Earlier this month the Labor Department announced a settlement with Wells Fargo regarding transactions involving the ESOP component of its 401(k) plan. Now a trio of plan participants has launched their own class action suit.
The DOL announced Sept. 12 that Wells Fargo agreed[i] to a multimillion-dollar settlement and penalty after an investigation found that the Wells Fargo 401(k) plan allegedly overpaid for company stock.
Under the terms of the settlement, Wells Fargo and Company, Wells Fargo Bank and plan trustee GreatBanc Trust Company agreed to pay $145 million, of which $131.8 million was allocated for eligible current and former 401(k) plan participants. The firm also agreed to pay a penalty of nearly $13.2 million to the DOL. Wells Fargo and GreatBanc entered the settlement without admitting or denying the allegations made by the department.
According to the DOL’s announcement, the investigation by the department’s Employee Benefits Security Administration (EBSA) determined Wells Fargo and GreatBanc Trust Company caused the 401(k) plan to pay between $1,033 and $1,090 per share for Wells Fargo preferred stock. Specifically designed for the plan, the stock converted to a set value of $1,000 in Wells Fargo common stock when allocated to participants. In transactions between 2013 and 2018, the plan borrowed money from Wells Fargo to purchase the preferred stock. EBSA investigators also apparently learned that Wells Fargo used the dividends paid on the preferred shares to defray its obligation to make contributions to the 401(k) plan, by using the dividends to repay the stock purchase loans. The investigation revealed the transaction was designed to cause the 401(k) plan to pay more for each share of stock than plan participants would ever receive.
Participant Suit
Now the participant suit—“about corporate self-dealing at the expense of the retirement savings of company employees”—filed by participant-plaintiffs Lawrence Beville, Aryne Randall, and Scott Kuhn—basically assert the same facts, but note that “the $131.8 million collected by the DOL for 2012–2018 is far less than the $401.5 million in reclassified dividend payments taken from the Plan by Wells Fargo from 2017–2019.”
They are also claiming that “upon personal knowledge, the investigation of their counsel, and their counsel’s knowledge and experience of ERISA and employee stock ownership plans (“ESOPs”), they are suing Defendants GreatBanc Trust Company (“GreatBanc”), Wells Fargo & Co. (“Wells Fargo”), Timothy J. Sloan[ii], and the Employee Benefit Review Committee, and its members during the proposed class period.”
Essentially—and the suit, filed in the US District Court for the District of Minnesota[iii] (Beville v. GreatBanc Tr. Co., D. Minn., No. 0:22-cv-02354, complaint 9/26/22) contains a fair amount of process detail[iv] about the transactions here—as part of the paying off the debt associated with the leveraged Employee Stock Ownership Plan, and the subsequent release of shares to participant accounts—more specifically the valuation of those shares, and the disposition of dividends attributed to those shares. But, essentially they note that “Wells Fargo, with the knowledge and consent of the other Defendants, converted Plan assets for its own use in blatant violation of ERISA’s prohibited transaction provisions. This was theft of participants’ retirement savings, an important part of their compensation package.”
‘Knew or Should Have Known’
The suit alleges that former Wells Fargo CEO Sloan “knew or should have known the Plan paid more than fair market value for Preferred Stock because he knew dividends exceeding minimum loan payments would be used to defray Wells Fargo’s employer matching liabilities instead of inuring to the benefit of the Plan, even though such dividends were impounded into the fair market value conclusion made by GreatBanc. In addition, Sloan knew that the Plan paid Wells Fargo more than $1,000 per share of Preferred Stock while giving the Wells Fargo the right to redeem the stock at any time for $1,000 per share. Further, the suit states that as CEO of Wells Fargo, Sloan was a party in interest to the Plan, and that, as CEO and President of Wells Fargo, Sloan had discretion under the terms of the Plan to apply dividends exceeding required loan payments on ESOP loans to make additional principal payments on such loans—giving Sloan discretionary control over Plan assets.
The plaintiffs here maintain that “all the dividend income, including the reclassified dividend income,[v] belonged to the Plan and its participants. The Plan paid for the dividend income when it acquired Preferred Stock because the price paid by the Plan included the present value of projected dividend income in the fair market value analysis. Plan participants were entitled to the full dividends on Common Stock allocated to their accounts.”
The Claims
First, by causing the Plan to pay more than fair market value for Preferred Stock, the plaintiffs argue that the Plan took on liabilities (the ESOP notes) that exceeded the fair market value of the principal on those notes. This, the plaintiffs argue, means the Plan paid too much interest on the principal, and because both the principal and the interest were inflated, when Preferred Stock was converted to common and allocated to participant accounts, less Preferred Stock was converted than would have been the case had the Plan paid fair market value for the preferred shares and participants received fewer shares of Common Stock.
