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Cross-Selling Program Triggers 401(k) Suit

These days if you sponsor a 401(k) plan that has company stock in it, and it suffers a sharp decline in value, you can pretty much count on getting sued.

So it should come as no surprise that Wells Fargo & Co. finds itself in the class action crosshairs in the wake of a drop in stock price following revelations of a cross-selling program at the bank.

Plan participant Francesca Allen is the named plaintiff in the action (Allen v. Wells Fargo, D. Minn., No. 0:16-cv-03405, complaint filed 10/7/16) filed on behalf of Wells Fargo 401(k) plan participants whose individual accounts were invested primarily in Wells Fargo stock from Jan. 1, 2014 through the present.

As is common with these stock drop suits, the Wells Fargo defendants are charged with intentionally withholding “material non-public information” from plan participants invested in Wells Fargo stock and the public at large about what the suit describes as “a criminal epidemic at Wells Fargo associated with a critical component of Wells Fargo’s business model and key driver of its stock price – i.e., cross-selling.” This while the suit alleges that “senior executives sold millions of their personal Wells Fargo stock at inflated prices, earning hundreds of millions of dollars, while failing to take corrective action to protect Plan Participants.”

According to the complaint, Wells Fargo's stock price nearly doubled during the six-year period of increased cross-selling – which the suit claims served to artificially inflate the stock price – before dropping in value once news of the cross-selling plan broke.

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 plaintiff claimed that the defendants had several prudent alternatives: temporarily removing the affected funds as an investment option in the plan, discontinuing or freezing further contributions to and/or investment in Wells Fargo stock, consulting independent fiduciaries regarding appropriate measures to take, initiating investigations and corrective actions to eliminate the conflicts of interest, and/or resigning as fiduciaries of the plan.

While the suit repeatedly emphasizes that the defendants “knew or should have known” about the impact of the cross-selling activities on the firm’s stock price, those arguments haven’t proven very successful in these stock drop cases, nor has the presentation of alternatives to the public disclosure of those activities. In similar cases, courts have been inclined to invoke an expectation that for each proposed alternative, a prudent fiduciary could not have concluded that the alternative would do more harm than good.

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