Wells Fargo faces shareholder fraud lawsuit

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(Reuters) – A federal judge on Thursday rejected Wells Fargo & Co.’s offer to dismiss a lawsuit claiming it defrauded shareholders over its ability to bounce back after five years of scandals over its treatment of customers.

The fourth-largest U.S. bank has been operating since 2018 under consent orders from the Federal Reserve and two other U.S. financial regulators to improve governance and oversight, with the Fed also capping Wells Fargo’s assets.

Shareholders said bank officials falsely claimed in TV interviews, analyst calls and congressional testimony that the bank was improving, when regulators actually viewed its progress as “deficient” and ” unacceptable “.

US District Judge Gregory Woods in Manhattan said shareholders plausibly alleged that certain statements by various bank officials, including former CEO Tim Sloan, were “willfully or recklessly false or misleading.”

According to shareholders, San Francisco-based Wells Fargo lost more than $ 54 billion in market value as the truth gradually came to light over a two-year period ending in March 2020.

Justice Woods also dismissed the claims against current CEO Charles Scharf, saying he was not guilty of the disputed claims.

The scandals prompted Warren Buffett’s Berkshire Hathaway Inc. to sell almost all of its 10% stake in the bank.

“We will continue to vigorously defend the litigation and strongly disagree with the claims,” Wells Fargo said in an emailed statement.

Mr Sloan’s attorney Josh Cohen said in an email Friday that his client’s statements were true and that Sloan “has worked tirelessly to bring Wells Fargo into compliance with consent orders and regulatory requirements “.

The move is a setback for Wells Fargo’s rebound after disclosures including opening around 3.5 million accounts without client permission and billing hundreds of thousands of borrowers for auto insurance that they didn’t need.

Wells Fargo has paid more than $ 5 billion in fines and the Fed’s $ 1.95 trillion asset cap is limiting the bank’s growth.

Mr. Sloan abruptly resigned as CEO after 2.5 years in March 2019. A year later, Wells Fargo canceled a $ 15 million bonus for him.

In his 61-page ruling, Justice Woods did not decide whether bank officials intended to defraud shareholders.

But he said it would have been “nearly impossible” for Mr. Sloan to ignore criticism from regulators.

“Based on the facts on the ground, Mr. Sloan knew or, more importantly, should have known that he was distorting important facts relating to the company,” Judge Woods wrote.

Shareholders are led by the state of Rhode Island and pension funds in Louisiana, Mississippi and Sweden.

Their lawyer Steven Toll said he was happy they could prosecute the “vast majority of alleged fraudulent statements”.


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