Wells Fargo Settles With Wachovia Investors for $590M

(August 5, 2011) — Wells Fargo — the biggest US home lender — has reached a $590 million agreement to settle a class-action lawsuit with investors in Wachovia securities that were sold between 2006 and 2008.

During that period, Wachovia — which was acquired by Wells Fargo during the financial crisis of 2008-2009 — sold more than $35 billion in securities, according to the lawsuit.

The settlement would end a 2008 suit that charges Wachovia with misleading investors in its bonds and preferred securities. The suit claims that Wachovia understated losses and omitted other facts associates with risky mortgages in order to prop up its stock price.

“Wachovia’s offering materials materially and repeatedly misstated and failed to disclose the true nature and quality of Wachovia’s mortgage loan portfolio, and materially misled investors as to the company’s exposure to tens of billions of dollars of losses on mortgage-related assets,” the complaint had alleged, the Wall Street Journal reported.

The investors — including several New York City pension funds for teachers, police, firefighters and other employees — maintain in the suit that Wachovia repeatedly claimed its mortgage loans were made with high underwriting standards even though the bank lent using risky policies.

“We settled this in order to avoid the distraction, risk and expense of ongoing litigation,” a Wells Fargo spokeswoman told the WSJ. “The settlement does not constitute an admission by Wells Fargo of any liability or violation of law by Wachovia.”

According to a statement today from law firms representing the plaintiffs, accounting firm KPMG LLP, which did auditing work for Wachovia and was also listed as a defendant, reached a $37 million settlement. “We’ve agreed to settle to avoid the cost of litigation and to put this matter behind us,” George Ledwith, a KPMG spokesman, said in a phone interview with Bloomberg.

Other banks have been sued by pensions over their alleged improper business practices during the financial crisis. Earlier this month, a group of 15 prominent institutional investors sued Bank of America (BofA) for its subsidiary Countrywide Financial’s alleged improprieties involved with the sale of mortgage-backed securities. The group, including BlackRock, the California Public Employees’ Retirement System (CalPERS), T Rowe Price Group, TIAA-CREF, and some in Europe, sued BofA in Los Angeles federal court, after deciding not to join a $624 million settlement that a court approved in February.

The 15 institutional investors’ lawsuit is not the first legal challenge to BofA’s proposal to end litigation with Countrywide investors. On July 5, a group of 11 mortgage-bond investors calling themselves Walnut Place filed a challenge in New York County Supreme Court attacking the July deal’s fairness.