San Francisco federal district court judge Susan Illston on Thursday refused to dismiss claims that more than two dozen current and former Wells Fargo directors and the bank’s CEO and former CFO breached their fiduciary duties to shareholders in the course of navigating the mortgage crisis. She ruled that the lead plaintiffs in the consolidated case, two pension funds represented by Robbins Geller Rudman & Dowd and Barrett Johnson, adequately alleged that the defendants misled shareholders about Wells Fargo’s cooperation with government investigators probing alleged “robo-signing” of mortgage documents and other loan practices at the bank.
Among other things, the plaintiffs claim that Wells Fargo’s board urged shareholders last March not to back a proposed internal investigation into the bank’s mortgage practices on the grounds that the investigation would interfere with ongoing efforts to cooperate with regulators. But at the same time, the plaintiffs allege, the board was doing its best to stymie the government’s investigation.
Those claims, Judge Illston concluded, were sufficient to survive the bank’s motion to dismiss. “The Court concludes that plaintiffs have sufficiently alleged that defendants breached their duty of loyalty by failing to disclose that, in the course of government investigations, Wells Fargo had opposed discovery requests, filed motions to quash, and refused to provide details concerning the Company’s policies,” she ruled. “If, as alleged, the Company was delaying these investigations, defendants either knew or should have known that materially misstating that fact in an SEC filing was legally improper.”
Judge Illston did grant part of the October 2011 motion to dismiss filed by the directors and their lawyers at Arnold & Porter, however. The judge denied claims of gross mismanagement and abuse of control with prejudice, and she rejected claims that bonuses granted to CEO John Stumpf and former CFO Howard Atkins amounted to corporate waste. She granted the plaintiffs leave to amend their claims related to the bonus payments.
The Wells Fargo directors and the bank are represented by Gilbert Serota of Arnold & Porter, who brought the case with him from Howard Rice Nemerovski Canady Falk & Rabkin when Howard Rice consummated its merger with A&P last month. Serota declined to comment on the ruling. We also reached out to co-lead plaintiffs counsel Shawn Williams and Travis Downs III of Robbins Geller but didn’t hear back.