Wells Fargo has agreed to pay $480 million to settle the securities class action lawsuit arising from the company’s fake customer account scandal. The lawsuit followed in the wake of allegations that the bank had opened millions of accounts on behalf of customers frequently without the customers’ knowledge or consent, and in some instances based on fictitious customer information. As discussed below, the massive securities suit settlement, which is subject to court approval, is among the largest ever. The company’s May 4, 2018 press release about the settlement can be found here. The settlement was also disclosed in the company’s May 4, 2018 filing on Form 10-Q, here. A May 4, 2018 press release about the settlement by Union Investment, the lead plaintiff in the action, can be found here.
The bank’s sales practices scandal arises out of a high-pressure sales strategy that led to as many as 2.1 million deposit and credit card accounts being created using fictitious or unauthorized customer information. In September 2016, fines and penalties totaling $185 million were imposed on the bank, including a $100 million fine by the Consumer Financing Protection Bureau, $35 million penalty to the Office of the Comptroller of the Currency, and another $50 million to the City and County of Los Angeles. In addition, in late March 2017, the bank agreed to a $110 million settlement of the consolidated class action that had been filed on behalf of bank customers who were affected by the improper sales practices.
As discussed in a prior post, in April 2017, following an independent board investigation, the bank imposed compensation clawbacks totaling over $180 million on certain former bank executives for their involvement in the fraudulent account scandal.
In a separate development not directly related to the phony account scandal, in April 2018, the Consumer Finance Protection Bureau, in conjunction with the Office of the Comptroller of the Currency, imposed a fine of $1 billion against the bank related to the way the bank administered a mandatory auto insurance program in connection with its auto loan business and the way the bank charged customers for interest-rate lock extensions.
The Securities Litigation
On September 26, 2016, a plaintiff shareholder filed the first of several securities class action lawsuits in the Northern District of California against the bank and certain of its then-current and former directors and officers. As discussed here, the lawsuits, which eventually were consolidated, were filed “in connection with the Company’s scandal of creating fake or unauthorized client accounts in order to hit lucrative performance goals and enrich Defendants, that artificially inflated the price of the Company’s common stock from February 26, 2014 through September 20, 2016.”
Specifically, the lawsuit alleged that Wells Fargo “falsely touted the Company’s cross-selling practices by repeatedly representing that its culture was focused around giving customers services that they valued and needed and that its efforts were highly successful and a key driver of strong financial results.” The lawsuit alleges further that, “after years of maintaining these assurances, various regulators and Wells Fargo suddenly revealed on September 8, 2016 that several regulatory investigations had culminated in findings that Wells Fargo employees secretly and illegally had been opening millions of unauthorized accounts for existing Wells Fargo customers in order to hit performance targets.” The complaint alleges further that the company’s board and senior management were aware of fake account fraud “on a significant scale” as early as 2013.
The plaintiff filed a consolidated amended complaint and the defendant filed motions to dismiss. In February 2018, Northern District of California Judge Jon Tigar denied in part and granted in part the defendants’ motions to dismiss. The dismissal motions of Wells Fargo and of many of its current and former senior executives and directors were largely denied. The parties subsequently entered settlement negotiations.
In its May 4 press release, the company announced that the parties had reached a settlement in principle to resolve the consolidated securities class action litigation. Under the terms of the proposed settlement, Wells Fargo agreed to pay $480 million dollars. The proposed settlement is subject both to confirmatory discovery and court approval. The company’s press release states that it “denies the claims and allegations in the action and entered into the agreement in principle to avoid the cost and disruption of further litigation.”
Neither the press release nor the company’s 10-Q disclose whether the company’s D&O insurers will contribute toward the settlement. However, both the press release and the SEC filing state that the amount of the settlement was fully accrued as of March 31, 2018, which suggests that the company will be funding the full amount of the settlement out of its own assets.
This settlement is among the largest ever securities class action settlement in the U.S. However, as massive as it is, it is not even in the top 25 all-time securities settlements. Based on the information in the latest ISS Securities Class Action Services list of the Top 100 securities suit settlements, the Wells Fargo settlement is the 30th largest securities suit settlement – although, if the list is adjusted to account for the nearly $3 billion settlement in the Petrobras securities suit announced earlier this year, the Wells Fargo settlement comes in at 31st. According to the lead plaintiff’s press release about the settlement, the Wells Fargo settlement is the fourth largest securities settlement ever in the Ninth Circuit.
Even though the Wells Fargo settlement didn’t even crack the Top 25 all time, this huge settlement is still significant. As I have noted on numerous posts earlier this year (for example, here), 2017 was an off year for securities suit settlements; in the words of Cornerstone Research in its annual survey of securities suit settlements, the aggregate amount of securities suit settlements during 2017 declined “dramatically” from prior years. However, with the gigantic Petrobras settlement announced in January 2018 and now with the $480 million Wells Fargo settlement, the overall numbers for 2018 are already pointing to a much more robust year for securities suit settlements, at least compared to last year.
Assuming it is approved, the settlement will resolve the high-profile securities suit pending against the company and its senior executives. However, the legal woes for the company and its senior executives as a result of the fake account scandal are far from resolved. Among other things, a parallel shareholder derivative lawsuit filed against the company’s senior officials and also before Northern District of California Judge Jon Tigar remains pending. As discussed here, in October 2017, Judge Tigar substantially denied the defendants’ motion to dismiss in the derivative litigation. Now that a settlement has been announced in the securities litigation, it will be interesting to see what develops in the derivative litigation.
Wells Fargo’s SEC filing represents a substantial statement that, notwithstanding the settlement of the securities suit, the company has many legal challenges remaining. A footnote to the company’s quarterly financial statements states that as of March 31, 2018, the company’s accrual for probable and estimable losses associated with pending legal matters is approximately $2.6 billion. (Presumably, at least a part of this fund represents amounts to be paid in settlement of the securities suit.)