Wells Fargo is facing another lawsuit over its securities lending program, this time by the Trust Fund Committee of the Nebraska Public Power District (NPPD) Employees Retirement Plan. The plan is suing for $1.5 million to recoup losses from a securities lending program the 401(k) participated in with Wells Fargo.
NPPD had participated in Wells Fargos securities lending program since September 2007, several months after Wells Fargo, as trustee of the funds retirement benefits, suggested that the plan get involved in the activity, according to NPPDs suit. The plan would receive additional annual earnings of approximately $140,000 if it participated in securities lending, Wells Fargo told NPPD, according to court documents.
In those 2007 discussions, Wells Fargo allegedly told NPPD that it had operated its securities lending program for 25 years; that Wells Fargo had 126 clients in the securities lending program; there was $23 [billion] in the securities lending program; and that no Wells Fargo client had ever suffered any loss in the securities lending program, according to the lawsuit.
NPPDs suit claims that Wells Fargos securities lending program continued to participate in two risky structured investment vehicles Cheyne Finance and Stanfield Victoria Finance, both of which would later collapse despite having identified problems with the portfolios weeks or months prior.
Additionally, says the suit, Wells Fargo had identified Lehman Brothers, with whom the bank had invested NPPD cash collateral, as in trouble by early June 2008 and later downgraded its rating of Lehman, but did not reveal to NPPD that its cash collateral was held at the broker-dealer, which would go on to collapse that September.
NPPD says Wells Fargo revealed to it in October 2008, following Lehmans bankruptcy, that the plans securities lending activities had lost approximately $3.1 million in the program; today the losses sit at around $1.5 million, according to the complaint.
NPPDs lawsuit follows another lawsuit by around 100 institutional investors that participated in the securities lending program, which was certified as a class-action suit in March this year. That suit was initially filed by The City of Farmington Hills Employees Retirement System against Wells Fargo in 2010. NPPD opted out of the class-action suit this July, it said in its lawsuit.
NPPD is claiming breach of fiduciary duty under the retirement plan trust agreement, breach of trust, breach of fiduciary duty under the securities lending program agreement, breach of contract, fraudulent misrepresentation and concealment, negligent misrepresentation, violation of the Minnesota Prevention of Consumer Fraud Act, violation of the Nebraska Consumer Protection Act, unlawful trade practices and violation of securities laws.
The case was initially filed by NPPD on October 8 in the District Court of Platte County, Nebraska. Wells Fargo successfully requested to have the case moved to federal court in the United States District Court for the District of Nebraska on November 2.
Wells Fargo categorically denies the allegations made in this lawsuit and will vigorously defend against them, a spokesperson told Global Custodian. The investments made by Wells Fargo on behalf of clients in the securities lending program were in accordance with investment guidelines, and were highly rated and suitable at the time of purchase.
In 2010, Wells Fargo was ordered to pay $30.1 million to the Minnesota Workers Compensation Reinsurance Association (WCRA) and three other nonprofit organizations for marketing risky securities lending programs.
A St. Paul state jury also found the bank guilty of blocking attempts to retrieve funds and failing to notify clients of significant losses. The nonprofits originally asked for more than $400 million, but the jury instead awarded $14.1 million for the breach of fiduciary duty and $4 million for each plaintiff for consumer fraud.
Christopher Gohlke