Four Minnesota nonprofits have been awarded more than $30 million in damages in a case against Wells Fargo.
The Minneapolis Foundation, the Minnesota Medical Foundation, and two others claimed Wells Fargo invested their money in risky securities, and failed to disclose the deteriorating value of the investments until it was too late to get out, according to the lawsuit filed in 2008.
A Ramsey County jury determined Wednesday that Wells Fargo breached its fiduciary duty to the nonprofits and violated the Minnesota Consumer Fraud Act.
The plaintiffs had asked for more than $400 million, but the jury award for compensatory damages was $30.1 million -- $14.1 million for breach of fiduciary duty and $4 million to each plaintiff on the consumer fraud claim.
A statement released by Wells Fargo said the company is pleased that the jury denied the plaintiffs the full amount of damages they were seeking.
"[The amount] was radically above the investment losses incurred, and validated that there was no breach of contract or conversion by Wells Fargo Securities Lending," the statement said.
Thursday afternoon, jurors will hear arguments about possible punitive damages against Wells Fargo. Ramsey County Judge Michael Monahan ruled Thursday morning that jurors may be told about the banks' income and net worth and value in assessing any punitive damages.
“Plaintiffs made money every single year up until this crisis.”Robert Weinstine, Wells Fargo attorney
Wells Fargo earned a record $12.3 billion in 2009. The bank has a market value of about $150 billion.
THE INVESTMENT PROGRAM
The Minnesota nonprofits participated in an investment program in which Wells Fargo, the fourth-largest U.S. bank by assets and deposits, would hold its clients' securities in custodial accounts and use those funds to make temporary loans to brokers.
The brokers borrowed the securities to support trading activities, such as short sales and option contracts. The brokers posted collateral worth at least 102 percent of the value of the loaned securities, the plaintiffs said in court papers.
Wells Fargo promised to focus on safe, liquid instruments, primarily money markets, the nonprofits claimed.
"Instead, Wells Fargo invested heavily in risky securities," including structured investment vehicles, or SIVs, mortgage-backed and asset-backed securities, the plaintiffs said in court papers.
Structured investment vehicles are used to issue short-term debt to fund purchases of higher-yielding mortgages, corporate bonds or other debt instruments. As subprime-mortgage losses mounted in 2007, investors were less interested in SIVs, because of concerns that they owned assets linked to bad home loans. Many of those SIVs subsequently defaulted.
In 2007, as the value of the collateral investments became less stable, Wells Fargo increased the amount of plaintiffs' securities out on loan, the nonprofits claimed. After two of the SIVs went into receivership, the plaintiffs asked Wells Fargo to return the securities or redeem their interests.
The bank refused to return the securities until the collateral investments were sold and plaintiffs made up a shortfall in value, according to the lawsuit.
ATTORNEY: PLAINTIFFS "HELD HOSTAGE"
The four plaintiffs were "held hostage" as Wells Fargo gave more favorable treatment to larger clients, attorney Michael Ciresi said in closing arguments at the trial on Tuesday.
Wells Fargo's attorney Robert Weinstine said in his closing that the nonprofits weren't blocked from getting out of the investments.
"Plaintiffs knew, and admitted they couldn't get out, unless they paid the 102 percent" value of the collateral, he said.
Wells Fargo warned the nonprofits in 2007 that "there would be more losses" if they stayed in the securities lending program, he said.
Wells Fargo didn't invest in risky securities, Weinstine said. While three of the 170 securities ultimately failed, "all except the three have matured at full value," he said.
The world financial crisis and credit crunch accounted for any losses, he said.
"Plaintiffs made money every single year up until this crisis," Weinstine said.
The other two plaintiffs in the case are the Minnesota Workers' Compensation Reinsurance Association, which provides workers' compensation reinsurance to all insurers and self-insurers in the state, and the Robins, Kaplan, Miller & Ciresi Foundation for Children, which is sponsored by Ciresi's firm.
The allegations prompted The Securities and Exchange Commission to investigate Wells Fargo's securities-lending program.
(Bloomberg News contributed to this report.)