It’s not unusual for a company whose stock has dropped to find itself embroiled in litigation – but three separate lawsuits by 401(k) plan participants?
Wells Fargo has now been named in a third potential class action – the latest by John Sterling Ross on “behalf of himself and other similarly situated current and former employees of Wells Fargo & Company or its predecessor companies, who were participants in and beneficiaries of the Wells Fargo 401(k) Plan, and who were invested in the Company stock during the period of February 28, 2013, through September 20, 2016, inclusive.”
The allegations presented cover similar ground in the two previous lawsuits, basically that the bank’s cross-selling program served to artificially inflate Wells Fargo’s stock. Moreover, not only did the plan’s fiduciaries breach their duties by continuing to allow investment by the plan in the company stock, but that they failed to take alternative actions that could have been taken that would not have violated securities laws, and would not have been more likely to harm the plan’s Wells Fargo Stock holdings than to help.
The latest suit states that defendants “could not reasonably have believed that taking any of these actions would do more harm than good to the Plan or to Plan participants,” and that “as experienced senior executives, Defendants were—or should have been—familiar with the rudimentary principles of how securities trade in efficient markets. Thus, they should have known that correcting the Company’s fraud would reduce Wells Fargo’s stock price only by the amount by which it was artificially inflated to begin with. They had no basis to believe that any factor was distorting the market for Wells Fargo stock at the time—such as widespread short-selling or liquidity problems or the like—and thus no reason to fear that public correction of the Company’s fraud would result in an overcorrection of Wells Fargo’s stock price.”
Defendants cannot have reasonably believed that there would be more harm than good to the plan or its participants from acting to prevent the fraud or the damage caused by it, noting that the act of preventing any new purchases of the Wells Fargo Stock Fund is not illegal “insider trading” under the federal securities laws because no transaction would occur and no insider benefit would be received by anyone, that the participants who chose to purchase the Wells Fargo Stock Fund paid fraudulent, excessive prices for the stock, and that, “no matter what happens to the stock price in the future, these Plan participants sustained a loss due to paying the excessive artificial price.”
Indeed, the plaintiffs argue that “the longer that Wells Fargo’s fraud went on, the more Plan purchasers bought at artificially inflated prices, and the size of the harm to each purchaser increased over time as the stock price inflated” and that, as a result, Wells Fargo’s stock “had farther to fall when the truth inevitably came out, so that the purchases were hurt even worse as the result of choosing to invest in Wells Fargo stock.”
The suit goes on to note that, “As a last resort, Defendants could have used their authority as fiduciaries to divert some of the Plan’s funds into a low-cost hedging product that would behave in a countercyclical fashion vis-à-vis Wells Fargo stock,” a product that defendants claims have “been available to providers of ESOPs for many years now,” a product that they say imposes very few transaction costs on a retirement plan, and their proprietary hedging formula allows for an ERISA fiduciary to make at least a contingency plan to deal with the inevitable drop in stock price that will come from the perpetuation of a corporate fraud.
This latest lawsuit (Ross v. Hardison, D. Minn., No. 0:16-cv-03595-JNE-FLN, complaint filed 10/24/16) was filed October 24 in a Minnesota federal court by Minneapolis-based FarmLaw and Zamansky LLC.
