In prior posts on this site (most recently here), I have suggested that D&O claims could arise in connection with the Paycheck Protection Program (PPP), a fiscal stimulus program Congress enacted as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). In what is as far as I know the first PPP-related securities class action lawsuit, a plaintiff shareholder has filed a securities class action lawsuit against Wells Fargo & Company, alleging that the company made misrepresentations to investors in connection with the company’s participation in the PPP. A copy of the plaintiff’s June 4, 2020 complaint can be found here.

Background

Wells Fargo participated in the PPP program as a lending institution, distributing funds to borrowers through PPP loans. In an April 5, 2020 press release (here), the company announced that it had received “strong interest” from the prospective PPP borrowers. The company also said that it was targeting to distribute a total of $10 billion to small business customers under the requirements of the PPP.

On April 8, 2020, the Federal Reserve announced that, in order for the company to be able to make additional small loans as part of the PPP, it would lift the asset cap to which the bank was subjected in 2018 after revelations that the company had opened millions of accounts in customers’ names without the customers’ permission. That same day, Wells Fargo announced that it would expand its participation in PPP and offer loans to a broader set of its small business and nonprofit customers subject to the same terms of the program.

An April 19, 2020 USA Today article (here) reported that at least one lawsuit had been filed against the company alleging that the company had unfairly allocated government-backed loans under the PPP. According to the article, the lawsuit, filed on behalf of small business owners, alleges that Wells Fargo “unfairly prioritized businesses seeking large loan amounts,” a move the lawsuit claims meant that the bank would receive millions of dollars more in processing fees. The lawsuit further alleged that the company “concealed from the public” that it was “reshuffling” the PPP applications it received and prioritizing the applications that would make the bank more money. The subsequently filed securities suit complaint alleges that the bank’s share price declined more than 5% on this news.

On May 5, 2020, Wells Fargo filed its quarterly report on Form 10-Q, disclosing that in addition to multiple PPP-related lawsuits, Wells Fargo had “received formal and informal inquiries from federal and state governmental agencies regarding its offering of PPP loans.” The securities complaint alleges that the company’s share price declined another 6% on this news.

The Lawsuit

On June 4, 2020, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Wells Fargo, Charles Scharf, the company’s CEO, and John R. Shrewsberry, the company’s CFO. The company is filed on behalf of a class of investors who purchased the company’s securities between April 4, 2020 and May 5, 2020. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The plaintiff seeks damages on behalf of the class.

Specifically, the plaintiff alleges that the Defendants made misleading statements or failed to disclose that: (i) Wells Fargo planned to, and did, improperly allocate government-backed loans under PPP, and/or had inadequate controls in place to prevent such misallocation; (ii) the foregoing foreseeably increased the Company’s litigation risk with respect to PPP allocation, as well as increased its regulatory scrutiny and/or potential enforcement actions; and (iii) as a result, the Company’s public statements were materially false and misleading at all relevant times.”

Discussion

As noted above, this new lawsuit against Wells Fargo represents, as far as I know, the first PPP-related D&O lawsuit. Although I and others had anticipated that there would be PPP-related D&O lawsuits, I don’t think this kind of lawsuit is exactly what I and others had in mind. I think most commentators (myself included) were anticipating that the claims would involve the PPP borrowers and representations that the borrowers allegedly made in order to procure the PPP, or in connection with the “maintaining payroll” contingency that would affect the borrower’s repayment obligation.

But while this specific lawsuit is different than what was anticipated, it unquestionably is a PPP-related securities suit. I think it is important to emphasize that the lawsuit has only just been filed, and while there may be underlying lawsuits alleging that Wells Fargo mis-prioritized PPP loans and funds, at this point those are mere allegations. There is nothing at this point confirming that Wells Fargo did anything wrong in connection with its administration of the program. I will say that given how hastily the program was devised, enacted, and put into effect, it is hardly a surprise that there may have been and may continue to be issues that arise. For that reason, I continue to believe that we will see further PPP-related securities lawsuits and other D&O claims.

While this lawsuit is the first PPP-related securities suit to be filed, it is only the latest in a series of lawsuits that have been filed since March relating to the coronavirus outbreak and its consequences. By my count, this lawsuit is the 10^th coronavirus related securities lawsuit to be filed, although the first to be filed so far in June. As is the case with many of the other coronavirus-related securities suits filed so far, the class period in this lawsuit is relatively short – although the class period in this suit (one-month long) is not as short as is the case in other lawsuits (including one in which the class period is four days, and another in which the class period is one week).

The lawsuit is also the first coronavirus-relate securities suit to be filed against a bank. While a bank might not seem like the most obvious target to be hit with a coronavirus-related securities suit, there is this thing about banks: They always seem to be getting drawn into the latest securities litigation wave. They were certainly in the center of things in the litigation wave that followed in the wake of the global financial crisis. To be sure, that does not mean that other banks that participated on the PPP program necessarily are at greater risk of involvement in securities class action litigation. Rather, it is simply an observation that the plaintiffs’ lawyers seem ready to try to bring the banks into the litigation fray from the moment the starting gun sounds.

Wells Fargo of course has had its share of D&O claims in the past. Readers will recall that the shareholder derivative lawsuit filed against the company’s board in connection with the fraudulent customer account debacle ultimately settled for a cash payment of $240 million (as discussed here). Wells Fargo settled the accompanying securities class action lawsuit for $480 million (as discussed here). In that respect, at least, it may come as no surprise that the plaintiffs’ lawyers are trying to drag Wells Fargo back in again.