In another legal setback for the bank, a federal judge in St. Paul said 12 of the bank's institutional clients can press claims of fraud.
For the second time this week, a court has handed Wells Fargo & Co. a major legal defeat over its allegedly fraudulent handling of stock-related investments for institutional clients.
A federal judge on Wednesday rejected all of the bank's arguments to throw out the most serious claims in a lawsuit by Blue Cross and Blue Shield of Minnesota, two other health care institutions, several pension funds, a college endowment fund and a charitable foundation.
All had been Wells Fargo clients only to find in 2007 and 2008 that they were caught in losing positions they blame on risky investments that the bank had long marketed as safely conservative.
U.S. District Judge Donovan Frank in St. Paul rejected the bank's broad dismissal request, clearing the way for a civil trial next January. At issue will be whether Wells Fargo engaged in fraud, misrepresentations and deceptive practices while breaching its duty to act in clients' best interests.
"The court finds that plaintiffs have sufficiently alleged the who, what, when, where and how of the alleged fraud ... [and] have detailed numerous alleged misrepresentations, the vast majority of which are contained in Wells Fargo's own corporate documents," the judge concluded.
Wells Fargo, in an e-mailed statement, said it was disappointed by the latest ruling and will defend the lawsuit vigorously against allegations that are "without merit."
The latest ruling was the second legal victory over Wells Fargo this week for a Minneapolis legal team led by attorney Michael Ciresi. On Monday, the Minnesota Appeals Court upheld a 2010 jury verdict of consumer fraud and breach of fiduciary duty by the bank -- a case also litigated by Ciresi. Four Minnesota nonprofits in that state court case stand to collect at least $41 million, and his firm is in line for $12.8 million in legal fees and costs, all from the bank.
Ciresi is best known as the lead attorney for state of Minnesota and a health insurer in a massive lawsuit against cigarette makers over the health effects of smoking that ended with a $6.5 billion settlement in 1998. The insurer Ciresi represented in that case, Blue Cross, is now his client again, suing one of the nation's largest banks.
Wells Fargo could lose tens of millions of dollars in the federal securities case if a jury reaches the same conclusion as the one in the 2010 Ramsey County case. The payout could balloon to the hundreds of millions of dollars if Ciresi successfully asserts a claim for punitive damages. In the 2010 case, however, Ciresi was unsuccessful in convincing a jury to sanction the bank with a $400 million punitive award.
The institutions suing in federal court include seven based in Minnesota and others in Colorado, Illinois, Michigan, Nebraska and Ohio. Besides Blue Cross, the group includes the Jerome Foundation, a St. Paul arts supporter, CentraCare Health System, whose operations include the St. Cloud Hospital, and the endowment fund for St. John's University and Abbey in Collegeville. Seven of the plaintiffs had invested retirement funds with Wells Fargo, including two union groups.
All of the institutions have large, stable stock portfolios. Wells Fargo offered them a program that promised to earn extra returns by "lending" the securities to stockbrokers, who temporarily need them to conduct specialized transactions such as selling stocks short.
The brokers who borrowed the securities handed over cash collateral to Wells Fargo. The bank promised to put the cash into conservative short-term investments, earning a return for the institutions. Instead, the lawsuit alleges, significant amounts went into complex "structured investment vehicles" that profited on the spread between long- and short-term interest rates -- until that strategy began to falter on the eve of the 2008 financial crisis.
Even then, the suit alleges, bank officials "continued to conceal the most damning information" about the tanking investments. Ciresi said in an interview that many bank e-mails and other internal documents revealing wrongdoing that were used in the first trial will again be offered in the federal case.
Wells Fargo's security-lending program, once a $26 billion investment pool with more than 100 institutional investors, was sold last year to Citigroup Inc. The bank defends the program.
"The investments made by Wells Fargo on behalf of clients in the securities lending program were in accordance with investment guidelines and were highly rated and suitable at the time of purchase," spokeswoman Laura Fay said in the statement.
Two similar federal lawsuits in Minnesota are pending against the bank, including one that has been certified as a class action. Ciresi said his clients opted to press ahead on their own rather than join the class action.
David Shaffer • 612-673-7090