Wells Fargo security trial is in the home stretch: After six weeks of testimony, the lawsuit by four nonprofits over how the bank handled investments is nearly ready for the jury. [Star Tribune, Minneapolis]

May 24--The marathon Wells Fargo investor trial, which featured more than two dozen witnesses and hundreds of exhibits, could be in the hands of a Ramsey County District Court jury by the end of this week.

Closing arguments are expected midweek in the closely watched case pitting Wells Fargo & Co. against four nonprofit clients, including three charities, who allege the bank lost millions of dollars for them with some ill-chosen investments, an allegation the bank adamantly denied during the trial.

Jurors, who began their duty six weeks ago, basically will be asked to decide if the bank's actions or negative forces in the market caused the losses, and whether the investors' expectations about the risks were reasonable.

The courtroom, presided over by Judge M. Michael Monahan, a bow tie aficionado and believer in punctuality, has been a sea of exhibit-filled binders and boxes. Video technicians flashed documents on a big screen for the jury and spectators, including note-taking attorneys who have clients in similar situations.

The four plaintiffs are seeking $407 million in actual damages and have obtained court approval to ask for additional, punitive damages. Wells Fargo contends the actual losses are considerably smaller -- less than 5 percent of the amount invested -- and the bank never guaranteed against losses. The bank also contends the investments are recovering as they mature and losses are dwindling.

The plaintiffs are the Minneapolis Foundation, the Minnesota Medical Foundation, the Robins Kaplan Miller & Ciresi Foundation for Children and the Minnesota Workers' Compensation Reinsurance Association.

The four were participants in Wells Fargo's security lending program, in which Wells Fargo would lend securities owned by the clients to brokers in large financial institutions who used the shares to conduct certain types of transactions. The clients received cash collateral for the shares and Wells Fargo pooled and invested it in generally safe financial instruments with the goal of earning a small return while the shares were in the brokers' hands.

Two investments defaulted

But the plaintiffs allege that Wells Fargo strayed from its safe-investment mission and held some riskier items, including commercial paper from structured investment vehicles, known as SIVs, which contained asset-based securities including subprime mortgages.

Two of the SIVs in the bank's portfolio defaulted which, along with the collapse of Lehman Brothers, caused losses in the securities lending program in 2007 and 2008.

In testimony last week, Wells Fargo executives said the economic downtown that began with a credit crunch in the middle of 2007 was unforeseeable.

"Prior to August 2007, SIV notes had a very long track record of stability," testified Matthew Grimes, head of a credit research team for Wells Capital Management, the unit that kept an approved investment list for the bank. "They met our standards."

Roger Adams, director of investment for the security lending program, said SIVs had been consistently safe and profitable.

"Then the entire market became illiquid," Adams testified. "It was a virtual standstill overnight. Investors simply stopped buying investments. I'd never seen anything like it before."

But under cross-examination by lawyers for the nonprofits, Wells Fargo officials acknowledged there were warning signs about the real estate market as early as 2006.

One document entered into evidence by the plaintiffs was a fourth-quarter 2006 internal report from a Wells Fargo subsidiary that noted the "housing market weighed heavily on the minds of investors ... delinquency and foreclosure rates ... are accelerating almost 50 percent faster than in previous market slowdowns."

A second report by the same subsidiary, Galliard Capital Management, regarding distressed homeowners said "losses will develop early and defaults will occur relatively quickly."

When asked whether he passed this information on to securities lending directors, Galliard portfolio manager Ajay Mirza replied, "No. My job is on the investment side."

Wells Fargo insisted the losses were the clients'. A letter to the Minnesota Medical Foundation from Executive Vice President Michael Hogan in October 2008, said, "Wells Fargo is not responsible for the participant's loss." It was caused by an "unprecedented market crisis."

In another internal document, Hogan said, "Wells Fargo will not indemnify any of those losses."

However, handwritten notes from a securities lending meeting several months earlier quote Hogan as saying "clients [are] just getting screwed right now."

Asked under cross-examination if he said that, Hogan responded, "I'm not sure I used that word, but the sentiment is accurate."

David Phelps --612-673-7269

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