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UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA Blue Cross and Blue Shield of Minnesota, et al.,
Civil No. 11-2529 (DWF/KMM)
Plaintiffs, vs. Wells Fargo Bank, N.A., Defendant.
ERISA PLAINTIFFS’ PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING WELLS FARGO’S BREACHES OF FIDUCIARY DUTY
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TABLE OF CONTENTS INTRODUCTION ............................................................................................................... 1 PROPOSED FINDINGS OF FACT REGARDING THE ERISA PLAINTIFFS’ BREACH OF FIDUCIARY DUTY CLAIMS .............................................................. 6 I.
II.
FACTUAL BACKGROUND ..................................................................................... 6 A.
The Parties .......................................................................................................... 6
B.
Wells Fargo’s Securities Lending Program ........................................................ 8 1.
Wells Fargo’s Representations ................................................................... 9
2.
The Structure of the Wells Fargo Securities Lending Program ............... 13 a.
Securities Lending Agreements ....................................................... 14
b.
The Business Trust ........................................................................... 14
c.
The Subscription Agreements .......................................................... 17
d.
The Investment Guidelines............................................................... 18
e.
The Confidential Memoranda .......................................................... 20
WELLS FARGO’S BREACHES OF FIDUCIARY DUTY .................................... 20 A.
The SLP Portfolio ............................................................................................. 21 1.
B.
Investment Vehicles ................................................................................. 21 a.
Cheyne SIV ...................................................................................... 24
b.
Victoria SIV ..................................................................................... 25
2.
Lehman ..................................................................................................... 25
3.
Wells Fargo violated other criteria in the Investment Guidelines ............ 26
4.
Wells Fargo failed to monitor compliance with the Guidelines ............... 27
5.
Wells Fargo’s fiduciary breaches are confirmed by Wells Capital’s analysis ..................................................................................................... 28
6.
Wells Fargo violated its duty of care by failing to have adequate resources to operate its SLP prudently ..................................................... 29
Wells Fargo Breached Its Fiduciary Duties by Failing to Take Appropriate Action as the Credit Crisis Unfolded ........................................... 30 1.
Failure to divest improper holdings .......................................................... 30
2.
Wells Fargo’s changing “redemption policies”........................................ 33
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3.
a.
Forcing Plaintiffs to pay the collateral shortfall while allowing others to exit whole ........................................................... 33
b.
In-kind distribution ........................................................................... 36
c.
Blowing up the Trust ........................................................................ 37
Wells Fargo’s concealment ...................................................................... 41
III. FACTS SPECIFIC TO EACH PLAINTIFF ............................................................. 49 A.
BCBSMN Pension Plan .................................................................................... 49
B.
Meijer Pension Trust ......................................................................................... 51
C.
Tuckpointers Local 52 Plans............................................................................. 53
D.
Nurses Pension Plans ........................................................................................ 56
E.
International Truck Retiree Trust ..................................................................... 58
F.
Jennie Edmundson (Nebraska Methodist) ........................................................ 60
IV. WELLS FARGO’S BREACHES OF ITS FIDUCIARY DUTIES CAUSED PLAINTIFFS’ LOSSES ............................................................................................ 63 A.
Business Cycles Are Foreseeable, and Did Not Cause Plaintiffs’ Losses........ 63
B.
Wells Fargo’s Breaches of its Fiduciary Duties Caused Plaintiffs’ Losses ................................................................................................................ 64
PROPOSED CONCLUSIONS OF LAW REGARDING THE ERISA PLAINTIFFS’ BREACH OF FIDUCIARY DUTY CLAIMS.................................... 67 I.
JURISDICTION ........................................................................................................ 67
II.
THE ERISA PLAINTIFFS ARE ENTITLED TO JUDGMENT ON THEIR BREACH OF FIDUCIARY DUTY CLAIMS ......................................................... 67 A.
The Court Is Not Bound by the Jury’s Verdict on the Non-ERISA Plaintiffs’ Breach of Fiduciary Duty Claim ...................................................... 68
B.
Wells Fargo’s Fiduciary Duties Under ERISA................................................. 69
C.
Wells Fargo Breached Its Fiduciary Duties to the ERISA Plaintiffs................ 71 1.
Wells Fargo’s collateral investments violated its ERISA fiduciary duties ......................................................................................................... 71
2.
Wells Fargo breached its fiduciary duties by changing the Plaintiffs’ redemption rights ..................................................................... 77 a.
Forcing Plaintiffs to pay the collateral shortfall while allowing others to exit whole ........................................................... 77
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3. D.
b.
In-kind distribution ........................................................................... 78
c.
Blowing up the Trust ........................................................................ 79
Wells Fargo’s misrepresentations and concealments breached its fiduciary duties ......................................................................................... 80
Plaintiffs Have Demonstrated a Prima Facia Case of Loss and Causation and Wells Fargo Has Not Met Its Burden ....................................... 84
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INTRODUCTION This matter was tried to the Court between June 17 and August 8, 2013, on the ERISA Plaintiffs’ claim against Defendant Wells Fargo Bank, N.A., for breach of fiduciary duty pursuant to Sections 404(a) and 409 of the Employee Retirement Income Security Act, 29 U.S.C. §1104(a), 1109. See Dkt. 200, Count I(b). On March 24, 2014, the Court issued its Findings of Fact, Conclusions of Law, and Order for Judgment. Dkt. 611. Without making any express reference to collateral estoppel, the Court determined it was bound and constrained to render judgment on ERISA Plaintiffs’ claims consistent with the jury’s determination in Wells Fargo’s favor for the common-law breach of fiduciary duty claims brought by the non-ERISA plaintiffs. Dkt. 611 at 7, 10.1 Nevertheless, in a footnote the Court stated that “[s]ignificantly, however, the Court notes that if it were not so bound, the Court would find, based on the evidence presented at trial, that Defendant breached its fiduciary duties to the ERISA Plaintiffs.” Dkt. 611 at 7, n.6. Judgment was issued the following day, dismissing the ERISA Plaintiffs’ ERISA claims with prejudice. Dkt. 612 at 1-2. The ERISA Plaintiffs filed post-trial motions for relief under Federal Rule of Civil Procedure Nos. 52 and 59, requesting the District Court either amend its findings of fact and conclusions of law to instead hold that it was not bound and enter findings in favor of the ERISA Plaintiffs consistent with its declaration, or alternatively grant them a new trial. Dkt. 617; Dkt. 619; see also Dkt. 615. 1
When a district court docket entry is cited, the page number provided for the pin citation is the page number assigned by the ECF filing system located on the top right-hand side of the e-filed document. 1
