Judge unloads on Wells Fargo with order on investment program

Wells Fargo & Co., already facing a $29.9 million jury verdict for fraud and breach of fiduciary duty to four Minnesota nonprofits, must pay fees, costs and interest that could add up to $15 million or more, a judge has ruled.

Ramsey County District Judge M. Michael Monahan, in an order filed Wednesday, also took the nation's fourth-largest bank to task for "years of management complacency, if not hubris" that resulted in undisclosed risks and eventually losses by customers of the bank's securities-lending investment program.

The judge said that the nonprofits' lawyers, led by Minneapolis litigator Mike Ciresi, provided a "public benefit" by bringing the bank's wrongdoing to light. Thus, Monahan said, the bank must pay the plaintiffs' attorneys fees and costs, which Ciresi's firm estimated at more than $15 million. The judge put off setting exact amounts.

Among the nonprofits harmed in their dealings with the bank were two of the state's best-known charities -- the Minneapolis Foundation, which supports a wide array of community programs, and the Minnesota Medical Foundation, which aids medical research at the University of Minnesota. The case has been closely watched by other institutional investors that lost money in the bank's securities-lending program.

As part of Wednesday's ruling, the San Francisco-based bank also must return to the Minnesota nonprofits an unspecified, but possibly significant, amount in fees that it charged to manage the investment program, plus interest. The bank must further pay interest back to 2008 on the $29.9 million verdict, which could add up to millions.

The judge overturned part of the jury verdict that had favored the bank, ordering a new trial over allegations that Wells Fargo improperly seized $1.6 million from a bond account of children's charity as the securities-lending program faltered. The judge denied Ciresi's motion for a new trial over punitive damages.

Laura Fay, a bank spokeswoman, said that Wells Fargo was pleased by the denial of new trial over punitive damages but strongly disagreed with the rest and will appeal. "We are confident that Wells Fargo acted prudently and in accordance with our clients' best interests at all times," Fay said in a written statement.

Case closely watched

The case is the first of at least three lawsuits against Wells Fargo over losses by institutional investors that participated in securities lending. Such programs usually offer a safe way to earn extra income on stocks and other securities that investors hold for long periods.

Banks like Wells Fargo lend clients' securities, mostly stocks, to Wall Street brokers who need them temporarily to conduct short sales and other transactions. In exchange, the borrowing brokers hand over cash collateral, which the bank invests, earning small gains for the clients lending out their securities.

But Wells Fargo's investments in asset-backed securities carried risks that led to losses in the credit crisis beginning in 2007. As losses mounted, Wells Fargo made it difficult for some investors to extract themselves from the program, so they sued.

Terry Fruth, a Minneapolis attorney who has been watching the case closely on behalf of his clients, said Monahan's post-trial order could help other investors prove similar claims against the bank.

The two other Minnesota plaintiffs were the Minnesota Workers' Compensation Reinsurance Association, which helps protect insurers against catastrophic job-related injuries, and the Robins Kaplan Miller & Ciresi Foundation for Children, a charity supported by Ciresi's law firm.

Monahan's ruling was a response to post-trial motions by both sides. He said he agreed with the jury's key findings.

"Wells Fargo breached its duty of full disclosure by not adequately disclosing that it was changing the risk profile of the securities lending program, that it breached its duty of impartiality by favoring certain participants over other participants, and that it breached its duty of loyalty by advancing the interest of the borrowing brokers to the detriment of one or more of the plaintiffs," the judge wrote.

Executives 'almost childlike'

During the 10-week trial in St. Paul, the jury heard recorded testimony from Wells Fargo Chairman and CEO John Stumpf and retired Chairman Richard Kovacevich, who said they knew nothing about problems in the securities-lending program in 2007. Stumpf said he didn't know the bank even had such a program.

The judge said the evidence was clear that "Wells Fargo was fully aware of the increased risk it was injecting into the securities lending program, that its line managers were not reasonably managing that risk, and that its actions and inactions had the potential for inflicting enormous harm on plaintiffs."

When the program got into trouble, the judge said, "Wells Fargo's attitude and conduct ... was primarily to shield itself, and its favored customers, from the consequences."