Wells Fargo Faces Class-Action Suit - Analyst Blog

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Wells Fargo & Co. ( WFC ) is in the headlines again and this time for a wrong reason. According to a Bloomberg report, the company has to countenance a class-action lawsuit brought by investors who alleged the company for marketing its risky securities lending program as a safe one.

Notably, in 2010, a lawsuit was filed against Wells Fargo by the City of Farmington Hills Employees Retirement System, a pension fund. The lawsuit was filed on behalf of 100 institutional investors who accused Wells Fargo for breaching its fiduciary duties.

Investors sought permission to compete the case as a group and when the judge of U.S. District Court in Minnesota found that the charges had issues which were more or less similar, the judge certified the case as a class-action lawsuit.

According to the investors, though Wells Fargo had marketed the lending program as a safe and low-risk one, the company had invested the fund in risky products such as mortgage-backed securities. Moreover, the performance of such investments was not even revealed to the investors to avoid any shift from the securities lending program. Wells Fargo has, however, denied the allegations and plans to defend the case.

Our Take

Post financial crisis, several investors have dragged top Wall Street banks to court for misleading them with false information and undisclosed risk factors of their financial products. As a result, the companies have ended up paying several millions to settle such cases. We believe that these cases tarnish a company's image to some extent and when settlements are reached for resolving them, a part of its hard earned money ends up meeting those penalties.

Recently, Deutsche Bank Ag ( DB ) has resolved a lawsuit related to the mortgage-backed securities that were sold to investors prior to the U.S. Housing market crisis, according to a Reuters report. The company is said to have misled investors regarding the risk profile of these securities. Deutsche Bank will pay $32.5 million for settling the lawsuit.

Wells Fargo currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we have a Neutral recommendation on the stock.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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