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.