Minnesota Appeals Court said the bank knowingly put nonprofits' funds at risk.
Four Minnesota nonprofits have won a key victory in their quest to collect more than $41 million in court damages from Wells Fargo & Co. over its mishandling of their investments.
The Minnesota Appeals Court on Monday upheld a 2010 jury verdict that Wells Fargo committed consumer fraud and breached its fiduciary duty to three charitable foundations and a state-chartered insurer. During the 2008 financial crisis, the groups got trapped in tanking, high-risk investments that the bank had portrayed as conservative. The losses were felt by groups across the Twin Cities other than those directly affected, since many smaller charities and programs relied on support from the organizations hit by the losses, which scaled back their giving after the financial setback became apparent.
In its ruling, a three-judge panel rejected every one of Wells Fargo's arguments for tossing out the verdict along with a judge's post-trial ruling that boosted the bank's total obligation to $54 million by ordering it to pay the nonprofits' legal fees.
The bank still can seek to appeal the case to the state Supreme Court -- a step that would further delay payouts to the nonprofits.
"We're very disappointed in the court's ruling and we will consider a further appeal," said Laura Fay, a spokeswoman for Wells Fargo.
The affected charities are the Minneapolis Foundation, a nearly century-old institution that supports community programs; the Minnesota Medical Foundation, which funds medical research at the University of Minnesota; and the Robins, Kaplan, Miller & Ciresi Foundation for Children, the giving arm of a Minneapolis law firm that also filed the suit. The fourth nonprofit is the Workers' Compensation Reinsurance Association, a state-chartered reinsurer for worker injuries.
A Ramsey County District Court jury in June 2010 awarded the nonprofits $30 million in damages for consumer fraud and breach of fiduciary duty. The interest on the unpaid award and a court order requiring the bank to return its original management fees bring the total damages to about $41.2 million. The Ciresi law firm stands to collect an additional $12.8 million from the bank in fees and costs, and possibly more as the case continues.
At the trial, litigator Mike Ciresi produced evidence from Wells Fargo's files that showed it knew the investment program, known as securities lending, carried more risk than it let on.
"The evidence was overwhelming," he said. "The bank was found guilty of fraud, breach of fiduciary duty and that they raided a client's bond account that was totally unrelated to securities lending to make up the losses they caused. One might ask, 'Is that a bank you would trust?' I'll let the public answer that."
The appeals court panel, led by Judge Terri Stoneburner, also found that the evidence against the bank was strong. The record "more than adequately supports the jury's finding of breach of fiduciary duties," the opinion said. A fiduciary duty is a legal requirement to put clients' interests first.
Wells Fargo had argued it didn't have such a duty because of the wording of a contract the nonprofits signed. But the trial judge, and now the appeals court, have rejected that argument.
Securities lending is a way for institutions with large, stable stock portfolios to make extra money by "lending" the securities to stock brokers to cover such specialized transactions as selling stocks short.
Under Wells Fargo's program, the nonprofits lent securities to brokers, who handed over cash collateral. The bank promised to put the cash into conservative investments, earning a return for the nonprofits. Instead, some funds went into complex investments that the bank knew carried enormous risk and lost value in 2008, according to the appeals court opinion.
The potential bank payouts apparently will compensate the nonprofits for the losses, although attorneys declined to comment in detail because the case is pending. And the longer the case goes on, the more the bank would pay. The annual interest on the nonprofits' award is a state-mandated 10 percent, which is about $250,000 each month. Interest accrues separately on the unpaid legal fees.
Wells Fargo's Fay said in an e-mail to the Star Tribune that the bank still believes the investments for its clients in the securities lending program "were appropriate and in accordance with investment guidelines. 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 securities lending program during very difficult economic conditions."
Wells Fargo sold its securities-lending business to Citigroup last year. But the bank still faces three other Minnesota lawsuits over the program, including one that was certified as a federal class-action last month.
David Shaffer • 612-673-7090