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On October 2, 2014, the Court issued a Memorandum and Order denying all posttrial motions. Dkt. 639. With regard to the ERISA Plaintiffs’ Rule 52 Motion, the Court continued to conclude that it was bound to render judgment consistent with the jury’s determination. Dkt. 639 at 7. While the Court denied the ERISA Plaintiffs’ motion to amend the judgment, it nevertheless issued an Amended Findings of Fact, Conclusions of Law, and Order for Judgment. Dkt. 640. This time, the Court expressly predicated its constraint on collateral estoppel. Dkt. 640 at 8. Yet again, within both October 2, 2014 Orders, the Court stated that if it were not bound, “[it] would find, based on the evidence presented at trial, that [Wells Fargo] breached its fiduciary duties to the ERISA Plaintiffs.” Dkt. 640 at 8 n.7; Dkt. 639 at 7. Judgment was entered on October 3, 2014. Dkt. 641 at 1-2. The ERISA Plaintiffs timely appealed the judgment. The Eighth Circuit Court of Appeals vacated the Court’s judgment in favor of Wells Fargo on the basis of collateral estoppel. The Appeals Court held that the Court “failed to consider whether the parties waived the application of collateral estoppel,” and remanded for this Court to “consider whether the parties’ actions constituted waiver.” Blue Cross Blue Shield of Minn. v. Wells Fargo Bank, N.A., 816 F.3d 1044, 1046, 1049-50 (8th Cir. 2016). After the Court of Appeals remanded the case, the parties submitted briefs and responses to the Court. Dkt. 661; Dkt. 665; Dkt. 668; Dkt. 669. On March 14, 2017, the Court concluded that Wells Fargo had “waived its right to apply the preclusive effect of the jury verdict to the ERISA Plaintiffs’ claims.” Dkt. 677 at 13. This determination was based upon the Court “reviewing the entire record, including the extensive procedural 2
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history of this case and the parties’ submissions” and “the totality of Defendant’s conduct.” Dkt. 677 at 2, 12 (emphasis added). Wells Fargo requested leave to file a motion for reconsideration, Dkt. 684, which the Court granted in part. Dkt. 690. Wells Fargo filed a motion for reconsideration, Dkt. 692; Dkt. 693, the ERISA Plaintiffs filed a response, Dkt. 695, and on June 8, 2017, the Court entered an order denying Wells Fargo’s motion for reconsideration. Dkt. 696. In its June 8, 2017 Order, the Court also ordered the parties to submit Proposed Findings of Facts and Conclusions of Law, and to “meet and confer on a briefing schedule on the appropriate measure of damages.” Dkt. 696 at 14. The parties met and conferred and proposed a briefing procedure and schedule, Dkt. 697, which was approved by the Court. Dkt. 698. Pursuant to this schedule, in today’s filing, the parties will submit Proposed Findings of Fact and Conclusions of Law regarding whether Wells Fargo breached its fiduciary duties under ERISA. Dkt. 697. On August 18, 2017, the parties will submit Proposed Findings of Fact and Conclusions of Law regarding remedies along with a brief on the recoverability and appropriate measure of “damages.”2 Id. On
2
Plaintiffs seek the full extent of remedies available under ERISA for breach of fiduciary duty. Plaintiffs have therefore used the term “remedies” throughout this brief to refer to the broad relief they will seek to be made whole, should the Court conclude that Wells Fargo breached its ERISA fiduciary duties. See 29 U.S.C. §1109(a) (“Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary.”) (emphases added); 29 U.S.C. §1132(g)(1) (allowing a court “in its discretion” to award reasonable attorney fees and costs of action to either party). 3
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September 1, 2017, the parties will submit a 10-page responsive brief on remedies. Id. The parties also agreed to defer the issues of attorney fees and costs until after the Court has entered its ruling on the merits and entered judgment. Id. While agreeing to submit their proposed Findings of Fact and Conclusions of Law in this two-step process, with findings and conclusions relating to breach of fiduciary duty being submitted first, the ERISA Plaintiffs have expressly preserved their rights to seek all available remedies under ERISA. Pursuant to the briefing schedule, Dkts. 69798, the Proposed Findings of Fact and Conclusions of Law that follow in this pleading focus upon Wells Fargo’s breaches of its duties rather than the appropriate remedies. In their forthcoming filings (including any post-judgment filings if necessary), the ERISA Plaintiffs will be seeking the appropriate remedies under ERISA to make good to the ERISA Plaintiffs such losses resulting from Wells Fargo’s breaches of fiduciary duty, so as to make the ERISA Plaintiffs whole; the disgorgement of both SLP and custodial fees paid to Wells Fargo, as well as attorney fees and costs as authorized by 29 U.S.C. §1132(g)(1), prejudgment interest, and any other “equitable or remedial relief as the court may deem appropriate.” 29 U.S.C. §1109(a). As some evidence presented at trial both supports Plaintiffs’ remedy theories but also constitutes liability evidence of Wells Fargo’s multiple breaches of its fiduciary obligations, both sets of submissions should be considered together, and no waiver of any argument, claim, or remedy is intended should proposed findings appear in one submission or the other.
4
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There have also been some post-trial developments that may impact the Court’s forthcoming findings. At the time of the parties’ bench trial, four of the ERISA Plaintiffs (the Meijer Pension Trust, the Jennie Edmundson Plan, the Nurses Pension Plan, and Tuckpointers Local 52) remained in the SLP. That is no longer the case. Since the parties’ bench trial, all four of these ERISA Plaintiffs paid Wells Fargo’s exit demands as of the date of their exit and left the SLP. At trial, the parties stipulated to the dollar amounts that corresponded to the ERISA Plaintiffs’ theory of recovery. See, e.g., TX 34052B; TX34059B. The parties also stipulated to the various SLP and custodial fees each Plaintiff had paid to Wells Fargo. TX33995A; Dkt. 597 (TX37498A). The ERISA Plaintiffs have requested that Wells Fargo provide updated figures that correspond to these stipulated trial exhibits in light of the current status of each ERISA Plaintiff, with back-up documentation. At the time of this filing, while Wells Fargo has acknowledged the ERISA Plaintiffs’ request for updated information and stated that it is working on a substantive response to this request, Wells Fargo has not yet provided such information. The ERISA Plaintiffs hope to reach agreement with Wells Fargo prior to the August 18, 2017 briefing deadline on stipulated dollar amounts that correspond with Plaintiffs’ remedy theories. Consistent with the Parties’ trial plan, and the extensive case history and the prior rulings of the Court and the Eighth Circuit as summarized above, the ERISA Plaintiffs now propose the following findings of fact and conclusions of law regarding Wells Fargo’s breaches of its fiduciary duties to the ERISA Plaintiffs. 5
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PROPOSED FINDINGS OF FACT REGARDING THE ERISA PLAINTIFFS’ BREACH OF FIDUCIARY DUTY CLAIMS I.
FACTUAL BACKGROUND A.
The Parties
1.
The ERISA Plaintiffs are administrators of Employee Benefit Plans
governed by ERISA. 2.
Blue Cross and Blue Shield of Minnesota is Administrator of the Blue
Cross and Blue Shield of Minnesota Pension Equity Plan (“BCBSMN”), a pension plan for Blue Cross and Blue Shield of Minnesota employees governed by the Employees Retirement Income Security Act (ERISA), 29 U.S.C §1001 et seq. BCBSMN began participation in the Wells Fargo Securities Landing Program (“SLP”) in September 2000 and exited the program in March 2008. TX33137; TR6210. 3.
Meijer, Inc. is Administrator of the Meijer OMP Pension Plan and Meijer
Hourly Pension Plan, which are participants in the Meijer Master Pension Trust (“Meijer Pension Trust”) and are pension plans governed by ERISA for employees of Meijer, Inc. The Meijer Pension Trust entered the SLP in July 2006, and remained in the program at the time of the parties’ bench trial in 2013. TX32811; TR6322. 4.
The Board of Trustees of the Tuckpointers Local 52 Pension Trust Fund is
the Administrator of the Tuckpointers Local 52 Pension Trust Fund. The Board of Trustees of the Chicago Area Joint Welfare Committee for the Pointing, Cleaning and Caulking Industry Local 52 is the Administrator for the Chicago Area Joint Welfare Committee for the Pointing, Cleaning and Caulking Industry Local 52 (collectively
6
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“Tuckpointers Local 52”). They are multi-employer ERISA plans. They entered into the SLP in 2007, and remained in the program at the time of the parties’ bench trial in 2013. TX32915; TR6488. 5.
The Twin City Hospitals - Minnesota Nurses Association Pension Plan
Committee is the Administrator for the Twin City Hospitals - Minnesota Nurses Association Pension Plan (“Nurses Pension Plan”), a multi-employer ERISA plan. It entered the SLP in August 2004, and remained in the program at the time of the parties’ bench trial in 2013. TX33222; TR6550-51. 6.
The Administrative Committee of the Joint Hospitals Pension Board is the
Administrator of the Twin City Hospitals Pension Plan for Licensed Practical Nurses (“LPN Plan”), a multi-employer ERISA plan whose members are Licensed Practical Nurses at various hospitals in the Minneapolis/St. Paul metropolitan area in Minnesota. It entered into the SLP in 2004, and terminated its lending of securities in October 2010. TX33223; TR6549-51. 7.
The Supplemental Benefit Committee of the International Truck and
Engine Corp. Retiree Supplemental Benefit Trust is the Administrator of the International Truck and Engine Corporation Retiree Supplemental Benefit Trust (“International Truck Retiree Trust”), a Voluntary Employees’ Beneficiary Association (for non-government employees) governed by ERISA for the employees of International Truck and Engine Corporation, now Navistar, Inc. It entered the SLP in 2003, and terminated its lending of securities in 2011. TX32801; TR6652.
