Judge dismisses diversity lawsuit against Wells Fargo
Winston-Salem Journal (NC)
A federal judge in California dismissed Friday a securities fraud class action against Wells Fargo & Co. related to its diversity hiring practices.
The lawsuit, filed June 28, 2022, alleges the bank and certain executives that include chief executive Charlie Scharf had made false or misleading statements about diversity hiring practices between Feb. 24, 2021, and June 9, 2022.
Judge Trina Thompson dismissed the case just three days after hearing oral arguments. It was dismissed without prejudice, with the judge giving the plaintiffs 21 days to file an appeal.
The bank defines a "diverse" candidate as a woman or person of color, along with categories pertaining to people with disabilities, veterans, sexual orientation and gender identity.
The key element of the lawsuit was claims that Scharf, as well as bank executives with hiring practices responsibilities, were misleading the public and investors with a Diverse Search Requirement protocol that debuted in March 2020.
The requirement set that "for most U.S. roles with total direct compensation greater than $100,000, at least 50% of interview candidates must be diverse with respect to at least one diversity dimension."
The plaintiffs cited several Wells Fargo regulatory reports and public comments, including before Congress, of how the bank was implementing the requirement.
In May 2022, The New York Times reported the guidelines contributed to fake job interviews with the diverse candidate interviewed for a job that already had been promised to someone else.
The plaintiffs claimed the bank's share price had been artificially protected by the misleading reports and public comments since the share price dropped 10% in the days after a June 2022 New York Times follow-up story on the diversity hiring practices.
There also were articles on the bank's diversity hiring practice in Business Insider.
Wells Fargo said in its response that its regulatory challenges "have nothing to do with the allegations in this case.
Thompson said the plaintiffs relied significantly on the four articles for the basis of their claim.
"The court agrees that a reasonable investor, under the circumstances alleged, would not expect sham interviews to be conducted to fulfill the Diversity Search Requirement," Thompson wrote.
However, she added that federal law "requires particularized allegations sufficient to infer that sham interviews took place during the class period and that they were widespread. The plaintiffs fall short of satisfying this requirement."
Thompson added that while "plaintiffs' attempt to tie (the fake interviews) together under the broad general category of diversity may add color to their claims, none of Wells Fargo's past regulatory issues dealt specifically with sham interviews conducted to fulfill the Diversity Search Requirement."
"Thus, while Wells Fargo's history provides some context for the allegedly misleading statements, it is not sufficient to confer scienter."
Wells Fargo, however, is not clear of potential legal and regulatory consequences.
The bank initially cited in its third-quarter 2022 regulatory filing that it is facing "formal or informal inquiries or investigations" from the U.S. Justice Department and Securities and Exchange Commission.
There was no update on those investigations in its second-quarter regulatory report on Aug. 1.
Where the investigations intersect is that the hiring practices also have been the subjects of shareholder derivative lawsuits filed in federal District Court for the Northern District of California and in California state court.
In August 2022, Wells Fargo stated a new version of its diverse candidate hiring guidelines.
The guidelines include:
Continue to expect a 50% diverse candidate slate and a diverse interviewer panel;Revise the existing process for allowing exceptions to the guidelines to provide for manager and recruiter review, and ongoing monitoring;Provide updated training for recruiters and managers on the diverse candidate guidelines, including how they should be applied throughout the recruiting and hiring process;Focus monitoring of the guidelines on the effectiveness of their contribution to the goal of increasing diverse representation; andContinue to hold senior leaders accountable for making progress on diverse representation.
Wells Fargo has said it conducted "a review of diverse candidate slate hiring approaches and interviewed Wells Fargo recruiters and hiring managers to determine what's working and what's not."