Wells Fargo Bad Loan Suit Dismissed

Wells Fargo shareholders lost their bid to hold the bank’s top executives responsible for alleged lying about the quality of high-risk home mortgages to federal insurers.

A federal judge last week dismissed the second attempt by shareholders to sue the bank, CEO John Stumpf and seven board members for unjust enrichment and waste of corporate assets between 2001 and 2010.

The lawsuit accused Wells Fargo of improper certification of the creditworthiness of over 100,000 of its high-risk residential mortgages to the U.S. Department of Housing and Urban Development were eligible for FHA-insured mortgages.

Under the rules of that insurance guarantee, if a borrower defaults, the lender submits a claim to HUD for the costs associated with the defaulted mortgage and sale of the property.  HUD then pays off the balance of the mortgage and owner costs and may assume ownership of the property.

Prior to filing the lawsuit, the shareholders led by Richard Gulbrandsen, failed to make a demand of Wells Fargo and the Board of Directors for reimbursement based on those claims.  The initial lawsuit was dismissed based on the plaintiffs’ failure to argue that such a demand would have been futile.

The current, amended version of the lawsuit, also failed to sufficiently pled futility of such a demand, according to Magistrate Judge Jacqueline Scott Corley in San Francisco.

The suit does not survive for that reason, although Corley noted that during 2002, the bank allegedly far exceeded its own standard for loans that misrepresented the borrowers ability to repay.  The bank had an internal benchmark of 5 percent for material violations, according to the court.  But during 2002 that “rate never dipped below 42 percent and reach as high as 48 percent,” she said, “meaning nearly one out of every two retail FHA loans that Wells Fargo certified to HUD did not qualify for insurance.”

An Office of Inspector General report cited the problems at the bank and recommended appropriate administrative action, but subsequent OIG reports revealed the same issues on loans between 2002 to 2004.

The original lawsuit was filed against the bank in the Southern District of New York and dismissed.  The current lawsuit was filed in San Francisco in 2012 but was against dismissed because plaintiffs “failed to allege sufficient particularized facts to excuse demand on Wells Fargo’s Board,” said Corley.

She pointed out that there was no specific allegation that any current member of the board was actually aware of either of the critical OIG reports.

The complaint “fails to allege particularized facts that raise a reasonable doubt that at least seven members of the current Board of Directors could have properly exercised his or her independent and disinterested business judgment in responding to a demand,” Corley said.

Case:  Gulbrandsen v. Stumpf, No. 12-5968JSC


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