With Wells Fargo Trial Underway, Securities Lending Again In The Spotlight

Another class action facing securities lending in the aftermath of the 2008 crisis is moving forward with the start of a trial involving Wells Fargo Bank.

A case was filed by several nonprofit institutional investors over Wells Fargo’s alleged misrepresentation of the safety of a securities lending program and the ensuing losses. The case, Blue Cross Blue Shield of Minnesota v. Wells Fargo Bank, was originally filed in September 2011.

Under the securities lending program in question, Wells Fargo would lend the securities it held as custodian out to brokers, who in turn provided collateral which Wells Fargo reinvested. The bank assured investors were safe “high-grade money market instruments” such as commercial paper or bank time deposits and CDs.

However, the plaintiffs argue that Wells Fargo invested in illiquid and risky instruments such as structured investment vehicles (SIVs) and mortgage-backed assets, and continued pursuing such an investment strategy even when it became clear that losses were likely. They also allege Wells Fargo had refused to disclose the losses or return the securities requested.

The plaintiffs accuse Wells Fargo of “systematic, intentional and unlawful conduct—including breaches of fiduciary duty, breaches of contract, and fraud—in a multibillion-dollar securities-lending program.”

Wells Fargo claims that the investments were safe to the best of its knowledge at the time, that the financial crisis of 2008 is to blame for any losses incurred, that the investors assumed some degree of risk and that the investors had stated: “they can survive the loss of the entire investment,” according to Wells Fargo attorney Bart Williams.

The case relates to the securities lending business Wells Fargo bought when it acquired Wachovia in 2008.

The court case, which is filed in Minnesota, is not the only one that Wells Fargo faces in the state; it has three pending cases, including a class action lawsuit with similar claims as well as a case from the Minnesota Life Insurance Company.

The case is part of the several litigious developments in securities lending in the continued aftermath of the 2008 financial crisis and the cash collateral reinvestment debacle.

In June, BNY Mellon reached a $34 million settlement with South Carolina relating to securities lending litigation. The South Carolina Treasurer, Curtis M. Loftis Jr., originally sued the bank in January 2011, complaining that it had failed to adhere to the investment guidelines under the securities lending agreement (SLA) relating to the state’s pension fund.

This litigation and others filed in recent years highlight the clients’ perceived risks of programs entered into before 2008 and the impact of the subsequent collapse of the sub-prime mortgage industry on securities lending.

Amidst the unwanted publicity for agent lenders surrounding these litigations since January 2011, many of them have not gone to trail. Out of several suits, four of them were settled, two were dismissed and two cases resulted in the bank paying up, indicating a willingness of client and provider to reach settlement in the aftermath of losses on programs post-2008. As part of the latest settlement between BNY Mellon and South Carolina, the custodian bank secured the client’s commitment for securities lending, and potentially foreign exchange in a new 10-year custody contract.