Wells Fargo & Company
) is set to end a class action lawsuit filed in 2010 by paying
$62.5 million, according to a
report. It was alleged that the company misguided investors by
promoting a risky securities lending program as secure.
The class action lawsuit, headed by the City of Farmington Hills
Employees Retirement System, on behalf of around 100 institutional
investors asked the U.S. District Judge Donovan Frank in St. Paul,
Minnesota to give preliminary approval to the deal in order to
settle the case. Notably, Wells Fargo has not accepted the
Generally, under the securities lending program, investors lend
their stock or other investments to banks or brokerage firms in
exchange of collateral in the form of the cash, government
securities or letter of credit. These financial institutions invest
such securities in short-term investments on behalf of the
investors. Traditionally, the securities lending program has been
observed as a low risk investment and hence many institutional
investors including pension funds, public funds and entities and
insurance companies have involved in the program.
The class action lawsuit alleges that Wells Fargo not only marketed
risky securities lending scheme as secure but violated fiduciary
duty and was engaged in fraudulent activities in connection to its
securities lending program.
As part of the agreement under the securities lending program,
Wells Fargo loaned investors' securities to third party borrowers
in exchange of cash collateral, which the company further invested
at its own discretion. Precisely, in exchange for fee, the company
should have protected clients' securities. The company assured
investors that it will put cash collateral in safe and liquid
investments, which they referred as 'short-term money market
However, the plaintiffs claimed that the company invested a
significant part of the collateral in illiquid or highly risky
securities including structured investment vehicles, asset backed
securities and mortgage backed securities. Gradually, the value of
such securities plummeted and investors consequently incurred
Wells Fargo's several other lawsuits relating to the securities
lending program are yet to be resolved. However, we remain
optimistic about the company's efforts to address such legacy
issues. Recently, it came into light that the company will end a
legal battle it has been engaged in since 2011 for a settlement of
around a minimum of $67 million in connection with the
Banking giants like Wells Fargo,
JPMorgan Chase & Co.
Bank of America Corporation
) have been burdened with numerous litigations since the financial
crisis. However, we believe the gradual revival of the economy and
stricter regulations will reduce the litigation overhang and bring
stability in the financial service industry. This will, in turn,
protect investors' interest.
Wells Fargo currently carries a Zacks Rank #3 (Hold).
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