Finding that Wells Fargo breached its fiduciary duty and engaged in fraud, a jury in St. Paul on Wednesday awarded $29.9 million in damages to four nonprofits that lost money in what the bank pitched as a safe investment program.
The 10-member jury took just a day to reach the unanimous verdict after a six-week trial in Ramsey County District Court that produced eight boxes of documents, including many internal bank memos, e-mails and handwritten notes.
The bank still could face punitive damages, which could vastly exceed the $29.9 million award. Attorneys for both sides will present their arguments Thursday, and the jury will deliberate for a second round.
The case has been closely watched by attorneys across the country, including those representing other clients who lost money in similar investment programs. While similar disputes were settled out of court, with banks agreeing to make good some of the losses, this was the first such case to go to trial.
The award was considerably less than what was sought by the plaintiffs, the Minneapolis Foundation, the Minnesota Medical Foundation, the Robins Kaplan Miller & Ciresi Foundation for Children and the Minnesota Workers' Compensation Reinsurance Association.
Their attorney, Mike Ciresi, had argued Tuesday for more than $400 million in damages for a range of alleged wrongs, including "conversion" of the nonprofits assets, intentional fraud, breach of contract and negligent misrepresentation, none of which the jury found.
But Wells' attorney Robert Weinstine said in closing arguments the bank shouldn't pay any damages. Though the nonprofits are down $14.1 million, he said, it was a regrettable consequence of the credit crisis that struck three years ago. He accused the nonprofits of seeking a windfall.
Attorneys for both sides were subdued as the verdict was read in the courtroom of Judge M. Michael Monahan shortly before 5 p.m. Wednesday.
The jury determined that Wells Fargo breached its fiduciary duty to its clients. During jury instruction, Monahan told the jurors that fiduciary duty meant the bank must operate in the best interests of its clients with good faith, loyalty, integrity and full disclosure.
More than half of the total damages -- $16 million -- was awarded for violation of the Minnesota Consumer Fraud Act. The jury was asked, "Did Defendant Wells Fargo provide false information or use a deceptive practice in the course of selling the securities lending services?" Jurors answered yes on the verdict form.
In a statement, Wells Fargo claimed partial victory. "We are pleased that the jury denied the plaintiffs the amount of damages they were seeking," the bank said, adding that the verdict "validated" its position that there was no breach of contract or conversion.
The low-profile investment technique at the heart of the trial is called securities lending. It's a method to earn pennies on the dollar with otherwise idle securities in the portfolios of institutional investors.
Under the program, banks like Wells Fargo lend securities, mostly stock, owned by clients to large brokers who use the shares for short sales and other specialized trading. In exchange for the loaned shares, the brokers hand over cash collateral worth 102 percent of the value of the securities. The bank invested the cash, earning small gains that are shared with the clients.
These investments usually are conservative and safe, but the nonprofits argued that Wells Fargo adopted a risky strategy that proved vulnerable during the credit crisis. Two of the bank's investments linked to the housing market defaulted, and one of the brokers used by Wells Fargo, Lehman Brothers, filed for bankruptcy.
The lawsuit alleged that Wells Fargo made it difficult for the clients to withdraw their funds without depositing additional sums to cover the losses.
The four nonprofits sued in late 2008. Charities and other groups that rely on those nonprofits have since said that they've found their grants reduced or cut off altogether as a result of the losses.
The $407 million sought in damages represented the plaintiffs' total investment in securities lending, not just their losses.
The plaintiffs' case relied heavily on internal Wells Fargo reports, e-mails and even handwritten notes on legal pads to bolster their assertion that Wells Fargo purportedly strayed from a safe investment strategy and fretted over what to tell clients.
Witnesses included retired Wells Fargo Chairman Richard Kovacevich and current Chairman and CEO John Stumpf. Both testified that they knew nothing about the situation in the securities lending program.
The bank was adamant in its defense that investment guidelines were followed and clients were always liable for losses.
Staff writer Pat Pheifer contributed to this report. David Phelps 612-673-7269