Wells Fargo Seeks Dismissal of Shareholder Suit on Fake Accounts

By Chris Bruce

Wells Fargo asked a federal judge to dismiss a shareholder lawsuit sparked by a recent bogus-account scandal, saying the plaintiffs failed to properly investigate their own claims ( In re Wells Fargo & Co. Shareholder Deriv. Litig. , N.D. Cal., 16-cv-05541, brief filed 4/14/17 ).

The filing late April 14 centers on a question that could mark an important juncture early in the case—whether the shareholders had to demand remedial action by Wells Fargo’s board before filing their suit, or whether they didn’t have to because the demand would have been futile.

The lawsuit, a derivative action brought on behalf of the company, arose last year after revelations that Wells Fargo employees created millions of deposit and credit card accounts for customers without their authorization in an effort to drive up “cross-selling” of complementary products to existing customers.

The suit said the bank’s board of directors was on notice of the practice, alleging “awareness or conscious disregard of significant red flags” concerning the creation of the accounts. According to the shareholders, that existing knowledge on the part of directors allowed the shareholders to file their suit immediately instead of waiting for action by the board, because any demand for board action would have been futile.

Wells Fargo filed its latest response April 14, again urging Judge Jon S. Tigar of the U.S. District Court for the Northern District of California to dismiss the case. Wells Fargo said Delaware corporation law—which it said applies in this case—requires plaintiffs in such disputes to first review corporate books and records before filing their claims.

That test wasn’t met here, Wells Fargo said. “Courts in Delaware, repeatedly and for years, have refused to fill in blanks for derivative plaintiffs who seek to plead that a pre-suit demand was excused as futile but, like Plaintiffs, do so without first using the tools provided by Delaware law that might have provided information concerning what a board in fact knew or did,” the brief said.

How the “demand futility” question is resolved will mark a critical early turning point in the case. If Wells Fargo prevails on that issue, it wouldn’t be fatal to the shareholders’ case but would make their case more difficult. The shareholders already have asked the court to allow them to amend their complaint if the case is dismissed on the demand futility issue. Likewise, a ruling against Wells Fargo would mark a setback for the bank while still allowing it to still contest the claims. Tigar has scheduled a May 4 hearing on the bank’s motion to dismiss.

Wells Fargo faces other legal battles in connection with the controversy, but is trying to put some of those aside. Last month, Wells Fargo reached a $110 million settlement with customers nationwide over the account-opening claims. That accord, which covers dozens of lawsuits filed across the country, is subject to court approval.

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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