7
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8.
Nebraska Methodist Health System, Inc. participated in the SLP as the
Administrator of the Jennie Edmundson Memorial Hospital Employee Retirement Plan, an ERISA plan, as well as on its own behalf and on behalf of other non-ERISA entities. While Nebraska Methodist’s non-ERISA claims were tried to the jury, the ERISA claims of the Jennie Edmundson Plan were tried to this Court. The Jennie Edmundson Memorial Hospital Employee Retirement Plan entered the SLP on July 26, 2002, and remained in the program at the time of the parties’ bench trial in 2013. TX12528; see TX34052B. 9.
Each Plaintiff participated in Defendant Wells Fargo Bank, N.A.’s SLP.
Wells Fargo also acted as Plaintiffs’ agent and fiduciary in the SLP, Trustee of the Wells Fargo Trust for Securities Lending (“Business Trust”), and “investment manager” for the SLP collateral investments. See, e.g., TX32811; TX32812; TX32874. The SLP also used the services of a number of subsidiaries or business units of Wells Fargo (or its parent company), including, but not limited to, Galliard Capital Management and Wells Capital Management (“Wells Capital”). TR1432-33. B.
Wells Fargo’s Securities Lending Program
10.
Each Plaintiff owns a portfolio of investment securities. These securities
were held by Wells Fargo in custodial accounts on behalf of each Plaintiff. TR1416-17. 11.
Wells Fargo marketed its Securities Lending Program (“SLP”) as a service
for its custodial clients to offset the bank’s custody fees. TR1428; TR1437. 12.
In securities lending, Wells Fargo makes temporary loans of its clients’
investment securities to Wall Street brokers. To secure the transaction, brokers provide
8
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cash collateral to Wells Fargo. Wells Fargo invests the cash until needed to recall the loaned securities. See TR692. 1. 13.
Wells Fargo’s Representations
Wells Fargo represented that the “prime considerations” for its collateral
investments were “preserving principal and liquidity.” See, e.g., TX11784; TR1418; TR1431-32. 14.
Wells Fargo represented that potential return was secondary:
Our asset allocation process for collateral reinvestment has as the primary considerations principal preservation and liquidity. The current yield or potential total return on the invested funds is of secondary importance.... TX35930 at 37; TR1456-57. This means the SLP did not stretch for yield. TR1456-57. 15.
Wells Fargo repeatedly emphasized that its collateral investments would be
in conservative, short-term, and “high grade money market instruments.” See, e.g., TX37167; TX11784; TR1431; TR6636-37. For example, Wells Fargo’s standardized marketing reports repeatedly stated: Investment of cash collateral is made in high grade money market instruments such as: Commercial Paper, Tri-Party Repurchase Agreements, Bank Time Deposits and CDs, and Money Market Funds. Investing is done in pools to achieve the highest possible yield given client investment guidelines, while preserving principal and liquidity. TX11784. 16.
Wells Fargo represented that the SLP’s “investment policy …. focuses on
2a-7-type money market securities emphasizing safety of principal and liquidity.” TX35930 at 37; TR3443-45. In fact, the Wells Fargo Business Compliance and Risk Management Manual stated: 9
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[C]ollateral investments will be focused on Rule 2a-7-type money market securities emphasizing safety of principal and liquidity. TX29 at 41;3 TR1470. A July 2007 “Frequently Asked Questions” document for Wells Fargo Relationship Managers answered the question “What types of Collateral Investments are utilized in the Business Trusts?” with: Investment of cash collateral is made in accordance with individual clients’ account guidelines and an investment policy that focuses on 2a-7 type money market securities emphasizing safety of principal and liquidity. Wells Fargo is known nationally for our short-term investment capabilities, and utilizes this expertise in the management of the collateral portfolio to increase returns to program participants. TX754; TR441-42. The representation that collateral securities would be focused on 2a-7 type money market securities emphasizing safety of principal and liquidity was made consistently and repeatedly to the Plaintiffs. TR446; TR1487-88 (Smith testimony that representation that “cash is reinvested in typical 2a-7 type money market instruments” was used “continuously with respect to this program to participants”); TR1471 (Smith agreeing that “in communications with participants in the program [we] used 2a-7 type or 2a-7 like to describe the type of securities the cash collateral would be invested in”). Further, 2a-7 defines minimal risk as defined in the Confidential Memorandum. TR537. 17.
2a-7 money market funds are among the most conservative—only one
“broke the buck” (lost investors’ money) in the last 30 years. TR326-27; TR968-69; TR976-77. Money market instruments are short term, highly liquid, easily converted to cash, and virtually risk free.
3
Pinpoint cites are to the Bates numbers except where such cites were impossible. In those instances, pinpoint cites are labeled as cites to “p.” and are to exhibit page number. 10
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18.
SLP Senior Managing Director Robert Smith also frequently represented to
participants—and prospective participants—in the SLP that the collateral investments would be made in the “safest money market instruments in the world.” TR1677; TR1442; see also TX35114 at 525 (Smith handwritten note on prospective client presentations says “instruments money mkt – safest in the world”); TR1825-26; TR2975-76; TR344546. Mr. Smith made this representation to various participants over a long period of time. TR2765-66. In drafting the guidelines for the Trust series, Portfolio Manager Roger Adams had in mind that representations were made to the participants that the collateral investments were to be “2a-7 type and the safest in the world.” TR4741. 19.
A Wells Fargo executive described his conversation with the SLP Risk
Manager, Ms. Hruska-Claeys: “She explained that most clients felt this was ‘free money’ without risk and I said that’s the exact expression I have used.” TX167. Ms. HruskaClaeys testified that she had heard that the relationship managers told people that securities lending “was like free money.” TR2974. 20.
Wells Fargo represented that its collateral investments would be in
investments that were on an “approved list.” See, e.g., TX31087 at 66; TX11784 at 112; TR6282 (Meijer); TR6640 (International Truck); TR1432-33; TR1443. The ERISA Plaintiffs relied on these representations. TR6278-83 (Meijer); TR6639-40 (International Truck); see also Jansky (2013) Clip Report 14:10-16:4 (Jennie Edmundson). 21.
The ERISA Plaintiffs relied upon Wells Fargo’s representations that the
“prime considerations” for the collateral investment portfolio shall be “safety of principal and liquidity.” TR6527-28 (Minnesota Nurses Association and Licensed Practical 11
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Nurses); TR6531-33 (same); TR6168 (BCBSMN); TR6258 (Meijer); TR6269 (same); TR6469-70 (Tuckpointers); TR6636-39 (International Truck); Jansky (2013) Clip Report 25:24-26:4 (Jennie Edmundson); see, e.g., TX33137 at ¶2f ; TX32801 at ¶2f. 22.
The ERISA Plaintiffs relied on Wells Fargo’s representations that they
could leave the program at any time for any reason. TR6168-69 (BCBS); TR6261-62 (Meijer); see, e.g., TX33137 at ¶4; TX32801 at ¶4. 23.
The ERISA Plaintiffs relied on Wells Fargo’s representations that the
program had little or no risk. TR6178 (BCBSMN); TR6186 (same); TR6258-59 (Meijer); TR6262-63 (same); TR6266 (same); TR6270 (same); TR6469-70 (Tuckpointers); TR6487-88 (same); TR6527-28 (Minnesota Nurses Association and Licensed Practical Nurses); TR6580 (same); TR6637-39 (International Truck); Jansky (2013) Clip Report 14:10-16:4 (Jennie Edmundson). 24.
The ERISA Plaintiffs relied on Wells Fargo’s representations that there
were safeguards in place to reduce or eliminate any risks. TR6282-83 (Meijer); TR663941 (International Truck); Jansky (2013) Clip Report 14:10-16:4 (Jennie Edmundson); see, e.g., TX31087 at 66; TX11784 at 12. 25.
The ERISA Plaintiffs relied on Wells Fargo to provide all important
information. TR6180-81 (BCBSMN); TR6273-74 (Meijer); TR6475 (Tuckpointers); TR6534-35 (Minnesota Nurses Association and Licensed Practical Nurses); TR6537 (same); TR6647 (International Truck); Jansky (2013) Clip Report 23:22-25 (Jennie Edmundson); Jansky (2012) Clip Report 78:14-21 (same).
