Nearly a dozen pensions and endowments, mostly in the US Midwest states of Minnesota and Nebraska, have sued Wells Fargo with claims the custodian [acted] in bad faith, with negligence, gross negligence, willful misconduct, fraud and/or reckless disregard of its duties in its securities lending activities.
The plaintiffs, which include health insurance giant Blue Cross and Blue Shield, were custody clients of Wells Fargo and participated in its securities lending program. They say the program was marketed to them by Wells Fargo as a way to earn higher returns on their securities, offsetting custody fees, according to court documents.
The pensions and endowments claim Wells Fargo promised to invest the cash in conservative investments, which Wells Fargo repeatedly represented would be high-grade money market instruments, where the prime considerations would be safety of principal and liquidity. However, the plaintiffs claim, the firm instead heavily invested the SLP [securities lending program] collateral in risky and/or highly illiquid securities, including structured investment vehicles (SIVs) and mortgage-backed assets with maturity dates that reached out nearly 40 years.
They further claim that Wells Fargo covered up the risky nature of the investments, and failed to notify them when the NAV of at least one collateral pool had dropped below par. They also say Wells Fargo held many of its SLP clients hostage, refusing to return their loaned securities unless the clients consented to unlawful conditions.
The official complaints lodged against Wells Fargo in the suit include: a pattern of improper investments in risky securities; failure to properly monitor and manage those investments; failure to disclose material information about the status of the program and its investments to participants, including intentional fraudulent concealment of such information; failure to treat all participants equally and impartially; and failure to put the interest of the participants ahead of the interests of the bank.
In a statement to media, Wells Fargo has denied the claims and defended its investment strategy.
Wells Fargo previously was sued by the Minnesota Workers Compensation Reinsurance Association (WCRA) and three other non-profit organizations for marketing the same risky securities lending program. The firm settled that suit in June last year for $30.1 million.
Custodians have gotten used to fielding lawsuits over securities lending programs that reaped rewards for them and their clients at the height of the market but which went south in the financial crisis. In other similar suits over securities lending programs, BNY Mellon has been sued by the attorney general of South Carolina and Swedish pension manager Frsta AP-fonden and Wachovia by the Ohio attorney general.
In the latest lawsuit against Wells Fargo, which was filed in the United States District Court for the District of Minnesota and requests a trial by jury, the plaintiffs ask the court to order Wells Fargo to immediately return plaintiffs’ securities; award at least $75,000 in damages to the plaintiffs; [declare] that Wells Fargo has engaged in consumer fraud, unlawful trade practices and deceptive trade practices in violation of the laws of the state of Minnesota; [order] Wells Fargo to disgorge all profits from plaintiffs’ participation in the [securities lending program]; pay the plaintiffs attorney fees; and other requests.
The full list of plaintiffs includes: Blue Cross and Blue Shield of Minnesota, as Administrator of the Blue Cross and Blue Shield of Minnesota Pension Equity Plan; CentraCare Health System, on Behalf of Itself and the Sisters of the Order of Saint Benedict Retirement Plan; Supplemental Benefit Committee of the International Truck and Engine Corp. Retiree Supplemental Benefit Trust, as Administrator of the International Truck and Engine Corp. Retiree Supplemental Benefit Trust; Jerome Foundation; Meijer, Inc., as Administrator of the Meijer OMP Pension Plan and Meijer Hourly Pension Plan, Participants in the Meijer Master Pension Trust; Nebraska Methodist Health System, Inc., on Behalf of Itself, and as Administrator of the Nebraska Methodist Hospital Foundation, the Nebraska Methodist Health System Retirement Account Plan, and the Jennie Edmundson Memorial Hospital Employee Retirement Plan; North Memorial Health Care; The Order of Saint Benedict, as the St. John’s University Endowment and the St. John’s Abbey Endowment; The Twin Cities Hospitals-Minnesota Nurses Association Pension Plan Pension Committee, as Administrator of the Twin Cities Hospitals- Minnesota Nurses Association Pension Plan.
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