Wells Fargo agrees to $300 million settlement in securities lawsuit

Wells Fargo & Co. has agreed to pay $300 million in cash as part of a settlement with shareholders addressing a federal class-action lawsuit filed in 2018.

The Construction Laborers Pension Trust for Southern California led the class action lawsuit brought on behalf of an estimated "hundreds of thousands" of investors.

The settlement also involves former Wells Fargo chief executive Timothy Sloan.

A trial had been scheduled to begin Feb. 27.

According to the settlement, the $300 million represents between 31% and 47% of the estimated aggregate damages in this case.

"It is an excellent result for the class and falls significantly above the typical range of percentage recoveries," the filing said. "This settlement is thus exceptional.

"On an absolute basis, it will likely rank within the top 100 largest settlements obtained to date in a securities fraud class action."

Wells Fargo said in a statement that "while we disagree with the allegations in this case, we are pleased to have resolved this legacy issue."

The settlement, which alleged violations of the Federal Securities Laws, requires court approval, which could come as soon as March 22.

The settlement funds will be placed in an escrow account within 10 days of the final settlement approval.

Key details

The plaintiffs claimed they were damaged by the bank when they purchased or acquired Wells Fargo's common stock during the class-action period of Nov. 3, 2016, to Aug. 3, 2017.

According to the settlement, the plaintiffs "alleged that during that period, (Wells Fargo) made materially false or misleading statements" in violation of federal Securities law.

Those statements "caused the price of Wells Fargo stock to trade at artificially inflated prices."

In late October 2016, the share price was around $46. The share price reached upward of more than $58 before closing the period in August 2017 at around $51.

The key element to the complaint was plaintiffs' accusations that Wells Fargo "improperly force placed unneeded collateral protection insurance on hundreds of thousands of its customers and failed to refund unearned guaranteed auto protection premiums to tens of thousands of customers."

Force-placed insurance is defined by the N.Y. Insurance Department as a policy placed by a lender, bank or loan servicer when the property owners' own insurance is canceled, has lapsed or is deemed insufficient, and the borrower does not secure a replacement.

For nearly 25,000 customers, the end result was repossession of their car.

According to the Financial Web website, collateral-protection insurance is defined as a policy that protects auto-loan lenders from financial losses resulting from having to pay claims when the vehicle owner does not have auto insurance.

CPI allows lenders to cover the claims without losing any money.

In most cases, the insurance cost is built into the borrower's loan, sometimes without the borrower's knowledge, as it appears may have been the case with Wells Fargo customers.

The lead plaintiff alleged the bank "knew of these issues, but never disclosed them to investors or the public."

"The facts did not come to light until they were published by the New York Times in July 2017.

"Lead plaintiff alleged that persons who purchased Wells Fargo stock during the class period suffered economic losses when the price of Wells Fargo stock declined as a result of two alleged corrective disclosures that revealed the issues to investors."

Related settlement

In January 2019, Wells Fargo agreed to pay at least $386 million to settle a 2017 class-action lawsuit addressing its auto collateral-protection insurance practices.

The amount was more than six times the $64 million that Wells Fargo initially agreed to pay in July 2017 to settle the lawsuit.

"As this litigation has shown, Wells Fargo's 2017 remediation plan was woefully inadequate and ultimately represented only a fraction of the benefit the settlement confers on customers," according to the filing.

National General Insurance Co. agreed to pay $7.5 million for its role with the products. Both parties denied wrongdoing.

That class-action period was Oct. 15, 2005, to Sept. 30, 2016 - the latter date being a couple of weeks after Wells Fargo's fraudulent customer-account scandal surfaced that has affected at least 3.5 million retail customers.

Wells Fargo said in a January 2019 statement that "reaching this agreement, which leverages remedies available in our existing remediation plan, is an important step in making things right for customers impacted by this issue."

The settlement said the scheme worked like this:

Wells Fargo would purchase CPI from National General or its predecessors, and then force-place the insurance on auto loan borrowers' accounts.

Wells Fargo would assess a full year's worth of CPI charges against the borrower's account, and then charge monthly interest on the premium before applying payments to a customer's principal loan balance.

That payment mechanism, according to the filing, ensured that the bank was paid for the CPI charges first, which left some customers delinquent on their auto loan payment.

There also was an unearned commission tacked onto the costs bore by customers.

On Dec. 21, Wells Fargo announced agreeing to a record $3.7 billion settlement with the Consumer Financial Protection Bureau. The settlement involves $1.7 billion in fines and more than $2 billion in redress and compensation to customers.

The CFPB enforcement action is just the latest in a series of regulatory and other federal fines and consent orders for Wells Fargo since its fraudulent customer-account scandal erupted in September 2016.

During that time period, total regulatory penalties have added up to at least $11.44 billion.

The CFPB described Wells Fargo as "a repeat offender that has been the subject of multiple enforcement actions by the CFPB and other regulators for violations across its lines of business, including faulty student loan servicing, mortgage kickbacks, fake accounts, and harmful auto loan practices."

Wells Fargo responded to the CFPB settlement by saying it resolved "multiple matters, the majority of which have been outstanding for several years, related to automobile lending, consumer deposit accounts and mortgage lending."

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