The Wells Fargo Judgment

In Minnesota yesterday, a jury found that Wells Fargo was guilty of violating its fiduciary duty to several of its institutional clients as a result of selling them several highly risky securities that Wells Fargo had claimed were safe. The court also ruled that Wells Fargo was guilty of consumer fraud. Given the way so many supposedly safe securities lost their value over the past couple of years, we could see a lot more cases like this.

The suit was brought by four nonprofits participating in an investment program whereby Wells Fargo held their assets for them and supposedly loaned them out in secure ways. Wells Fargo then invested these assets in securities known as structured investment vehicles, or SIVs, which are basically short-term debt issued to fund the purchases of even more debt, such as corporate bonds or mortgage-backed securities, as well as some other high-risk vehicles. When the crash started happening in 2007, these proved to be awful investments. The nonprofits said they were expecting these investments to be more akin to money market funds.

The jury gave the plaintiffs a total of $30 million in damages, and there could be more to come in punitive damages. Wells Fargo, though, is claiming a victory of sorts, since the plaintiffs had asked for more than $400 million. It remains to be seen how much of a precedent this sets, but at least institutions are now on notice that if they push an investment as safe, it had better be reasonably safe.