Fraud Ruling Against Wells Fargo in Minnesota Points to Widespread Abuses in Securities Lending Program

A fraud and breach of fiduciary duty ruling against Wells Fargo in a major scandal in Minnesota may have much broader ramifications for this sanctimonious bank.

The facts are not pretty. Wells Fargo, in its investment management operation, used securities lending to boost returns. But the returns it increased appeared to be only those of the bank. Institutional investors in various programs lost money as a result of this activity. Four Minnesota plaintiffs, including two of the state’s high profile charities, sued. A jury had already awarded the plaintiffs $29.9 million for fraud. A post trial ruling by the judge has added costs, interest, and reimbursement of fees that looks set to more than $15 million to the total.

District Judge M. Michael Monahan concurred with the jury’s main 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.

What makes this ruling interesting is that although it set aside a minor part of the jury award, a $1.6 million issue, to be subject to a new trial, is that it was punitive as a result of the judge’s determination that the fraud was systematic. It is unusual to award the payment of the plaintiff’s attorney’s fees, or to order disgorgement of fees paid for services (the other component of the additional $15 million plus is interest on the $29.9 million). The basis for awarding attorneys’ fees? The bank is such a menace to society that having counsel root it out is a public service. From the Minneapolis Star Tribune (hat tip reader Ted L):

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…

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 judge didn’t just find that Wells Fargo acted with disregard to the rights and interests of the particular plaintiffs,” Fruth said of Monahan. “He said the way it ran the program was with disregard to the rights of the customers. … He has made a finding that is going to bind Wells Fargo in other cases.”

The judge also seems to understand full well how banking works in America:

…Wells Fargo Chairman and CEO John Stumpf and retired Chairman Richard Kovacevich… 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.

Monahan said that he found the executives’ statements “to be almost childlike” and that he accepts “that one of the primary functions of subordinates in today’s corporate America is to shield their ultimate superiors from accumulating embarrassing information….

“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.”

We’ve been told that investors are afraid to sue banks, fearing that they will be cut off from information (query what value that information really has in reasonably efficient markets, particularly when the use of such information is to induce customers to make more trades). Investment management clients are in a somewhat different position, in that they are not actively managing their accounts and are not limited to going to a relatively small number of dealer banks for transaction execution (the asset management business is far less concentrated and more diverse). Nevertheless, findings like these may embolden heretofore more cautious institutional investors to seek to recoup losses when they think their bank had abused them.

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16 comments

  1. 60sradical

    Thanks Yves! Now we might be getting somewhere! My position is to relentlessly attack the securitizing industry for what it has illegally done!! Laws were in place. As I suggested before, regulation works IF the regulators have integrity. The question now being: How/where can integrity gain traction when Congress,for the most part, and most certainly, the Exectutive Branch, seem to be wholly-owened subsidiaries of Wall ST and the Fed? How the hell does America get to critical mass on this issue without seeing bankstas as frog-hopping perps?
    If we don’t get some serious justice soon, Orwellian finacially driven fscism bites our collective asses.

    1. Francois T

      “If we don’t get some serious justice soon, Orwellian finacially driven fscism bites our collective asses.”

      Hmmm! That is not the usual outcome in these cases; if justice cannot be rendered the usual and legit way, other avenues will be explored by those who were harmed and defrauded. How do you think the Triads, the Sicilian and the Russian Mafia came to be? At the origin of it all, there was rampant and systematic injustice.

      For some unfathomable reason, governments are so eager to forget history.

      Oh well!

  2. Doc Holiday

    Oh come on, let’s get real — Uncle Buffy is the biggest crook ever to hit the big time! Hope he goes down in flames in 2011, along with WFC, BAC, Citi, Goldman, wall street, Treasury, FTC, Fannie, FDIC …. duh.

  3. Doc something or other

    Re: “Monahan said that he found the executives’ statements “to be almost childlike””

    I would have said retarded (instead of chldlike) and also called them corrupt little bastards that need to have the living hell beat out of them — before they go to prison for life, without parole .. and then take away every penny from their families, friends and congressmen and women.

    1. bidrec

      42. c. The difficulty with the program became apparent in 2007. This action commenced in October 2008. It is arguable that the improper conduct continues as Wells Fargo is still holding Plaintiff’s securities and continued to lend those securities over the objections of their owners. p20

      In other circumstances this is Standing Operating Procedure.

      “The Bank now proposes to act in the capacity of a “conduit lender” to provide additional return enhancements to its securities lending customers. Currently, the Bank’s customer chooses various potential borrowers from a list of usual borrowers. However, the customer may decide not to “approve” all of the borrowers on the list, resulting in some customers that will not permit their securities to be lent directly to certain borrowers. Yet, a certain borrower may desire to borrow securities that only may be found in accounts of customers that have not approved the borrower. To engage in the conduit lending services, the Bank would borrow the desired securities as principal from the customer that had declined to approve the borrower, and then on-lend those same securities as principal to the borrower.”

      http://www.occ.gov/static/interpretations-and-precedents/may05/int1026.pdf

  4. anonymous

    Wells Fargo is not the angel it pretends to be!

