Investors claimed they were misled about bank’s progress in fixing governance and oversight issues that came to light in wake of 2016 “fake accounts” scandal.
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Wells Fargo has agreed to pay another whopping settlement to put allegations of past misdeeds behind it, this time earmarking $1 billion to settle a lawsuit by shareholders who said they were misled about the bank’s progress in fixing problems flagged by regulators almost a decade ago.
In December, Wells Fargo agreed to pay $3.7 billion to settle allegations by the Consumer Financial Protection Bureau that it harmed millions of consumers over a period of several years through mismanagement of mortgages, auto loans and deposit accounts.
In 2021, Wells Fargo agreed to pay a $250 million fine to another federal regulator, the Office of the Comptroller of the Currency, which found fault with the bank’s practices for helping homeowners having trouble paying their mortgages.
But the $1 billion settlement granted preliminary approval Tuesday by U.S. District Judge Gregory Woods has its roots another, earlier scandal — the 2016 “fake accounts” debacle in which Wells Fargo employees were accused of enrolling existing bank customers in new accounts without their knowledge in order to meet sales targets.
In the wake of that scandal, in 2018 Wells Fargo entered into consent orders with several regulators to address governance and oversight issues, including the Federal Reserve Board, Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau.
Executives at the bank gave the public assurances that they were making progress in fixing the problems that led to the consent orders. But a 2020 report by the House Financial Services Committee revealed Wells Fargo’s “prolonged failure” to satisfy the terms of consent orders and “establish the safeguards necessary to protect consumers from harm,” attorneys for shareholders said in a 2020 complaint.
Shares in Wells Fargo plummeted following the release of the report, falling 34 percent in one week on fears of further action by regulators, the lawsuit claimed.
Wells Fargo denied the allegations brought by shareholders against the bank and executives who have since departed. But in the end, it agreed to settle the lawsuit after Judge Woods declined to dismiss the case and ordered the parties to enter into mediation.
“Defendants, who deny that they have committed any act or omission giving rise to liability under the federal securities laws, are entering into the settlement solely to eliminate the uncertainty, burden, and expense of further litigation,” said a notice to affected Wells Fargo investors.
The Employees’ Retirement System of Rhode Island (ERSRI), a Wells Fargo investor which claimed about $6 million in losses, “stood up for its stakeholders and held Wells Fargo accountable for its misconduct” by participating in the lawsuit, said Rhode Island General Treasurer James Diossa.
“Wells Fargo betrayed the trust of Rhode Island pensioners and is now rightly facing consequences because of that,” Diossa said in a statement.
If the settlement is granted final approval, investors who owned shares in Wells Fargo from Feb. 2, 2018 through March 12, 2020 are expected to recover an average of 53 cents per share if they don’t opt out. Attorneys who represented investors say they’ll apply for an award of up to 19 percent of the settlement fund, or $190 million.
A settlement hearing is scheduled for Sept. 8 at the U.S. District Court for the Southern District of New York in Manhattan.
Once the nation’s largest mortgage lender, Wells Fargo has seen much of that business evaporate last year as rising interest rates crushed demand for mortgage refinancing.
Wells Fargo mortgage originations, by channel
Source: Inman analysis of Wells Fargo regulatory filings
While other lenders have also been hit hard by rising rates, Wells Fargo has also reduced its footprint in the mortgage lending business by closing retail branches and shutting down its correspondent lending channel, which at times accounted for more than half of the bank’s mortgage production.
Wells Fargo said in January that the decision to exit correspondent lending was part of a strategy to better serve the bank’s customers and minority communities. But Bloomberg reported in August that executives were weighing such a move over concerns about the financial and reputational risk of buying mortgages from third parties after “years of struggles to avoid costly regulatory probes and hits to the bank’s reputation.”
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