Wells Fargo securities lending case goes to trial

The bank says its practices were reasonable and conservative, but investors who lost big in a securities lending program disagree.

 

A group of 11 jurors will decide whether Wells Fargo & Co. grossly mismanaged a former securities lending program and lied about its safety, or whether the financial calamity that followed the boom was to blame for millions of dollars in losses.

Lawyers painted vastly different pictures of the multibillion-dollar program in opening statements Tuesday in federal court in St. Paul before U.S. District Judge Donovan Frank. The San Francisco-based bank marketed the program to institutional investors such as pension funds.

The investors accuse Wells Fargo of fraud in playing fast and loose with what was supposed to be a very conservative investment program. They assert that the bank failed to properly monitor and manage the collateral investments, then lied to participants about the performance while investments melted down.

Of the total securities in the portfolio in the fall of 2007, nearly 15 percent were distressed or had defaulted.

The investors say that instead of investing funds in safe investments such as high-grade money market instruments, as they were led to believe, managers were making riskier bets on complicated instruments such as structured investment vehicles, or SIVs.

One such SIV, Cheyne Finance, was run by a London hedge fund and invested in subprime mortgages. Cheyne was put into a receivership.

“Mr. Stumpf runs the bank,” Minneapolis lawyer Michael Ciresi said, referring to Wells Fargo CEO John Stumpf. “He didn’t even know what an SIV was. He had to go to Wikipedia.”

Wells Fargo has denied the allegations. It sold the majority of its ClearLend securities lending business to Citigroup Inc. in 2011 and has largely exited the securities lending business.

In court Tuesday, a lawyer for Wells Fargo characterized the program’s investments as “reasonable, safe and conservative” at the time. The unit had a good track record, he said, until the financial crisis — and even then the losses were a small percentage of the overall program.

“Nothing Wells Fargo did or did not do harmed investors,” said Bart Williams, a Los Angeles lawyer for Wells Fargo.

“The Wells Fargo securities lending program, and the people who ran it, performed at an extraordinarily high level at times of the most unthinkable stress,” Williams said. “We will prove that Wells Fargo’s primary interest at all times was the welfare and best interest of all the members and participants in the securities lending program.”

Investors were clearly warned in writing that they could suffer some losses, he said.

The case is one of at least four ongoing lawsuits in Minnesota over the bank’s former multibillion-dollar securities lending program, and the second jury trial in Minnesota over the program.

Wells Fargo lost an identical case in 2010 after a six-week jury trial in Ramsey County District Court. In that case, also brought by Ciresi, jurors determined the bank breached its fiduciary duty and engaged in fraud. They awarded nearly $30 million in damages to four charitable foundations, with an additional award of damages and attorneys’ fees and interest bringing the total to about $57 million.

Wells Fargo appealed, but the verdict was upheld.

One of the other lawsuits over the program that Wells Fargo is facing in Minnesota, filed by the City of Farmington Hills Employee Retirement System in 2010, is set for trial Sept. 16. Judge Frank certified that lawsuit as a class action last year.

Wells Fargo’s securities lending program involved the securities, mostly stock, that the institutional investors kept in custodial accounts at the bank. They authorized Wells Fargo to lend the securities to borrowers, typically third-party brokers who used the shares for their own trading.

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