although the four plaintiffs sought more than $400 million in damages, a St. Paul state court jury awarded $30.1 million in compensatory damages to the organizations, finding Wells Fargo liable for breach of fiduciary duty and violations of the Minnesota consumer fraud act. The jury will consider punitive damages in a second phase of the trial that begins this week.
The suit is one of multiple complaints alleging U.S. banks purchased illiquid securities for clients. In September, the U.S. Securities and Exchange Commission announced that it is examining whether banks that engage in securities lending make adequate disclosures to pension-fund clients. Wells Fargo denied that it made any misrepresentations or pushed risky investments, blaming any losses on the financial crisis.
"The investments made by Wells Fargo on behalf of our clients in the securities lending program were in accordance with investment guidelines and were prudent and suitable at the time of purchase," Wells Fargo spokeswoman Laura Fay said in an e-mail to Bloomberg BusinessWeek. "We are pleased that the jury denied the plaintiffs the amount of damages they were seeking, which was radically above the investment losses incurred, and validated that there was no breach of contract or conversion by Wells Fargo Securities Lending."