In an interesting twist on a long –running credit-crisis related securities suit, Wells Fargo has agreed to pay $75 million to settle the Wachovia equity investor securities class action lawsuit, even though their suit had been dismissed at the district court level and was on appeal at the time of the settlement. The parties’ November 21, 2011 notification of the settlement to Southern District of New York Judge Richard Sullivan can be found here. Victor Li’s December 3, 2011 Am Law Litigation Daily article about the settlement can be found here.


The settlement relates to litigation brought by former equity shareholders and bondholders of Wachovia Corporation.  The equity securities holders’ and bondholders’ actions arise from  financial disintegration Wachovia experienced between its 2006 purchase of Golden West Financial Corporation and its 2008 merger with Wells Fargo & Company. The allegations are based on the difficulties Wachovia experienced as a result of the Golden West “Pick-A-Pay” mortgage portfolio. Further background regarding the equity securities litigation can be found here and background regarding the bondholders’ litigation can be found here.


As discussed here, on March 31, 2011, Southern District of New York Judge Richard Sullivan granted the defendants’ motions to dismiss the equity securities litigation, but he denied the motion to dismiss the bondholders’ action, other than with respect to certain bond offerings in which the plaintiffs had not actually purchased any securities. A copy of Judge Sullivan’s opinion can be found (here),


Judge Sullivan granted the defendants’ motions to dismiss the equity securities plaintiffs’ ’34 Act claims, finding that the plaintiffs had not sufficiently alleged scienter. Judge Sullivan concluded that the “more compelling inference” is that “Defendants simply did not anticipate the full extent of the mortgage crisis and the resulting implications for the Pick-A-Pay loan portfolio. Although a colossal blunder with grave consequences for many, such a failure is simply not enough to support a claim for securities fraud.” He added that “bad judgment and poor management are not fraud, even when they lead to the demise of a once venerable financial institution.”


Judge Sullivan also granted the defendants’ motion to dismiss the equity securities plaintiffs’ ’33 Act claims, finding that their “scattershot pleadings” failed to “afford proper notice, much less provide facially plausible factual allegations.” He added that he could not conclude “that the relevant offering documents contained material omissions in violation of affirmative disclosure obligations.”


Thereafter, the bondholders, whose case survived Judge Sullivan’s dismissal motion rulings, went on to settle their lawsuit for a total of $627 million, which, as discussed here, is the largest settlement to date as part of the subprime and credit crisis-related litigation wave. The settlement amount of $627 million represented two different settlement funds: $590 million on behalf of the Wachovia defendants, including 25 former directors and officers of Wachovia, as well as 72 different financial firms that underwrote bond offerings for Wachovia between 2006 and 2008; and $37 million on behalf of Wachovia’s auditor, KPMG.


Meanwhile, the Wachovia equity investors, whose action Judge Sullivan had dismissed, had appealed the dismissal to the Second Circuit. In an apparent move to avoid having the case revived on appeal, Wells Fargo has now agreed to pay $75 million to settle the equity investors’ suit. The case must be remanded from the Second Circuit in order for the settlement to be presented to the district court for approval.


As I noted at the time of the $627 million settlement with the Wachovia bondholders, Wachovia’s purchase of Golden West has to be one of the leading candidates for the title of worst deal leading into or as part of the credit crisis-related financial transactions. There is a lot of competition in the worst transaction category, including Bank of America’s purchase of Countrywide. But there is no doubt that the Golden West deal is one of the real stinkers.


From the perspective of Wells Fargo, the litigation consequences for the bank from the mortgage meltdown are becoming rather impressive. When you consider this $75 million settlement and he Wachovia defendants’ $590 contribution to the bondholders’ settlement, which came on the heels of the $125 million Wells Fargo mortgage backed securities settlement (about which refer here), it looks like the financial crisis litigation consequences for Wells Fargo have been massive . The bank’s current aggregate settlement costs of $790 million may provide some explanation why it preferred to settle this case than to run the risk that the securityholders might succeed in having the dismissal of their case overturned on appeal.


The $75 million Wachovia equity investors’ settlement comes on the heels of the public disclosure of the $315 million Merrill Lynch mortgage-backed securities settlement, which Alison Frankel first reported in a November 18, 2011 article on Thomson Reuters News & Insight (here). Though the fact and amount of the settlement have been public for a couple of weeks, the parties have only just now filed their actual stipulation of settlement, dated December 5, 2011 (here). The $315 Merrill settlement dwarfs Wells Fargo’s earlier $125 million MBS settlement, which has stood as the largest MBS-related settlement so far.


In the Merrill Lynch MBS lawsuit, the plaintiffs alleged that the defendants (Merrill Lynch and related Merrill entities; certain other underwriter defendants and certain Merrill officers) had mislead investors who purchased the MBS securities, through statements in the securities’ offering documents that misrepresented the quality of the loans and the adequacy of the collateral within the loan pools.


Like Wells Fargo, Merrill and its acquirer Bank of America have also now paid out or at least agreed to pay out an impressive aggregate amount in subprime and credit crisis-related securities lawsuit settlements. As discussed here, Merrill had previously settled the subprime-related securities lawsuit brought by its shareholders for $475 mm, and had also settled the related ERISA lawsuit for $75 million.   Merrill separately settled the subprime-related lawsuit brought by its bondholders for $150 million (refer here). With the addition of the recent $315 MBS settlement, Merrill’s aggregate settlements are now up to $1.015 bb.


And to line up everything in its proper category, the $624 million Countrywide settlement, in addition to the $1.015 bb of Merrill settlements, all arguably belong on BofA’s ledger. The Merrill and Countrywide settlements altogether total about $1.639 billion, or fully 40 percent of all of the subprime and credit crisis related lawsuit settlement amounts so far (which total about $3.913 billion). These Merrill and Countrywide settlements plus the Wells Fargo settlements total $2.48 billion, which reresents almost 64% of the aggregate amount of the subprime and credit crisis related lawsuits settlements to date


What the Merrill, Countrywide and Wachovia/Wells Fargo settlements have in common, in addition to representing the largest of the subprime and credit crisis related lawsuit settlements, is that in each case the corporate defendant is now part of a financially strong successor in interest. This circumstance contrasts significantly with other subprime and credit crisis cases – like those involving Lehman Brothers and Washington Mutual, for instance – where the corporate defendants are defunct and there is no solvent successor in interest. Securities suits involving these defunct companies have settled for much smaller amounts that those involving solvent companies.


I have in any event added the Wachovia equity investors’ settlement and the Merrill MBS settlement to my running tally of subprime and credit crisis-related securities class action lawsuit case resolutions, which can be accessed here.