12
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26.
The ERISA Plaintiffs relied on Wells Fargo’s representations that it
monitored the portfolio daily. TR6284-85 (Meijer); TR6474 (Tuckpointers); TR6539-40 (Minnesota Nurses Association and Licensed Practical Nurses); TR6644 (International Truck); Jansky (2013) Clip Report 24:14-21 (Jennie Edmundson); see, e.g., TX33073. 27.
After being informed about Cheyne in November 2007, the ERISA
Plaintiffs relied on Wells Fargo’s representation that they should remain in the program. TR6298 (Meijer); TR6303-04 (same); TR6478-79 (Tuckpointers); TR6481 (same); TR6545 (Minnesota Nurses Association and Licensed Practical Nurses); TR6651 (International Truck); Jansky (2013) Clip Report 33:25-34:7 (Jennie Edmundson); see, e.g., TX33314 at 71. 28.
Wells Fargo expected Plaintiffs to rely upon these representations and knew
that Plaintiffs were relying upon these representations. TR1418 (Smith testimony that he knew participants were relying on Wells Fargo “to have investments made with consideration of safety of principal and liquidity”); TR1421 (Smith testimony that he intended for statements made in securities lending presentation to be relied upon); see also TR5969 (Williams in closing argument: “the truth is they [Plaintiffs] were relying on Wells Fargo.”). 2. 29.
The Structure of the Wells Fargo Securities Lending Program
Wells Fargo drafted a series of legal documents to govern its SLP,
including a Securities Lending Agreement and various documents relating to three Series (or Funds) that Wells Fargo established as investment vehicles for the securities lending collateral. 13
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a. 30.
Securities Lending Agreements
Each Plaintiff entered the SLP by executing a Securities Lending
Agreement (“SLA”). Those agreements: Appointed Wells Fargo as Plaintiffs’ “Agent” for purposes of securities lending. See, e.g., TX32811 at ¶1. Stated Wells Fargo received the cash collateral for loans. Id. at ¶2f. The SLA’s required Wells Fargo to “commingle[]” the collateral “for investment purposes.” Id. Required collateral investments to be in “short-term money market instruments” and “[t]he prime considerations for the investment portfolio shall be safety of principal and liquidity requirements.” Id. Stated each participant may terminate a loan “for any reason at any time.” Id. at ¶4. Stated when a loan is terminated, “The Bank will return to the Borrower … the collateral securing the loan.” Id. Stated that the participant assumes the “risk of loss arising out of collateral investment loss and any resulting collateral deficiencies[;]” but further states that “the Bank expressly assumes the risk of loss arising from negligent or fraudulent operation of its Securities Lending Program.” Id. at ¶8. b. 31.
The Business Trust
Wells Fargo has run an SLP since 1982. See TX11784 at 03. Wells Fargo
commingled cash collateral into pooled investments for participants. 32.
Years later, in October 2000, Wells Fargo established the Wells Fargo
Trust for Securities Lending. TX7886. Wells Fargo was the Trustee, and thus fiduciary. Id. Plaintiff BCBSMN was already in the SLP at the time. TX33137.
14
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33.
Wells Fargo did not inform participants of the Trust until June 1, 2001,
when Mr. Smith sent a letter stating that the Trust would “improve efficiencies,” “improve the accounting” and “increase[] the effectiveness of our daily process.” TX12744. (Wells Fargo’s letter did not reference—or attach—the Declaration of Trust. Id.) 34.
Prior to this litigation, Wells Fargo drew virtually no distinction between its
actions as “Trustee” and “bank.” Wells Fargo’s policy manual stated: “The Wells Fargo Securities Lending business is conducted under the legal entity of Wells Fargo Bank Minnesota, N.A.” TX29 at 29. 35.
In reality, the Trust was a sham. It purported to be a “Maryland Business
Trust.” TX7886; TR1653. It, however, conducted no business and owned no property in Maryland. TR1653; TR1656. For extended periods of time—including 2004 through mid-2007—its Certificate of Trust was “forfeited” or not in “good standing” in Maryland. TX877; TX879; TX37377; TR1656-58; TR2838-44. The bank disregarded the formalities of the Business Trust—there were no established Trust procedures or employees. See TR1653; TR2845-46; TR2888-89. The contract with Galliard was signed on behalf of the bank, not the Trust. TX281; TR1659-61. Likewise, the contract with Wells Capital was signed on behalf of the bank, not the Trust. TX859; TR1661-64. 36.
While Wells Fargo claims that a Trustee Committee conducted the business
of the Trust, as late as June 2008, the SLP compliance officer wrote: “Who is on the Trustee Committee and is there a charter?” TX356; TR1411-12.
15
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37.
One member of the purported three-person Trustee Committee—Laurissa
Ahlstrand—admitted she had never even read the entire Declaration of Trust or other trust documents. TR5169-70. Despite testifying that she had only read parts of the Declaration of Trust, she swore in an affidavit to this court stating that “at all times [she had] fully abided by the Declaration of Trust.” TR5179. 38.
Section 3.3 of the Declaration of Trust provides that where the Shareholder
is a qualified employee benefit plan subject to the provisions of ERISA, “the Trustee hereby acknowledges that it is a fiduciary of such plan to the extent of the investment of assets of such plan in any Shares of the Trust.” TX7886. It further provides that “[a]s such, the Trustee shall perform its duties herein with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” TX7886 at §3.3. 39.
Section 8.5 of the Declaration of Trust provides that the provisions of
Article Eight of the Declaration (“Limitation of Liability”) “shall not relieve a Trustee of any liability for any responsibility, obligation, or fiduciary duty imposed upon the Trustee by Part 4 of ERISA.” TX7886 at §8.5. 40.
Wells Fargo created separate Series (pools or funds) as the mechanism for
commingling cash collateral for investment. Two are relevant here: the Enhanced Yield (“EY”) Fund and the Collateral Investment for Term Loans (“CI Term”) Trust.
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c. 41.
The Subscription Agreements
Wells Fargo drafted Subscription Agreements for each Series. In most, but
not all instances, Wells Fargo provided Subscription Agreements to the Plaintiffs for signature. See TR1539-41. 42.
Plaintiff BCBSMN signed the Subscription Agreement for the CI Term
Trust in April 2006. TX32789. BCBSMN did not sign a Subscription Agreement for the Enhanced Yield Fund but was automatically transferred into the EY Fund by Wells Fargo. Plaintiff Nurses LPN Pension Plan signed a Subscription Agreement for the EY Fund in August 2004. TX33225. It never participated in the CI Term Trust. The other five ERISA Plaintiffs signed Subscription Agreements for both the CI Term Trust and EY Fund. TX33053 (Meijer); TX32917, TX36672 (Tuckpointers Pension); TX32919, TX32920 (Tuckpointers H&W Fund); TX33224, TX33226 (Nurses Pension Plan); TX32802, TX33293 (International Truck). 43.
The Subscription Agreements provide that the Subscriber may rely on, inter
alia, “any ... documents furnished or made available” by Wells Fargo. See, e.g., TX32917 at ¶5(e). 44.
While the Subscription Agreements state “[t]he Subscriber adopts, accepts,
and acknowledges that it shall be bound by all the terms and conditions of the Declaration of Trust” (id. at ¶3), it also acknowledges Wells Fargo did not provide the Declaration of Trust: “The Trust’s Declaration of Trust ... is available upon request.” Id. at ¶1.
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45.
The Declaration of Trust was never sent to a participant unless the
participant requested a copy. TR1579-80; TR1845; TR2833-34. d. 46.
The Investment Guidelines
Wells Fargo drafted Investment Guidelines for each Series. Under
“Investment Objectives,” the Guidelines state: The [Series] seeks to provide a positive return compared to the daily Fed Funds rate by investing in high-quality, U.S. dollar-denominated securities, where the prime considerations for [the Fund] shall be preservation of principal and daily liquidity requirements. See, e.g., TX32798; TX32820. 47.
