Wells Fargo Targeted in Second Stock Drop Complaint

According to plaintiffs, a refusal to purchase company stock is not a “transaction” within the meaning of insider trading prohibitions and would not have required any independent disclosures. 

A new lawsuit filed in the U.S. District Court for the District of Minnesota suggests Wells Fargo’s highly publicized sales violations in its personal banking business have also caused the company to breach its fiduciary duty to retirement plan participants.

Specifically, plaintiffs accuse the bank’s internal management of improperly retaining common stock of Wells Fargo & Company as an investment option in the company’s 401(k) plan “when a reasonable fiduciary using the care, skill, prudence, and diligence … that a prudent man acting in a like capacity and familiar with such matters would have done otherwise.”

The allegations in the suit follow the classic pattern of so-called “stock drop” litigation, and they follow a similar complaint filed against Wells Fargo just last week in the same jurisdiction, with some important differences.

By way of background, negative media reports and Congressional inquiries 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.

This second piece of proposed class-action litigation argues that defendants, who allegedly had access to non-public information relating to Wells Fargo’s operations, permitted the plan to continue to offer Wells Fargo Stock as an investment option to participants even after they knew or should have known that Wells Fargo Stock was artificially inflated during the class period—defined by plaintiffs as January 1, 2011 to September 8, 2016.

“Due to the artificial inflation of the company stock price—which would be corrected upon the revelation of negative information—Wells Fargo Stock was an imprudent retirement investment for the plan given its purpose of helping plan participants save for retirement,” the plaintiffs claim. “As fiduciaries of the plan, defendants were empowered to remove Wells Fargo Stock from the plan’s investment options, or to take other measures to help participants, but failed to do so or to take any other action to protect the interests of the plan or its participants.”

As a result, according to the plaintiffs, Wells Fargo managers breached their obligations under ERISA and are liable for damages to a large class of participants.

NEXT: Appealing to Fifth-Third Bank v Dudenhoeffer 

According to plaintiffs, the Supreme Court has explained that an Employee Retirement Income Security Act (ERISA) fiduciary’s perpetuation of an imprudent investment violates his or her obligations under ERISA, whether that investment is company stock or a proprietary mutual fund. 

“In Fifth Third Bancorp v. Dudenhoeffer, the Supreme Court considered a class action in which participants in an ERISA plan challenged the plan fiduciaries’ failure to remove company stock as a plan investment option,” plaintiffs argue. “The Supreme Court held that retirement plan fiduciaries are required by ERISA to determine independently whether company stock remains a prudent investment option. Moreover, the Supreme Court rejected the defendant-fiduciaries’ argument that they were entitled to a fiduciary-friendly ‘presumption of prudence,’ holding that no such presumption applies.”

According to plaintiffs, SCOTUS further held “that the duty of prudence trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary … Likewise, the plan’s fiduciaries are subject to the same duty of prudence that applies to ERISA fiduciaries in general … Thus, even if the plan purportedly required that Wells Fargo Stock be offered, the plan’s fiduciaries were obligated to disregard that directive once company stock was no longer a prudent investment for the plan.”

The plaintiffs’ argument continues: “Given the totality of circumstances prevailing during the class period, no prudent fiduciary could have made the same decision as defendants to retain and/or continue purchasing the clearly imprudent Wells Fargo Stock as a plan investment. To remedy the breaches of fiduciary duties described herein, plaintiff seeks to recover the financial losses suffered by the plan as a result of the diminution in value of company stock invested in the plan during the class period, and to restore to the plan funds that participants would have received if the plan’s assets had been invested prudently.”

As of the start of the class period on January 1, 2011, the plan held more than $5 billion in company stock, and it acquired significantly more Wells Fargo Stock thereafter.

NEXT: Examining the complaint 


The text of the complaint offers some interesting insights into the process allegedly used by Wells Fargo plan fiduciaries as they oversaw the purchase of shares of company stock.

According to plaintiffs, at the start of the class period in 2011, participants were able to make Wells Fargo stock purchases at the price of $28.33 per share. This figure increased throughout the class period—as Wells Fargo was rewarded in the stock market for its major push to embrace and enhance cross-selling within its personal banking divisions—such that by the end of 2015, participants were paying nearly $46 per share.

The complaint goes on to argue that plan fiduciaries, given their knowledge that Wells Fargo was being rewarded for improper sales practices that would inevitably come to light, should not have permitted the continued purchase of Wells Fargo stock even at a level stock price—let alone after the price practically doubled in value.

“By the beginning of the class period, defendants, most of whom were insiders of the company, knew or should have known that Wells Fargo’s cross-selling programs engendered illicit sales tactics,” the complaint continues. “Wells Fargo’s cross-selling programs were illegally producing growth within the company’s existing customer base. Nonetheless, defendants continued to allow the plan to hold and invest tens of millions of dollars in Wells Fargo’s artificially inflated securities through the plan.”

In terms of alleging a plausible action that defendants should have taken were they acting as prudent and knowledgeable fiduciaries—an absolutely crucial element of a successful stock drop complaint—plaintiffs have a few suggestions.

“Recognizing that the price of Wells Fargo Stock had become artificially inflated by the misleading information relating to the success of Wells Fargo’s cross-selling programs and the company’s legal and regulatory compliance, defendants should not have merely stayed the course, continuing to purchase Wells Fargo Stock on behalf of the plan and the class for more than its true value,” the complaint says. “Indeed, defendants plausibly could have taken any of several alternative actions to comply with their duties as fiduciaries of the plan. As set forth more fully below, none of these steps would have (a) violated securities laws or any other laws, or (b) been more likely to harm the Plan’s Wells Fargo Stock holdings than to help. Defendants could have (and should have) directed that all company and plan participant contributions to the company stock funds be held in cash or some other short-term investment rather than be used to purchase Wells Fargo Stock.”

According to plaintiffs, a refusal to purchase company Stock is not a “transaction” within the meaning of insider trading prohibitions and would not have required any independent disclosures that could have had a materially adverse effect on the price of Wells Fargo Stock.

“A prudent fiduciary in similar circumstances would not have viewed this decision as more likely to harm participants than help them,” the complaint concludes. “Defendants also should have provided that participant contributions meant to purchase company stock be diverted into prudent investment options based upon the participants’ instructions or, if there were no such instructions, the plan’s default investment option.”

The full text of the complaint is here.