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.
DEUTSCHE BK AG (
DB
): Free Stock Analysis Report
WELLS FARGO-NEW (
WFC
): Free Stock Analysis Report
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