The Investment Guidelines also contain sections titled: “Quality,” “Issue
Selection,” “Maturity,” “Diversification,” and “Compliance Standards.” See, e.g., Id. Under “Quality,” the Guidelines provide certain ratings requirements. Id. Under “Issue Selection” the Guidelines list various classes of securities that may be purchased. Id. Under “Diversification,” the Guidelines provide that a “[m]aximum of 25% of the [Portfolio] will be invested in any industry or sector, except the financial services or banking industry....” Further, a “[m]aximum of 15%” of the portfolio “will be invested in illiquid instruments.” Id. Under “Maturity,” the Guidelines provide that the “maximum maturity or average life” of any security was five years or less. Id. And securities with a floating or variable rate that resets “shall use the reset date as the maturity date for interest rate sensitivity calculations.” Id. 48.
Each of these criteria is subject to the “prime considerations” of
“preservation of principal and daily liquidity requirements.” TR380; TR395; TR533-34; TR811; TR863-65; TR890-91.
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49.
The Investment Guidelines also provided that all investments must be rated
“in the highest short-term rating category” by one or more of the nationally recognized rating agencies (or, if it does not have a short-term rating, its long-term rating must be within the ‘A’ category or better). See, e.g., TX32798; TX32820. 50.
It is widely acknowledged, however, that the principal U.S. rating agencies
are rife with conflicts of interest—particularly in rating complex structured financial products and mortgage-backed securities—due in part to the agencies’ close relationships with the banks whose securities they rate. TR322-23; TR500-04; TR519-22; TX171; TX172; TX8357-1. Indeed, Mr. Smith referred to the ratings agencies as “useless bastards.” TX172. Thus, Wells Fargo did not rely on the ratings organizations to determine the quality of the securities that it might purchase for the collateral investment pools. TR1701-02; TX172. These ratings were only one of the factors they relied on. Id.; TR2680; TR2685-86; TR4618; TR4720-21; TR5030-31. 51.
Wells Fargo represented that it would monitor the portfolio daily. See, e.g.,
TR426-27; TR1707-08; TR3380-81. The Investment Guidelines themselves stated that a designated person “shall review the [Fund] against guidelines daily to ensure compliance, and shall report this compliance to the management on a monthly basis.” See, e.g., TX32798; TX32820. And, if a security’s rating or quality was downgraded, the Confidential Memoranda provide that Wells Fargo “shall reassess promptly whether such security presents minimal credit risks” and “shall …. take such action as the Investment Manager determines is in the best interests of the [Fund] and its shareholders.” See, e.g., TX32874 at 207-08. 19
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e. 52.
The
CI
The Confidential Memoranda Term
Confidential
Memoranda
stated
that
“the
prime
considerations” for investments “are safety of principal and daily liquidity requirements.” See, e.g., TX32874 at 205. 53.
The CI Term Confidential Memoranda stated: “The assets of the [Fund]
will be valued each Business Day at their then current market value . . . .” Id. at 203. 54.
The CI Term Confidential Memoranda provided Subscribers with the right
to redeem all or any part of their interests in the Funds in cash on seven days’ notice. The CI Term Confidential Memoranda stated: Shareholders have the right to require the Trust to redeem all or any part of their interest in the [Fund] upon notice to Wells Fargo of at least seven (7) business days and at such other times as may be permitted by Wells Fargo, but no less often than as of the close of each Business Day, at a redemption price equal to the valuation per Share as determined by Wells Fargo. Payment for redeemed Shares will be made in cash within seven days after the redemption date; provided, however, that Wells Fargo reserves the right to postpone payment of the redemption price (without liability for interest or income thereon) or to suspend redemption rights in certain circumstances as specified in the Declaration of Trust. Id. at 204. 55.
The 2005 EY Fund Confidential Memorandum provided identical rights, in
slightly different language. See, e.g., TX33053 at 020. II.
WELLS FARGO’S BREACHES OF FIDUCIARY DUTY 56.
Wells Fargo knew that its clients, including Plaintiffs, were relying upon its
representations that the collateral would be invested in Rule 2a-7 money market instruments and that the “prime considerations” would be “safety of principal and
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liquidity.” TR1417-18; TR1421-22; TR1471-72. The ERISA Plaintiffs relied on Wells Fargo, as its fiduciary, to make and monitor the SLP collateral investments. TR6178-80; TR6272-75; TR6474-75; TR6529; TR6533-35; TR6643-44; Jansky (2013) Clip Report 22:22-24:21. A.
The SLP Portfolio
57.
Although the first issue listed in the Guidelines is “U.S. Treasury and
Government-sponsored Agency obligations,” the safest and most liquid investments, in 2007–2008 the SLP held no Treasuries. TR526; see, e.g., TX32798; TX32820. Instead, the portfolios were heavily invested in risky and/or illiquid securities. 1. 58.
Investment Vehicles
SIVs are complex investment structures that borrow short term to fund
longer-term assets, making a profit off the interest-rate spread. TR330-35. Typically, the underlying assets are mortgage-backed, including subprime investments. TR335; TR33839. 59.
Wells Fargo’s top executives repeatedly criticized SIVs. John Stumpf, the
then-CEO of Wells Fargo & Company and Chairman of Wells Fargo Bank, N.A., and Richard Kovacevich, Chairman of Wells Fargo & Company until 2009, stated that Wells Fargo knew in advance that the bank should avoid risky subprime investments and SIVs. Mr. Kovacevich stated: So, the decision was pretty easy. The head of our mortgage company, Mark Oman, came to me in 2005 and said, ‘I don’t think we should do the crazy things that are going on in the subprime mortgage market because it violates our vision and values and our responsible lending principles.’ He said, ‘We will lose market share but it is not right for our customers or our
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company.’ I quickly agreed. . . . Similarly, Dave White, Head of Commercial Banking, decided not to pursue CD – CDOs, CLOs, SIVs and highly leveraged loans to private equity firms, all of which became problematic in this crisis.” TX383 at 295. 60.
Mr. Stumpf characterized such investments as “taking enormous risks.” For
example, in a 2008 interview, Mr. Stumpf stated: In fact, I was embarrassed at the time, but not so much now, that I didn’t even know what an SIV was. I thought it was some new automobile. When I finally figured it out, I thought, “Why would people do this?” What advantage, what purpose does an SIV serve, other than putting something off balance sheet and keeping it from your investors and taking enormous risks? TX372; see also Stumpf Clip Report 78:9-18. Not knowing what SIVs were when he first heard of them, Mr. Stumpf had to look them up, and did so—on Wikipedia. Stumpf Clip Report 66:6-23. 61.
The Investment Guidelines did not identify SIVs as a potential investment.
TR527-28. Plaintiffs’ expert, Professor Christopher Geczy, testified that SIVs are not “commercial paper” or “debt obligations.” TR936-37 (Medium term notes from SIVs are corporate notes only “in the most technical possible way” and “not what you think of when you think of as corporate notes”); TR937 (Geczy disagreeing that SIVs are corporate notes and debt obligations in the standard way of teaching it). 62.
Wells Fargo itself considered SIVs to be a separate sector from commercial
paper, representing them separately on internal charts that showed the percentages of investments in each. See, e.g., TX197 at 72; TX490 at p.13; TR532. Wells Fargo personnel regularly referred to the “SIV Sector.” See, e.g., TX414 (Grimes email: 22
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“Following our review on the SIV sector”); TR529; TR1758; TX38 (Grimes email: “I am working on a full sector review of the SIV sector”); TR1809; TR4770; TR5531. 63.
SIVs are also not like traditional commercial paper because they do not
have the “full liquidity backstop” that asset-backed commercial paper has. TR937-38. This “compounds the risk of the SIV” because it is “not like traditional asset-backed commercial paper where you might have full 100 percent backup line of credit. You might only have three weeks of safety.” TR359. In fact, Cheyne did only have three weeks of liquidity. TX1396 at 36; TR5512-13. Victoria also only had three weeks of liquidity. TX420 at 00; TR5549. 64.
The concept of leverage, which brings with it expanded risk, is also
inherent in the structure of an SIV and differentiates it from traditional commercial paper. TR337-38. SIVs could have leverage of up to 40 to 1. Id. 65.
