Wells Fargo & Company
On October 12, 2016, Saxena White filed a shareholder derivative action on behalf of Plaintiff The City of Birmingham Retirement and Relief System (“Birmingham”) in the United States District Court for the Northern District of California on behalf of Wells Fargo & Company (“Wells Fargo” or the “Company”) (NYSE:WFC). The Complaint charges the directors and officers of Wells Fargo with violations of Section 14(a) of the Exchange Act, breach of fiduciary duty, and unjust enrichment.
The Complaint alleges that since 2011, the board of directors (“Board”) and executive management of Wells Fargo have perpetuated a business model of aggressively cross-selling additional products to existing customers. Setting unreasonably high sales quotas and threatening employees with termination if they failed to meet these quotas, Wells Fargo management effectively forced its bankers into opening over two million unauthorized accounts to keep their sales numbers competitive, resulting in serious and systematic violations of federal and state laws. As alleged in the Complaint, the Board knew about the significant weaknesses in the Company's internal controls that should have flagged the misconduct at the Bank's branch level, but consciously and knowingly allowed this systemic customer abuse to continue so that the Bank's cross-selling statistics—a key metric and the primary reason for the meteoric rise of Wells Fargo stock—remained strong. As of the filing of the Complaint, the Board’s failure to take action has resulted in fines of $185 million, a 9% drop in the Bank's stock, and untold reputational damage. Further government investigations and other legal action may result in substantial additional penalties, fines and liability for Wells Fargo.
On November 22, 2016, Birmingham along with Plaintiff Fire and Police Pension Association of Colorado (“Colorado Fire and Police”) filed a joint motion before the Court for an Order consolidating the various related shareholder derivative actions, appointing Colorado Fire and Birmingham as Co-Lead Plaintiffs and appointing their choice of Co-Lead Counsel. On January 12, 2017, Judge Tigar appointed Colorado Fire and Police and Birmingham as Co-Lead Plaintiffs in the Wells Fargo & Company Consolidated Derivative Litigation and appointed Saxena White as Co-Lead Counsel. In his Order, Judge Tigar specifically held that the Lead Plaintiffs had fully demonstrated that they would adequately protect the interests of Wells Fargo and its shareholders, stating that Lead Plaintiffs and their counsel “have demonstrated a superior ability to move this litigation forward effectively and efficiently, and to otherwise best serve the interests of the plaintiffs.” The Court also noted counsel’s “key role” in this landmark derivative case, “which has made the outset of this litigation more efficient for both the parties and this Court.”
On February 8, 2017, the Court entered a briefing schedule regarding the timing of the filing of Lead Plaintiffs’ Consolidated Complaint and Defendants’ anticipated motion to dismiss briefing. In accordance with the schedule, Plaintiffs filed the Consolidated Complaint on February 24, 2017. Defendant's filed their Motion to Dismiss the Consolidated Complaint on March 17, 2017. A hearing on Defendant's motion was held on May 4, 2017.
On May 4, 2017, the same day as the hearing, the Honorable Jon S. Tigar denied in large part Defendants’ motion to dismiss. In its Order, the Court concluded that demand was “futile because the allegations in the Complaint create a reasonable doubt as to whether a majority of the Director Defendants face a substantial likelihood of liability as to Plaintiffs’” breach of fiduciary duty, securities, and derivative claims. In so holding, the Court determined that a majority of Wells Fargo’s Directors knew about the widespread “illegal activity and consciously disregarded their fiduciary duties to oversee and monitor the company.” The Court emphasized that Wells Fargo’s Directors consciously disregarded their fiduciary obligations because “Wells Fargo’s success was dependent upon cross-selling, which was in turn dependent upon the same strict sales quotas that drove employees to create fake accounts.”
On June 5, 2017, Defendants filed additional motions to dismiss the Complaint on non-demand futility grounds. Plaintiffs filed their opposition brief on July 5, 2017 and Defendants’ replies were submitted on July 26, 2017.
On October 4, 2017, Judge Tigar delivered yet another resounding victory to Plaintiffs in denying the Defendants’ motions to dismiss as to the majority of the claims brought. Judge Tigar found in his October 4, 2017 Order that Plaintiffs’ “extensive and detailed allegations” specifically showed that the executives and directors made false statements about the scheme in the Bank’s filings to the U.S. Securities and Exchange Commission. Specifically, the Court found that “Defendants knew of, but failed to disclose, a fraudulent business practice that put the company at material risk – namely, the fraudulent account-creation scheme.”
A proposed $320 million settlement (the “Settlement”) has been reached in this Derivative Action. On February 28, 2019, Lead Plaintiffs filed a motion for preliminary approval of the Settlement as well as various supporting documents, including the Settlement agreement between the parties. The benefits to Wells Fargo of the proposed Settlement include (i) monetary consideration of $240 million paid to Wells Fargo from its insurers; (ii) agreement and acknowledgement that facts alleged in the Derivative Action were a significant factor in causing certain corporate governance changes undertaken by Wells Fargo during the pendency of the Derivative Action, which include improvement to Wells Fargo’s internal controls, internal reporting, and expanded and enhanced oversight of risk management by the Board of Directors (the “Corporate Governance Reforms”); and (iii) agreement and acknowledgement that facts alleged in the Derivative Action were a significant factor in causing certain remedial steps with respect to compensation reductions and forfeitures undertaken by Wells Fargo during the pendency of the Derivative Action (the “Clawbacks”). As part of the Settlement, the parties agreed that the Corporate Governance Reforms and the Clawbacks have a value to Wells Fargo of $80 million, for a total Settlement value to Wells Fargo of $320 million.
The proposed Settlement is subject to Court approval, and a preliminary approval hearing is scheduled before the Honorable Jon S. Tigar for April 4, 2019 at 2:00 p.m.