Stock Drop Suit Targets Wells Fargo

In the new ERISA lawsuit, plaintiffs allege that plan fiduciaries knew well in advance about the problematic sales practices that have come to light in the last month.

By John Manganaro | October 13, 2016
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A new lawsuit filed in the U. S. District Court for the District of Minnesota points to Wells Fargo’s ongoing troubles involving unethical sales practices to make the case that 401(k) plan fiduciaries should have dropped company stock as an investment option to protect the best interest of plan participants.

The allegations in the suit follow the classic pattern of so-called “stock drop” litigation, but the new complaint also stands out as unique because of the rapid pace with which it was filed following the triggering disclosure. Followers of the financial services industry will already be aware of the negative media reports and Congressional inquiries that have plagued Wells Fargo’s personal banking wing for roughly a month now. According to published news reports and the admissions of now-ousted CEO and Chairman John Stumpf, the company’s aggressive sales requirements for low-level banking professionals directly inspired the opening of millions of unauthorized customer accounts. This resulted in a major backlash against the company that has cut roughly 12% to 15% of Wells Fargo stock’s market value compared with this time last year. The company faces separate civil penalties approaching $200 million.

In the new Employee Retirement Income Security Act (ERISA) lawsuit, plaintiffs allege that plan fiduciaries knew well in advance about the problematic sales practices.

“Defendants intentionally withheld material non-public information from plan participants invested in Wells Fargo stock and the public at large about a criminal epidemic at Wells Fargo associated with a critical component of Wells Fargo’s business model and key driver of its stock price—i.e., cross-selling,” plaintiffs suggest. “This criminal epidemic was created by Wells Fargo’s senior executives, including its CEO and Chairman, through an incentive structure that encouraged and caused employees to sign up customers for unauthorized and unwanted accounts and other banking products to generate inflated share price growth.”

At the same time, according to the complaint, these senior executives sold millions of their personal Wells Fargo stock at inflated prices, earning hundreds of millions of dollars, while failing to take corrective action to protect plan participants.

“As a result of this, as well as other conflicts of interest and fraud, defendants violated their fiduciary duties to the plan participants in violation of ERISA, causing no less than hundreds of millions of dollars in damages to the plan,” plaintiffs allege.

NEXT: Examining the plaintiff’s claims