In addition to violating the issue selection criteria of the Investment
Guidelines, SIV investments violated the “prime considerations.” TR352-56 (Geczy testimony that the SIVs and the underlying investments they held were not appropriate for a securities lending program where the prime considerations were safety of principal and liquidity); TR538. While the Wells Fargo 2a-7 funds also held SIVs, in January of 2008, they constituted less than 1% of those funds’ holdings, while the CI Term Trust had 29.5% SIVs in March 2008 and the EY Trust had between 4% and 11% in SIVs. TX39013; TR545-46.
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66.
Although the Investment Guidelines did not allow SIVs as potential
investments, the Trust Series in which Plaintiffs were most heavily invested—the CI Term—held as much as 29.5% of its assets in SIVs. TX490 at p. 13; TR554; TR1760. 67.
SIVs were risky investments that did not have to be made because
alternative investments were available in the summer of 2007. TR547. These alternatives included liquid commercial paper from the likes of Verizon, Dow, 3M, Wal-Mart and “many others.” TR547-58. a. 68.
Cheyne SIV
The first SIV in the Business Trust to go under was Cheyne, which was, in
Wells Fargo’s own words, run by a “hedge fund shop” based in London. TX405; TX413; TR2406-06; TR2411. 69.
The underlying assets in Cheyne (later re-named Gryphon) were primarily
real estate—with 39% of subprime real estate exposure. TR5325-26. 70.
By June 2007, one of the funds operated by Cheyne—called Queens
Walk—reported major losses due to rising delinquencies in the mortgage market. TX195; TR556; TR5542-43; see also TR1783-87. 71.
The Wells Fargo Rule 2a-7 money market funds—which were not part of
the SLP—bailed out of Cheyne by July 2007. TR556. The Wells Fargo SLP, however, not only failed to sell its existing Cheyne holdings in July 2007—it purchased more. TR556. 72.
In August 2007, Cheyne hit its capital-loss trigger due to a sharp decline in
the value of its assets, and required the appointment of a receiver in the U.K. TR556-58. 24
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SLP team members were instructed not to discuss Cheyne outside their group. TX185; TR1831. b. 73.
Victoria SIV
In January 2008, Victoria became the second SIV in the SLP to default and
enter enforcement. TR2052; see, e.g., TX31206. Shortly thereafter, a senior Wells Fargo executive—outside of the SLP—evaluated the underlying assets in Victoria and concluded that “most Victoria assets have something wrong with them and that’s why we have not bought them to date.” TX497 at 41; TR5326-27. 74.
Wells Fargo purchased the Victoria holdings out of the Wells Fargo money
market funds to make them whole, but did not for the SLP. TR1297; TR4964; TR498384; see also TR3833-34. 2. 75.
Lehman
Lehman Brothers had significant exposure to real estate, making the SLP
Lehman holdings inappropriate, given the Business Trust’s other real estate and banking and financial exposures, and given the prime considerations of safety of principal and liquidity. TR577. 76.
Wells Fargo’s internal documents show that Wells Fargo had warnings
about Lehman. For example, in early June 2008, a Wells Capital executive wrote: “I think Lehman’s in trouble. Long exposures in sec lending pools.” TX535. 77.
On June 12, 2008, Wells Capital put Lehman on hold: “NO PURCHASES
UNTIL FURTHER NOTICE.” TX14880 (capitals in original). Days later, Wells Capital took Lehman off hold, but with significant limitations: a 32–day maturity limit.
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TX14882-1. At this time, the SLP had Lehman holdings with maturities more than 16 months long. TX518. 78.
In July 2008, the Wells Fargo central credit team also downgraded Lehman.
TX522. 79.
By Lehman’s bankruptcy, Wells Fargo had no Lehman holdings in its
money market funds and only “limited” holdings other than the SLP. TX531. The SLP, however, was listed as an “Area of Significant Risk,” with $460 million in Lehman holdings. Id. At the time of bankruptcy, each of the three SLP Business Trust Series held substantial amounts of Lehman holdings. Id. 80.
This can be explained, at least in part, by the SLP’s “extensive relationship”
with Lehman. TX530. Lehman was one of the Wells Fargo SLP’s largest broker/borrowers of loaned securities: more than $1 billion each day. TX530; see TR3636-37. In return, the Wells Fargo SLP purchased millions of dollars of Lehman securities as collateral for the program. TX518; TR3637. In July 2008, Executive Vice President Mike Niedermeyer wrote: “I believe we are all sensitive to our ongoing positive relationship with Lehman; we value Lehman as a trading counter party. We are not ‘advertising or emphasizing’ this change to anyone outside our company.” TX522; TR3638-39. 3. 81.
Wells Fargo violated other criteria in the Investment Guidelines
The SLP was heavily invested in SIVs. The CI Term held as much as 30%
of its assets in SIVs in 2007–2008. TX490 at p. 13; TR554. This percentage violated the
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25% limit for any industry or sector, mainly because of investments backed by real estate. TX32798; TX32820; TR954. 82.
The SLP also had substantial and inappropriate real estate and subprime
exposure. Wells Fargo did not monitor the SLP’s real estate exposure. TR4725-27. 83.
The Investment Guidelines also state that a “[m]aximum of 15% of the
[Portfolio] will be invested in illiquid instruments.” See, e.g., TX32798. This is a key constraint, given the fundamental right of SLP participants to exit the program at any time—if the collateral investments could not be sold, participants would be trapped in the program. As Mr. Adams recognized: “In our business, liquidity is the name of the game....” TX170. 84.
The SLP violated the 15% limit. For example, Wells Capital, a wholly-
owned subsidiary of Wells Fargo and investment advisor to the SLP, declared virtually all SIVs illiquid by August 2007; in the CI Term Trust, SIVs comprised substantially more than 15% of the pool. TX490 at p.13. Mr. Smith wrote in March 2008: As a percentage of all trust assets, the liquid portion is 67% for the Enhanced Yield Trust and 23% for the CI Term Trust. TX42A. In other words, the illiquid portion was 33% for the Enhanced Yield Fund—and 77% in the CI Term Trust. 4. 85.
Wells Fargo failed to monitor compliance with the Guidelines
The Investment Guidelines provide:
The unit Compliance Manager or person designated by Wells Fargo shall review [the Fund] against guidelines daily to ensure compliance, and shall report this compliance to the management on a monthly basis.
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TX32795 at 37; see also TX32820 at 42. 86.
As Professor Geczy testified, ongoing monitoring is essential to a portfolio
manager’s fulfillment of its fiduciary obligations: Well, a portfolio needs to be not just constructed and securities not to just be bought, they need to be monitored. I like to teach my students that the day you hold an asset is the day you bought it. And that’s because portfolio characteristics are ongoing. They change across time. The world isn’t just constant as I’ve just shown. You have to be awake. You have to be monitoring the portfolio in an ongoing way. But that is not just part of the basic common sense. It’s also part of executing fiduciary duty and the tenants [sic] of portfolio management. TR398. 87.
Wells Fargo, however, failed to monitor key constraints—including real
estate and subprime exposure. TX492 at 18; TR605-06; TR1795-97; TR1835; TR2763; TR2953-54; TR4724-26; TR4809. It also failed to conduct a 2a-7 liquidity analysis of the entire collateral investment pool on a daily basis. TR536. 5. 88.
Wells Fargo’s fiduciary breaches are confirmed by Wells Capital’s analysis
In the fall of 2007, Wells Fargo senior management requested that Wells
Capital review the SLP portfolio. TX148; TX149; Hartman Clip Report at 94:06-14; 94:24-95:04; 97:02-24; 101:02-25; see also TR1815-16. 89.
Wells Capital ran the SLP portfolio through its portfolio credit scoring
system. Wells Capital reported that the SLP portfolio “is exposed to a much higher default risk than any 2a7 fund we manage.” TX151; TR374; TR4835-36. In Wells Capital’s ratings, the higher the credit score, the higher the default risk. Wells Capital found that the SLP portfolio’s credit score was “826% of the maximum credit score 28
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allowable in any 2a7 fund we manage.” TX151; TR375; TR1819. Although this is a basic risk-management tool, the SLP had never performed any similar portfolio analysis. TX33. 90.
Wells Capital concluded that about 15% of the SLP portfolio assets “do not
meet or would not meet the standards for inclusion on our [Wells Capital] approved list.” TX152 at 33. 91.
