Wells Fargo & Co.'s legal troubles are mounting following revelations of the bank's recent cross-selling scandal last month.
A participant in the Wells Fargo 401(k) plan has sued the company over a “material drop” in its stock price following news of the scandal, characterized as a “criminal epidemic” that caused hundreds of millions of dollars in damages to the retirement plan, according to a court filing.
“Defendants intentionally withheld material non-public information from Plan Participants invested in Wells Fargo stock and the public at large about 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,” according to the lawsuit, Allen v. Wells Fargo & Co. et al.
The suit, filed Oct. 7 in Minnesota federal court, was first reported by Bloomberg BNA.
Approximately 34% of assets in the company 401(k), a massive $36 billion plan with more than 360,000 participants, are invested in Wells Fargo common stock, according to BrightScope Inc., a 401(k) ratings provider.
Regulators fined Wells Fargo $185 million in September for opening about 2.1 million unauthorized deposit and credit-card accounts for banking customers, in an effort by employees to meet sales quotas set by the firm.
Since the news broke, the company's share price has fallen approximately 9%, from roughly $50 per share to around $45.60 as of 1 p.m. Wednesday.
The plaintiff in the proposed class-action lawsuit alleges 401(k) plan fiduciaries knew the value of Wells Fargo stock was artificially inflated because of the “broad and systemic fraud scheme,” and that the value of the stock would be negatively impacted once the fraud was disclosed.
Fiduciaries violated their duties under the Employee Retirement Income Security act of 1974 by failing to take actions to protect the plan and participants from stock losses that occurred as a result of the scheme, according to the complaint.
Ancel Martinez, a Wells Fargo spokesman, declined to comment on the lawsuit.
Wells Fargo is also facing another lawsuit, filed last month, from shareholders outside the 401(k) for misleading them about the account openings.
There has been a “steady stream” of ERISA stock-drop cases since the 2008-09 financial crisis, according to Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm.
However, a Supreme Court ruling in Fifth Third Bancorp v. Dudenhoeffer in 2014 “made the pleading standards pretty tough” in these cases, making plaintiffs' success more difficult to achieve, Mr. Thompson said.
“It's an uphill fight for the plaintiffs in this one,” he said. “There's not been much if any success in recent years with these kinds of lawsuits.”