In another high-dollar settlement resulting from the nation's mortgage meltdown, Wells Fargo agreed to pay $590 million to resolve allegations that Wachovia misrepresented the quality of its residential mortgages from 2006 to 2008.
Combined with $37 million from Wachovia auditor KPMG, attorneys said the $627 million total was one of the 15 biggest securities class-action settlements in history and the biggest to emerge so far from the financial crisis.
The agreement resolves claims brought against Wachovia by large bond investors such as the Orange County Employees' Retirement System in California. In lawsuits consolidated in federal court in New York, the investors alleged the Charlotte bank misled them about the quality of its $120 billion "Pick-A-Payment" mortgage portfolio, which later undermined the health of the company. San Francisco-based Wells bought Wachovia in the fall of 2008 as it verged on collapse.
The settlement is a victory for investors who suffered in the financial crisis, said Darren Robbins, one of the attorneys who represented the plaintiffs.
"It sends the right message," Robbins said. "Hopefully, people will learn from the meltdown itself and recoveries like this."
A Golden West legacy
Wachovia inherited the Pick-A-Payment product when it bought Golden West Financial in 2006 in a $24 billion acquisition that gave it valuable West Coast branches butalso much bigger exposure to the cresting housing market.
The loans had a minimum payment option that caused a borrower's balance to grow rather than shrink. The mortgages were also concentrated in California housing markets that cratered in the housing crash. Wachovia continued to make the loans into the middle of 2008, despite rising losses.
In their complaint, the plaintiffs said Wachovia issued more than $35 billion in bonds and preferred securities to investors from July 31, 2006 and May 29, 2008. (These were bonds and securities issued on behalf of the company, not ones formed by packaging together home loans.) In offering materials pitching those investments, Wachovia "materially and repeatedly misstated and failed to disclose the true nature" of the company's mortgage portfolio, the suit said, providing an inadequate picture of the risks the bank faced.
Thinking they were purchasing securities issued by a "risk-averse" financial institution, these investors instead plowed their money into a company plagued by lax underwriting, inadequate reserves and exposure to billions of dollars of risky mortgages, including complex securities backed by subprime home loans, the complaint stated. These factors "combined to bring Wachovia to the brink of insolvency by late summer 2008 - just months after the last offering at issue in this action," the complaint stated.
Observer stories in early 2008 detailed Wachovia loan officers' complaints about pressure to sell Pick-A-Payment loans, as well as higher incentives for selling the loans. Wachovia began revealing rising losses in the portfolio in April 2008 and by June the board had ousted chief executive Ken Thompson. In October 2008, his successor, Bob Steel, agreed to sell the company to Wells, which trumped an earlier government-assisted deal with New York-based Citigroup.
At the time of the merger, Wells predicted lifetime losses of 29 percent in the Pick-A-Payment portfolio. It has since said the loans are performing better than expected but hasn't provided a new loss estimate.
Still to come
The proposed settlement still needs court approval. Institutional and individual investors who bought bonds and preferred securities from Wachovia during the July 2006 to May 2008 time period are eligible for the settlement.
It's unclear how much each investor will receive, Robbins, the attorney, said. Lawyers' fees will be determined by the court, he said.
Investors who bought Wachovia stock during a similar period also filed similar lawsuits against the bank. In March, U.S. District Court Judge Richard Sullivan of the Southern District of New York dismissed those cases. The plaintiffs have filed an appeal.
In a securities filing Friday, Wells said the proposed settlement with bondholders has already been reflected in its financial statements.
"Wells Fargo agreed to this settlement in order to avoid the distraction, risk and expense of on-going litigation," Wells spokeswoman Mary Eshet said. "The settlement agreement does not constitute an admission of Wells Fargo of liability or any violation of law by Wachovia."
KPMG spokesman George Ledwith said the firm agreed to the settlement to "put this matter behind us."
Wells' settlement eclipses a $624 million class-action pact Bank of America and KPMG reached with investors who said they were misled by Countrywide Financial, the lender Bank of America acquired in 2008.
In other Wachovia-related litigation, Wells last year reached a class-action lawsuit settlement with borrowers who took out Pick-A-Payment loans from 2003 to 2008.
