Wells Fargo sees mixed results in investment fraud trial
Wells Fargo says it's considering its legal options, even after a Ramsey County district court jury decided not to impose punitive damages on the bank.
That decision came in a closely-watched securities suit brought by four Minnesota non-profits. They accused the bank of misleading them about the safety of their investments.
The lawsuit by three philanthropic foundations and the Minnesota Workers' Compensation Reinsurance Association state had a mixed outcome for Wells Fargo.
On Wednesday, jurors found the bank had committed fraud and violated its duty to the nonprofits. The panel jury awarded the nonprofits $30 million. But yesterday they said punitive damages weren't warranted.
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Jurors say they tried to strike a balance between holding Wells Fargo accountable and not blowing the situation out of proportion.
"I don't think there was a clear cut bad guy in this situation," said juror Susan Lundy. She said there wasn't enough evidence to justify punitive damages.
"We didn't feel like it was an extraordinary case for something that would qualify for punishing them further," she said.
The case involved a practice called securities lending. Big pension funds, foundations, and other institutional investors have portfolios full of stocks, bonds and other securities.
They can try to earn a little extra money on those assets by lending them to Wall Street and other investors. In return, the institutional investors get cash as collateral.
The bank in the middle, in this case Wells Fargo, manages the transaction and invests the cash.
Normally this is considered a low-risk, low-return practice, but the credit crisis exposed that investments were winding up in risky assets, and the losses can be painful.
Wells Fargo says the four non-profits lost $14 million. A huge California state pension fund lost two-thirds of a billion dollars on securities lending.
Even though the Ramsey County jury hit Wells Fargo with a $30 million award, that's far less than the $400 million sought by the nonprofits. Juror Danielle Penneau said $30 million should cover their losses.
"This was not a case of fat cats on Wall Street versus little nonprofits," she said.
Penneau says Wells Fargo clearly violated the law. But she says it came across more as fumbling than bad intent.
"There was some disconnect within Wells Fargo... certain business groups did'nt know what other business groups were about and the disconnect prevented clients from being fully informed," Penneau said.
One of the plaintiffs in this case -- the Minnesota Medical Foundation -- declined to comment on the jurors' decision. Minnesota Public Radio couldn't immediately reach the other plaintiffs.
Wells Fargo released a statement commending the jury for acting appropriately by not awarding punitive damages. But the company says it's considering its legal options because it believes it isn't liable for the plaintiffs' losses. Wells Fargo stopped short of saying it would appeal.
The bank says it stands behind its securities lending business and the quality of their investments. But local attorney Terry Fruth says now the company's vulnerable.
Fruth represents other non profits considering suits against Wells Fargo.
"Wells Fargo has won this punitive damages battle but they've lost the war," he said. "The decision by the jury makes it, in my view, impossible for Wells Fargo to defend against the claim of breach of fiduciary duty."
The stakes in this case are large. Not only are there other lawyers like Fruth waiting in the wings -- securities regulators are considering added restrictions on securities lending.
University of Minnesota Law Professor Richard Painter says the Wells Fargo case provides good examples of what those reforms could fix.
"Clearer regulation could make it easier for everyone to know what the rules are going into the relationship," he said.
With regulation pending and the possibility of more lawsuits, Wells Fargo has a lot to consider in deciding whether to appeal the jury's 30 million award in this case.
