Investor Impact: Holding Wells Fargo Accountable for Securities Fraud

July 25, 2023

By Kate Fitzgerald
Shareholder Advocate Summer 2023

On May 16, the United States District Court for the Southern District of New York preliminarily approved a $1 billion settlement in In re Wells Fargo Securities Litigation (S.D.N.Y.). If granted approval, following a hearing scheduled for September 8, 2023, it would be among the top securities class action settlements of all time.

A Story of Betrayal and Fraud

Wells Fargo Bank is one the largest banks in the United States.

Between May 30, 2018 and March 12, 2020 (the “Class Period”), Wells Fargo and its top executives allegedly made a series of false and misleading statements to not only investors, but the public and Congress. Specifically, Plaintiffs allege that the Bank, which had been fined $3 billion by the U.S. Department of Justice, SEC, and other federal and state authorities for opening an estimated 3.5 million phony bank accounts, misrepresented its compliance with government mandated consent orders.

These orders, mandated by the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, were created to rectify Wells Fargo’s governance and oversight failures, which allowed such consumer fraud to happen in the first place.

To make matters worse for the Bank, the FRB issued an unprecedented asset cap, restricting any future growth until the bank was in compliance with the consent orders.

As senior bank executives continued to allegedly mislead investors that regulators were satisfied with the Bank’s progress on fulfilling the consent orders and that the asset cap would be timely removed, Wells Fargo’s common stock traded at artificially inflated prices.

The Truth Revealed

The truth regarding Wells Fargo’s fraud was revealed over a number of corrective disclosures. Ultimately, in March 2020, a House Committee on Financial Services report revealed that, after a yearlong investigation, Wells Fargo’s remediation plans were “materially incomplete” and fell “woefully short” of regulators’ expectations.

Congressional hearings revealed even more. Wells Fargo CEO Charles Scharf testified that “the company’s leadership failed its stakeholders” and “we did not have the appropriate controls in place across the company.”  As a result of these revelations, Wells Fargo’s stock plummeted.

The Role of Investors

Given the significant losses to their public pension funds, the Public Employees’ Retirement System of Mississippi (Mississippi) and the State of Rhode Island, Office of the General Treasurer (ERSI), stepped in and addressed Wells Fargo’s fraud head on. In November 2020, shortly after the initial investor suit was filed, both ERSI and Mississippi were appointed co-Lead Plaintiffs, Cohen Milstein was appointed Lead Counsel with co-counsel.

If the court grants final approval, this $1 billion settlement will help compensate the public pension funds and other investors impacted by Wells Fargo’s fraud.

Significance of Investor Involvement

Research confirms that when large, sophisticated institutional investors, such as ERSI and Mississippi, serve as lead plaintiffs in securities class actions, the case is more likely to survive defendants’ motions to dismiss, settlements are higher in value and are from a higher percentage of recoverable damages. Their involvement in securities class action helps to deter companies from engaging in fraud in the future.

Indeed, a $1 billion settlement is also an effective warning to other banks and companies: investors are not only watching, but they are also ready to act.

Investor Impact on Industry

In re Wells Fargo Securities Litigation also highlights the enforcement role private litigation can play when banks fall short of their obligations to ensure proper compliance with regulators and other government entities.

This is important to note as banks get bigger through market consolidation. The effect will likely mean less executive and board oversight and less market choice for customers, creating ripe opportunities for customer harm and fraud.

Investor confidence and our economy are dependent upon the integrity of the banking industry, and institutional investors are critical to helping keep banks accountable.