Wells Capital executives stated that two of the SLP pools (in which
Plaintiffs participated) had “$9 bln of what looks like a potentially very dangerous situation.” TX153 at 68. 6. 92.
Wells Fargo violated its duty of care by failing to have adequate resources to operate its SLP prudently
Wells Fargo had a responsibility to see that the Securities Lending
Department had adequate resources. TR640-41. In fact, the presentations Wells Fargo gave to the ERISA Plaintiffs touted the resources of Wells Fargo Bank. See, e.g., TX11578 at 02; TX31087 at 27; TR6277-78; see also TR1432. 93.
When Wells Capital conducted its evaluation of the SLP portfolio, it
questioned “whether Sec Lending ever[] allocated sufficient resources to portfolio and risk management.” TX156 at 71; TR5058-59. Wells Capital also wondered whether “the focus on Cheyne diverted their limited resources from other potential problems.” TX153 at 68; see also TR680-81 (Geczy testimony that Wells Fargo failed to provide adequate resources).
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94.
Mr. Niedermeyer also noticed the lack of resources that had been devoted
to securities lending, commenting that “he just happened to notice we are running $25 b[illion] on a shoestring.” TX186 at 31; TR640. Notes of this meeting go on to say that “other operations w/ this size have a great deal more resources.” TX186 at 32; TR1868. 95.
In October 2007, the SLP was given permission to gather the resources that
it needed and hadn’t had to that point in time. TX492 (“Mike H and Mike N have told us we CAN get what we want.”); TR1792-93; TR2264; see also TX186 at 32 (“other resources (how can we make it happen. Mike N. will help).”). 96.
Because of senior management’s lack of confidence in Mr. Smith, initial
plans also called for Wells Capital to take over the investment function for the whole SLP, including the Trust pools that held Plaintiffs’ collateral. TX145; TX148; TX153; TX330; TR1513; TR2721-22; TR3487. In the end, only the separately managed accounts were transferred to Wells Capital and the Plaintiffs’ pools were left to languish with Smith’s team—without a “lifeguard.” TX145; TR4800-01. B.
Wells Fargo Breached Its Fiduciary Duties by Failing to Take Appropriate Action as the Credit Crisis Unfolded 1.
97.
Failure to divest improper holdings
Wells Fargo failed to construct the SLP portfolio to withstand inevitable
business cycles. This breach of fiduciary duty was compounded by Wells Fargo’s failure to take appropriate action as economic conditions changed, and its cover-up as the SLP crashed.
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98.
As early as December 2006, Wells Fargo recognized deterioration in the
sub-prime sector. Galliard, which was advising the SLP, was aware of the impending meltdown in the subprime market no later than the fourth quarter of 2006. TX258 at 44– 46; TR612-14. 99.
Matt Grimes—of Wells Capital—was warned about and had knowledge
that the housing market was weakening and there was deterioration in the subprime market in early 2007. TR5533. 100.
Wells Fargo—recognizing the problem specifically with AAA securitized
products—stated in a January 11, 2007 presentation entitled “How can banks lose billions of dollars on a Super Senior AAA (i.e., better than AAA)?,” that “ABS CDO performance can be binary because their underlying collateral is RMBS and not whole loans.” TX429 at 83, 85. 101.
Rather than take appropriate action, in January 2007, the SLP Portfolio
Manager advised: “To get bang in this econ environ – take more risk.” TX245 at 66; TR618-19; TR1761-63. 102.
By April 2007, the situation had deteriorated to the point where Wells
Fargo began to remove investments from the approved list for the SLP due to their “subprime exposure/LBO [leveraged buy out] risk.” TX1235; TR628. 103.
Thereafter, month after month, the removed list continued to grow, with the
primary reasons for removal listed as “sub-prime exposure/CDO [collateralized debt obligations] risk.” See, e.g., TX248 at 79. Eventually, all SIVs were removed from the
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approved list. TX34778 (December 13, 2007 letter to Jerome Foundation states “[w]e no longer have any SIV securities approved for new purchases”). 104.
Wells Capital’s policies required that where securities were removed for
cause, i.e., due to credit concerns, “existing holdings are to be sold.” TX37083 at 34-35; TR2678-79. The SLP, however, did not consider a removal from the approved list to be a sell directive or a sell recommendation and therefore did not sell securities that were removed from the approved list. TR1809-12; TR2395; TR2785. While Wells Capital provided the approved list, it was the SLP—primarily through Portfolio Manager Adams—that was responsible for making the buy/sell decisions and monitoring the portfolio. TR1504-05; TR1804; TR3351; TR3532. As a result, the SLP held on to an increasingly vulnerable portfolio. 105.
Wells Fargo believes that in August 2007, when Wells Fargo became aware
that Cheyne had hit a capital loss trigger and was downgraded by Standard & Poor’s, it could have still sold Cheyne paper at no discount. TR2405; TR2410. The SLP also could have sold its Victoria holdings in September 2007. TR2070-72. 106.
As late as February 2008, a Wells Capital executive expressed his disbelief
at the failure of the SLP to sell securities that had been removed from the approved list, writing “Unbelievable. Off the approved list, worth virtually par, and still in the portfolio.” TX160; TR2693-94. 107.
Likewise, in August of 2008, just weeks before Lehman went into
bankruptcy, Wells Fargo could have sold the Lehman holdings in the SLP for as much as 98.98. TX27502; TR2548-50. Mr. Smith testified that this meant that “Lehman was still 32
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trading at a fairly good price” and they could have sold it with only a $1 million loss on $100 million in holdings. TR2550-51. The SLP, however, did not sell its Lehman holdings. Id. 2.
Wells Fargo’s changing “redemption policies” a.
108.
Forcing Plaintiffs to pay the collateral shortfall while allowing others to exit whole
Before November 20, 2007, participants had always been permitted to exit
the SLP at the stated Net Asset Value (“NAV”) of $10. TR2876 (Hruska-Claeys testimony that historically everyone had left at the stated NAV value of $10); TR2990 (prior to November 2007, Jackson National had never been told to process at other than the $10 stated NAV). In fact, all participants had the right to get in and get out at $10. TR1829-30 (Smith testimony). 109.
Wells Fargo had no written policy in place on how to handle exits from the
program if the NAV dropped below the stated NAV. Wells Fargo claimed at trial that its oral policy was that if the NAV was within .5% of $10, ins and outs would be processed at $10. TR3409; TR3791. There was no oral policy for how to process ins and outs if the NAV was below 9.95. TR3792; see also TX1593; TR3408 (Hogan can see from TX1593 that as of November 6, 2007, JNL did not know how to process ins and outs if the NAV was outside the .5% corridor). As November progressed, Wells Fargo developed, for the first time, a policy. TR3792. 110.
In June 2007, the SLP fund accountants alerted Wells Fargo that the NAV
had dropped below $10 in one of the SLP Trust pools, due primarily to the “dramatic
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decrease in market value” of one of the securities (SLM Corp.). TX181; see also TR1097-98; TR1491. Instead of taking action to shore up the portfolio (by divesting risky, long-term, and/or subprime holdings), Wells Fargo increased the amount of securities on loan: If we grow the Cit term pool with new term trades and get an array of better priced investments in here our nav issue may dissipate since SLM will be a smaller portion of the cit pool . . . . How much additional term would we have to do to get the NAV back into good shape? TX181; see also TR1798. 111.
The SLP Portfolio Manager emailed the fund accountants:
We were wondering what the effect on the NAV would be if we increased the denominator (fund shares) by 100MM priced at 100. Trying to get a handle on how much we would need to increase the size of the portfolio to get the NAV to round back up to 10.00. TX182; see also TR1804-06. 112.
By no later than September 2007, the NAV of the CI Term Trust had fallen
to 9.94. TX187; TR1859-61; TR3682; TR3799-00. In a conference call on October 1, 2007, Wells Fargo Executive Vice President Michael Hogan recounted Mr. Niedemeyer’s concerns to senior SLP managers: “3 funds - $40 million below par (that’s a lot) Does WF have oblig to make whole?” TX186 at 30; see also TR639; TR1861; TR3132. 113.
