Continued: Four big clients sue Wells Fargo over investment loss

A state-chartered insurance fund and three large foundations allege that a unit of Wells Fargo & Co. "systematically and intentionally" defrauded them by placing millions of their investment dollars in risky, mortgage-backed investments instead of conservative money market funds.

In a lawsuit filed Wednesday in Ramsey County District Court, the Minnesota Workers' Compensation Reinsurance Association (WCRA), the Minnesota Medical Foundation, the Minneapolis Foundation and the Robins, Kaplan, Miller & Ciresi Foundation for Children asked a judge to find Wells Fargo in violation of state consumer fraud and unlawful trade practices laws and to pay unspecified damages and return several hundred million dollars in related securities.

The plaintiffs, in a suit filed by consumer lawyer Mike Ciresi, charge that they are among many institutional clients nationally who were misled by Wells Fargo through a securities-lending operation that invested "billions of dollars in risky and/or illiquid securities ... in a securities-lending program that it marketed and misrepresented to its clients as conservative and safe."

So far, estimated losses for the four plaintiffs appear to be more than $16 million on paper. The suit, served on Wells Fargo last week but not filed until Wednesday, comes after months of negotiations failed to achieve an agreement. It also comes amid a global financial storm through which Wells Fargo has navigated successfully, by most accounts.

Wells Fargo said in a prepared statement after the suit was filed: "We dispute these allegations. Like all investments, the investors bear the risk of their investment losses. We intend to vigorously defend this action."

Last month, the League of Minnesota Cities Insurance Trust filed a similar lawsuit against Wells Fargo in federal court with similar allegations.

Like many financial institutions, Wells Fargo has a securities-lending department that makes money for itself and clients by lending the securities of consenting clients, such as the Minnesota Medical Foundation and the Minneapolis Foundation, to brokers who borrow the securities to use in normal trading activities such as options contracts and short sales of stock. To protect Wells Fargo clients, brokers typically post collateral, often cash, of up to 105 percent of the value of the loaned securities, and they also pay interest on their borrowings. The stock-loan department typically invests the cash collateral and shares the proceeds with the client in a move to boost the return beyond what's provided by the original securities.

According to the lawsuit, Wells Fargo promised to invest the cash collateral in money market instruments, among the most conservative of investments. Instead, Wells Fargo invested at least some of the several hundred million dollars in "risky securities" that have declined markedly in value since 2007, the suit said. Moreover, Wells Fargo issued "audited financial statements with false information and reported artificially inflated values for the collateral investments."

The lawsuit contends that it took months before Wells Fargo admitted the problem investments in late 2007 and urged investors to hang on and to not redeem their investments, which would convert a paper loss to a real loss.

The biggest player in the lawsuit is the WCRA, a provider of reinsurance to insurers and self-insured employers. The agency said it had nearly $300 million invested in the Wells Fargo collateral investment portfolio when it began to decline in value last year. The agency believes it has unrealized losses of nearly $14 million. The agency and other plaintiffs say Wells Fargo has refused to make good on the losses or to redeem the underlying securities.

The Minneapolis Foundation said its average loan balance is about $93 million and that it has unrealized losses of $2.3 million. The Minnesota Medical Foundation says its loan balance is down about $1 million while the Robins Kaplan foundation claims that its balance is down about $100,000.

The lawsuit charges Wells Fargo with violating its fiduciary obligation to clients.

Wells Fargo representatives cite the historic safety of their securities-lending practices, but note that the collapsed market for preferred investment vehicles took them by surprise, according to the complaint.

The suit blasts public statements of Wells Fargo executives who have said the bank avoided most of the pain of the collapse of the subprime mortgage market and derivatives-market collapse by avoiding most of the risky practices.

"Behind Wells Fargo's closed doors, however, another reality exists," according to the complaint.

Neal St. Anthony • 612-673-7144