Wells Fargo Cross-Selling Scandal Leads to ERISA Class Action

A participant in Wells Fargo’s 401k plan filed a proposed class action suit last week (Oct. 7), accusing the bank of allowing employees to continue investing their retirement savings in company stock despite knowing the price was artificially inflated due to the now-uncovered cross-selling scheme.

Roughly one-third — $12 billion – of Wells Fargo’s 401k assets are invested in its own stock.

Wells Fargo has dominated headlines this month after it was discovered its commercial banking unit was engaging in a cross-selling scheme in which customers were signed up for unauthorized accounts and products.

Since the news broke, of course, the stock has taken a 10% hit.

Does the suit have a chance? Bloomberg BNA explores:

According to the complaint, Wells Fargo’s stock price nearly doubled during the six-year period of increased cross-selling, before dropping in value once news of the scheme broke.

If recent court rulings are any indication, Wells Fargo plan participant Francesca Allen may face an uphill battle in her attempt to hold the company liable under ERISA. In the past month alone, courts have rejected similar challenges against BP Plc, Whole Foods Corp. and RadioShack Corp. In all three cases, the courts found that employees failed to overcome the high bar recently set by the U.S. Supreme Court for cases challenging stock losses under ERISA.

This most recent suit seeks to hold Wells Fargo liable for losses suffered by as many as 350,000 participants in the company’s 401(k) plan, which holds assets of about $35 billion. In addition to regulatory fines and stock losses, the complaint asserts that the company’s alleged misdeeds have led to significant lost business and “untold reputational damage.”

The Supreme Court ruling mentioned above is FIFTH THIRD BANCORP ET AL.v. DUDENHOEFFER ET AL., which removed one set of guidelines for stock-drop cases like this one, and imposed another. But the new guidelines aren’t turning out to be any more plaintiff-friendly than the last.

Pensions & Investments explains:

The guidelines in a landmark Supreme Court ruling on stock-drop cases are turning out to be almost as tough on plaintiffs as the standard the court nullified.

[…]

In that ruling, the Supreme Court nullified a defense known as the “presumption of prudence,” which was based on a 1995 Philadelphia federal appeals court ruling. This defense enabled sponsors to convince most judges that lawsuits should be dismissed at the initial pleading stage rather than at the trial stage. In doing so, companies avoided the heavy expenses of pretrial discovery and/or the trial itself.

In its place, the court issued guidance to lower courts to determine whether they should accept or dismiss a stock-drop case based on fiduciaries’ administering company stock funds in defined contribution plans. So far, ERISA attorneys say, the ruling appears to have been stricter than originally believed.

[…]

The Dudenhoeffer ruling “certainly has caused the plaintiffs to think twice and be more conservative in their decisions” to sue sponsors, said Nancy Ross, a partner at Mayer Brown, Chicago.

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