    Remember a few years ago the Well’s exec who moved into a house they had foreclosed on in Malibu? (a ‘fringe’ benefit?)…

    There’s still corruption in that dept… Insider favoritism, pay-offs, shadow buyers, etc. affecting short sales, foreclosures, evictions, etc.

    Their problems aren’t only in investment and securitization.

    Mr. Stumpf’s ignorance is his bliss… for the time being.

  5. Billy Bob

    “Monahan said that he found the executives’ statements “to be almost childlike” and that he accepts “that one of the primary functions of subordinates in today’s corporate America is to shield their ultimate superiors from accumulating embarrassing information….”

    For years now I have been enjoying the disconnect between the Supermanagers we see worshipped in the pages of the WSJ and various business gazettes – giants whose knowledge and command bestride the continents and the years – and the Meremanagers who are called in front of legislative hearings and juries and suddenly appear to know almost nothing about their businesses, how they are run, what they do, etc. If these people know so little about their businesses, how can boards possibly justify giving them such huge compensation packages?

    I will always remember with profound pleasure the testimony of poor persecuted Bernie Ebbers, CEO of Worldcom, a mere “gym teacher” who, despite enormous remuneration did not seem to know anything about anything, but really wanted to help folks with his “aw shucks / gee whiz” testimony. These people belong in prison, where, after having their money taken from them and restored to shareholders and customers they bilked, they will be able to explore alternative lifestyle arrangements.

    1. PQS

      You took the words right out of my mouth.

      Why more Americans (who, after all, largely WORK in corporate America) haven’t figured out how this scam works, I’ll never understand….

      I’ve seen the “protect the higher ups/promote the idiots” routine for years and years and been disgusted by it for just as long. Especially when times get even a little tight and suddenly those of us in the galley are told to pay more for insurance, get less in our paychecks, and generally accept a short stick in order to stay employed. Meanwhile, some VP/Corner Office Denizen gets “demoted” to Hawaii or some other hardship tour….

      1. Bob

        Americans who work in corporate America? Do you forget wells Fargo is one of the top employers in the country. Something like one in 500 people work there. This news won’t make for good Christmas news for a lot of hard working families and innocent stockholders

  6. deeringothamnus

    This is all part of the dynastic cycle normal to the human condition. Consider ancient China. Virtuous regimes take over from corrupt ones, and once in power, themselves become corrupt and are overthrown, in a repeating cycle. This happens because elites are by nature exclusive, eventually excluding both the genes and ideas needed to prevent inbreeding. In ancient China, the victors would kill them and their families down to the third level. The same thing has happened in any number of places and times ,such as revolutionary France, Bolshevik Russia, Ruanda, etc. . I therefore fear for our elite ruling class, and might offer to hide some of them in my basement some day.

    1. Billy Bob

      I think of the Bush family, daddy an athlete and wartime pilot; junior a cheerleader and pretend pilot; and the Bush girls who appear to be normal young women whose main talent appears to be the Butt Dance.

  7. Matt

    Said to be 3 Trillion in the securities lending programs industry wide. Now the borrowing brokers, are they shorting 3 Trillion in securities? No they have been selling whatever paper that passes for the securities lending program rating, like “A” back to the lender.
    The securities lending program became another dumping ground of unwanted securities on naive investors who were sold out by their brokers.
    Security lending has now been shown to be a breach of fiduciary duty.

  8. whoknu

    When both of these men were my boss way back when, they acted as if they knew just about everything there was to know about banking, finance, investing, business, even government legislation (deregulation). We were expected to worship at their feet if we wanted to gain even a smidgen of their vast knowledge. Now they tell us they were really just a couple of ‘know nothing’ bank clerks all along. I am just shattered…

  9. PayBack Time

    If you believe that Senior Management was not aware of the crookery that they were hiding and commiting, then I have some swamp land to sell you in Brooklyn NY. Senior Management is always aware what is going on, that is how they became Senior Management. On top of that their bonuses are tied to it. While they pile away millions of dollars in bonuses, the average Wells Fargo employee, may get a 25.00 holiday bonus, and a 1.5 percent increase for slaving away, working long hours, sacrificing family time away while at work, only to kiss the heels of so called “Leadership at Wells Fargo” The only leadership that is happening there is intense brainwashing through intimidation, deception, and false rewards. Let me tell you how it works, First you are brainwashed and told the economy is bad and there are no jobs. The you are told, you are lucky to have a job. Then you are told, the harder you work the better off you will be. Then at the end of the year after you have killed yourself, completing project, you are rewarded with a 25.00 holiday bonus, while senior management rakes in their million of dollars of bonuses, gets their car allowances, and stock options. Don’t believe me? Don’t have to, incidences like this caught in the news are only the beginning. Where there is one snake, there are plenty more…

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