Wells Fargo Board Denied Early Exit From Fake-Account Suit

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By Michael Greene

Wells Fargo shareholders can move forward with a lawsuit seeking to hold officers and directors accountable for the bank’s bogus-account scandal, a federal court in California held May 4 ( Shaev v. Baker , 2017 BL 149940, N.D. Cal., No. 16-cv-05541-JST, 5/4/17 ).

The lawsuit, brought by shareholders on behalf of the company, stemmed from revelations that Wells Fargo employees created millions of deposit and credit card accounts for customers without their authorization to meet sales targets. The ruling is important because it rejected the bank’s claim that the shareholders should have asked the board to take remedial steps before they sued.

The shareholders didn’t have to demand action by the Wells Fargo board before filing their suit, the U.S. District Court for the Northern District of California said. Such a demand would have been “futile” because, based on the shareholders’ allegations, a majority of the bank’s directors faced a substantial likelihood of liability, the court said.

The shareholder complaint included an “abundance of particularized allegations” to support the inference that directors “knew about widespread illegal activity and consciously disregarded their fiduciary duties to oversee and monitor the company,” Judge Jon S. Tigar wrote.

Statements to Congress

The court found that former chief executive officer John Stumpf’s statements to the Senate Banking and House Financial Services committees about the board’s monitoring of sales integrity issues plausibly suggested that directors knew about widespread illegal activity by 2014, at the latest, and failed to take action.

The court also said the shareholders’ complaint included several other detailed allegations that directors disregarded their duties to monitor and oversee the business.

“While any of these red flags might appear relatively insignificant to a large company like Wells Fargo when viewed in isolation, when viewed collectively they support an inference that a majority of the Director Defendants consciously disregarded their fiduciary duties despite knowledge regarding widespread illegal account-creation activities,” Tigar wrote.

Kevin Lindahl, general counsel for co-lead plaintiff the Fire and Police Pension Association of Colorado, told Bloomberg BNA that “we look forward to prosecuting this case.”

The lawsuit was brought on behalf of public safety employees in Colorado and all Wells Fargo shareholders to “recover losses resulting from the failure of the directors and officers to act as responsible fiduciaries,” Lindahl said in an email.

Wells Fargo Vice President of Corporate Communications Ancel Martinez told Bloomberg BNA that “we cannot speculate on pending claims.”

However, “we will advocate strongly for our positions before the court,” Martinez said in an email. He added that the bank is taking “decisive steps to rebuild the trust of our customers, team members, community partners and shareholders.”

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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