Setting the stage for a lengthy and contentious trial, four nonprofit Minnesota institutions demanded more than $400 million Thursday from banking giant Wells Fargo asserting their funds were put at risk in the bank's specialized securities lending program that included "potentially very dangerous" investments.
In his opening statement before a jury in St. Paul, the nonprofits' attorney Mike Ciresi said evidence in the civil trial "will show not only negligence but gross negligence" as the bank shifted from conservative money-market-style investments to more exotic ones, including mortgage-backed securities.
Attorneys for Wells Fargo responded that the securities-lending program was the victim of the financial collapse in 2007 and 2008 that shook U.S. markets.
"This is an extremely hard-working group of [Wells Fargo] people who worked and worked and worked to minimize the losses their clients would incur," said Larry Hofmann, the bank's attorney for the case before Ramsey County District Judge M. Michael Monahan. "The plaintiffs have not taken responsibility for the losses in their accounts."
Hofmann said the program, in which the bank's clients loan securities to brokers for certain types of trades in return for cash collateral that is invested to produce small profits, had made money from its inception in 1983 until 2007.
"Only then did the plaintiffs say there was something wrong with the program," Hoffman told the jury of seven women and five men.
The trial is being watched by other institutional investors across the country who lost money in similar investment programs. Indeed, the courtroom was standing room only during opening statements Thursday.
The plaintiffs, including three charitable foundations, are the Minneapolis Foundation, the Minnesota Medical Foundation, the Robins Miller Kaplan & Ciresi Foundation for Children and the Workers' Compensation Reinsurance Association (WCRA).
The $407 million in damages sought by Ciresi does not reflect losses, but primarily consists of the balance of funds under the custodial care of Wells Fargo when the organizations asked for the money to be returned. Ciresi also has received court approval to seek punitive damages but did not address that topic in his opening statement.
In his presentation to jurors, Ciresi used a number of internal Wells Fargo documents, including e-mails, meeting minutes and handwritten notes, to support his case that executives who ran the securities lending program were ill-equipped to invest in the sophisticated, leveraged vehicles.
"Are we too leveraged?" one executive asked in a memo. "What happens if clients pull out?" said another. Yet a third memo described the executive running the securities lending program as "unfocused and flighty."
Ciresi said the nonprofits asked Wells Fargo for their money back in 2008 and were refused. He said WCRA got its portfolio released after paying Wells Fargo $63 million while the Robins Kaplan foundation got its smaller portfolio released for a charge of $1.6 million. Ciresi called the portfolios of the other two foundations "hostages."
But Hofmann said Wells Fargo and its 401(k) program for employees were the largest participant in the securities lending program. He said the nonprofits represented themselves as sophisticated investors.
"They took the benefits without fail, but they want Wells Fargo to take the losses," Hofmann said. "Low risk does not mean no risk."
Hofmann said the bank is repaying losses to investors as the investments mature. He said the four plaintiffs each lost between 3 and 4.6 percent of value.
The trial is expected to last until Memorial Day.
David Phelps • 612-673-7269