Second, when Wells Fargo took the Plan’s Preferred Stock dividends and used them to offset its employer matching contributions, the suit claims that participants received less Common Stock than they would have otherwise received. “Had all the dividends been used to pay ESOP notes, the Plan and its participants would have received many more shares of Common Stock when more Preferred Stock was converted to Common Stock and allocated to participant accounts. Further, Wells Fargo would have had to pay its employer matching contributions from its own account, yielding yet more Common Stock (or cash) allocated to participant accounts (but paid for by Wells Fargo instead of the Plan and participants). Thus, had Wells Fargo not taken dividends for its own use, participants would have received an additional $125.2 million worth of Common Stock (or cash) in 2017, an additional $42.9 million worth of Common Stock (or cash) in 2018, and an additional $233.4 million worth of Common Stock (or cash) in 2019.”
Third, the suit claims that Wells Fargo took dividends on Common Stock allocated to participant accounts and used such dividends to offset its employer matching contributions. “In other words,” the plaintiffs explain, “Plaintiffs and other participants paid, in part, for the matching contribution that Wells Fargo owed them for their service to the company.”
In sum, the suit argues that “Wells Fargo stole from the Plan and its own employees, and GreatBanc, which was charged with protecting the participants’ interests, aided and abetted this theft.”
Stay tuned.
[i] A statement by Wells Fargo alongside the settlement announcement notes that the company strongly disagrees with the DOL’s allegations and believes it followed applicable laws in conducting the transactions. “Though the Company disagrees with the DOL’s allegations and has not conducted these transactions since 2018, Wells Fargo believes resolving this legacy matter is in the best interest of the Company,” the statement reads. It added that, “All 401(k) Plan participants received all matching and profit-sharing contributions due to them. An independent third-party approved the transactions on behalf of the 401(k) Plan and confirmed that the 401(k) Plan did not pay more than fair market value for the Company stock at issue.”
[ii] As the suit reminds us, “Defendant Timothy J. Sloan was the Chief Executive Officer of Wells Fargo from October 2016 to March 2019,” and resigned in 2019 “under pressure arising from the fraudulent account scandal where Wells Fargo created millions of fraudulent bank accounts on behalf of Wells Fargo clients without their consent.” The suit states that on Oct. 12, 2016, Wells Fargo’s board designated Sloan as the sole member of the Board’s ESOP Committee, which “decides whether, when, and under what terms to issue Preferred Stock to the Plan in exchange for notes issued by the Plan to Wells Fargo. Sloan was the sole member of the ESOP Committee for the 2017 and 2018 transactions between the Plan and Wells Fargo in Preferred Stock.”
[iii] Nichols Kaster PLLP, Bailey & Glasser LLP, and Feinberg, Jackson, Worthman & Wasow LLP are representing the plaintiffs here.
[iv] “Over the course of many years, Defendants caused the Plan to pay more than fair market value when acquiring Wells Fargo preferred stock for the ESOP portion of the Plan. Each year, going back to at least 2007, up to and including 2018, the Plan acquired Preferred Stock financed by a loan from Wells Fargo. For example, in 2018 the Plan acquired 1,100,000 shares of Preferred Stock with a stated value of $1,039.00 a share, for a total value of $1,142,900,000. The terms of the loan required the Plan to use Preferred Stock dividends to pay the principal and interest. But the dividend income from Preferred Stock owned by the Plan vastly exceeded the amounts paid on the loans by tens of millions, sometimes hundreds of millions, a year. Wells Fargo took the excess dividend income and used it to meet its employer matching contribution obligations, which contributions were a contractual and ERISA liability of Wells Fargo. In short, the excess dividend income was used for the benefit of Wells Fargo, not for the benefit of the Plan and its participants and beneficiaries.
When valuing Preferred Stock, Defendants, among other things, factored the projected income from Preferred Stock dividends into the fair market value of the stock – but then used the dividend income from Preferred Stock to make its contractually obligated employer matching contributions to the Plan. “In other words”, the suit claims, “the Plan paid for a dividend that it did not and would not receive because Wells Fargo, with the knowledge and approval of the other Defendants, used the dividends to satisfy its employer contribution obligations under ERISA and the Plan”. The suit goes on to assert that the Wells Fargo defendants knew about the diversion of dividend income from the Plan “and therefore caused the Plan to pay more than fair market value each time it acquired Preferred Stock because the fair market value agreed to by GreatBanc, Wells Fargo, and Sloan included a future stream of dividend payments which they knew would not be received by the Plan or used for the benefit of the participants and beneficiaries, but instead would be diverted to defray Well Fargo’s obligation to make matching contributions to the Plan.”
[v] In 2017, reclassified dividends were $125.2 million, in 2018, reclassified dividends were $42.9 million, in 2019, reclassified dividends were $233.4 million. Total reported reclassified dividends during the Class Period were $401.5 million, according to the suit. “It is unknown to Plaintiffs whether dividends were reclassified in 2021 and 2022.”