Even though the NAV was below $10, Wells Fargo permitted certain
participants to exit with no losses. TR1856-57 (PSA, Arizona Board of Regents, and Longview Fiber got out at $10). Public Safety of Arizona (“PSA”) was one of the largest SLP participants, with nearly $2 billion of securities on loan. TR1854-55; TR3657-58. 34
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Wells Fargo allowed PSA to exit the Business Trust in September 2007, after the NAV had broken par, for a cash payment equivalent to $10 par—that is, without any losses. TR1856-57. This resulted in $6 million in overpayments. TX191; TR1257-59; TR1888; TR1916-18; TR1920-21; TR1980; TR2931. If Plaintiffs—who were unaware that the NAV had broken par and unaware of the other problems in the SLP—had exited in September 2007, they too would have had no losses. TR675; TR2053; TR2604. 114.
Mr. Hogan wrote to his boss, Executive Vice President Mike Niedermeyer,
to explain the situation: This is what happened with [PSA]. They came in and went out at $10.00, even though the weighted average NAV across the two pools they invested in was $9.97 when they exited. So [PSA] received more than its fair value at that time because of the unrealized loss impact on the true NAV. *** [T]he remaining shareholders are now short by the same amount the departing client was “overpaid.” TX48 at 01; see also TX191 at 90 (“our pocket/or customer”; “Wells won’t infuse cash”). 115.
To cover up the shortfall caused by PSA’s exit, Wells Fargo retroactively
changed its accounting methodology and recalculated the NAV. TX48 at 02. Wells Fargo retroactively recalculated the NAV by using a valuation process that was “slightly different” from what the pools had used before. TR3412-13. To recalculate, they used “amortized cost” with a “further conservative adjustment.” Id. This recalculation changed the NAV but did not change the risk profile of the pool; it did not change the securities that they owned. Id. In fact, Wells Fargo retroactively recalculated the NAV twice. TR3415. 35
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116.
Wells Fargo retroactively applied a .5% “collar” and diluted the $6 million
shortfall created by PSA’s exit. TR3793. In fact, Wells Fargo came to the conclusion that if they applied a collar (similar to a money market fund) they could eliminate the $6 million dollar overpayment all together. Id. 117.
Ms. Hruska-Claeys—the SLP’s Risk Manager—testified that she believed
that the retroactive recalculation of the NAV was “unethical.” TR2938-41; see also TR2082. 118.
In November 2007, Wells Fargo began the process of drafting a policy that
would restrict participants from exiting the SLP at $10 par. TR1951-52. Instead, they would have to exit at the floating NAV. Id. This change was referred to in internal notes as changing the rules “in the middle of the game.” TX188 at 70; see also TR1951-53. b. 119.
In-kind distribution
Wells Fargo “establish[ed] terms and conditions” (TX7886 at §3.1(q))
regarding redemption by specifically providing in the Confidential Memoranda that redemptions be in cash. TX32807 at 27; TR1135-40; TR1313-14; see TR2021-30. 120.
In March 2008, without notice, Wells Fargo decided that it would no longer
allow participants to exit the SLP with cash redemptions (at the NAV); instead requiring all exits through a “Distribution in Kind”—a pro-rata distribution of the devalued/illiquid collateral securities. TX222 at 92; TR3186. 121.
For a period of time before making this change in March 2008, Wells Fargo
instituted different levels of redemptions—some in cash and some in-kind. TR2587. It instituted three different tiers. Id.; see also TX28063. From $0 to $50 million “where you 36
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could get out at floating rate NAV.” TR2587. From $50 to $100 would be based on management discretion “based at that point in time on where the market was.” Id. And from $100 and over it was “basically” in-kind. Id. 122.
Wells Fargo understood the implication of these changes. The SLP
executives referred to the situation as “Hostage Clients.” TX226; see also TX227. More graphically, Mr. Smith wrote that clients with between $50 and $100 million who were stuck in the program were “F*CKED.” TX221. 123.
For smaller participants, the piece sizes of the collateral would be so small
that—even if they were liquid—the securities could not be sold. TR3248; TR3462. Wells Fargo recognized the “biggest issue of fid[uciary] breach for small accts ....” TX278 at 49; see also TR3219. The fact that the smaller clients were stuck with lots too small to sell was internally referred to as being “cruel and unusual.” TR3248; TR3462. c. 124.
Blowing up the Trust
The SLAs required Wells Fargo to “commingle[]” the collateral “for
investment purposes.” See, e.g., TX32811 at ¶2(f); see also TR2092; TR449. The collateral was commingled for investment before the Trust existed. TR1579. The termination of the Trust did not affect the SLA’s requirement that the investments had to be pooled. TR454-55. After the Trust was disaggregated, Wells Fargo never commingled the funds for investment again. TR672. 125.
In the spring of 2008, Wells Fargo began to discuss possible disaggregation
of the Business Trust. See, e.g., TX278, TX1794. This would force each participant into a separate account, with a distribution in kind of the devalued and/or illiquid collateral 37
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securities—even if participants stayed in the program. TR2039-40; see also TR2096. The smaller clients would be stuck with piece sizes too small to sell, while the larger clients could sell off certain assets and downsize their participation. Id. 126.
Notes from a March 17, 2008 meeting show that, while discussing
“obstacles to disaggregation,” Robert Bean of Institutional Trust Services, told Robert Poferl, Mr. Smith, Ms. Hruska-Claeys and others that the “biggest issue of fiduc[iary] breach [was] for small accounts.” TX278 at 49; see also TR3219. 127.
Seven days later, on March 24, 2008, Mr. Bean also recommended that an
independent trustee be appointed if the Trust was to be disaggregated or carve outs were to be accomplished. TX1794 at 57. His email of that date—which was eventually circulated to Mr. Smith, Mr. Hogan, Ms. Hruska-Claeys, Ms. Ahlstrand and attorney Timothy Carlin—stated that “discussions were held Thursday afternoon with respect to the possible disaggregation of the Sec Lending Pools.” TX1794 at 56. “Negatives to making this change” included “Fiduciary conflicts as trustee of the business Trust, versus Trustee of the client’s plans, versus fiduciary responsibility as investment manager of the pools.” Id. at 57. After discussing possible “middle ground” options, he concluded that “Given possible perceived conflicts, I would strongly recommend the appointment of an independent trustee for the Sec. Lending pool trusts.” Id.; see also TR3040-42. 128.
Mr. Smith testified that he was aware of this email and Mr. Bean’s
recommendations that an independent Trustee be appointed if the Trust was going to be disaggregated because of the conflict of interest that existed between Wells Fargo and the
38
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participants. TR2065-66. Mr. Hogan testified that he is sure that he learned of Mr. Bean’s recommendation at the time. TR3464. 129.
The next day, on March 25, 2008, carve outs from the Trust were discussed
during a conference call. TX1780; TR2088-90. During that call, notes show that Bob Poferl stated that “fiduciary hats in multiple ways, diff[erent] roles conflicting, kicked around an indep[endent] trustee for bus. trust – to make dec[ision] in an objective way.” TX1780 at 73; see also TR2088-90. The conference call was attended by many securities lending personnel, including Mr. Smith, Ms. Ahlstrand, Ms. Hruska-Claeys, and Mr. Hogan. TX1780 at 68. 130.
The notes of that March 25, 2008 conference call also show that attorney
Timothy Carlin informed the group that there was a “direct conflict for the bus[iness] tr[ust] w/ interest of the participants.” Id. at 73; see also TR2979-80. Ms. Hruska-Claeys testified that she remembered Mr. Carlin expressing this opinion during the call. TR3042. 131.
Mr. Hogan testified that he had the authority to appoint an independent
Trustee—as did Messrs. Niedermeyer, Hoyt, Stumpf and Kovacevich. TR3464-66. Nonetheless, an independent Trustee was never appointed. TR2096; TR3042; TR3471. Ms. Hruska-Claeys testified that, although there was discussion “about the differing interests,” there “wasn’t a big discussion” about an independent Trustee. TR3246. Mr. Hogan also testified that he does not believe he informed Mr. Niedermeyer that Mr. Bean said an independent Trustee should be appointed or that Mr. Carlin stated there was a conflict between the participants and Wells Fargo. TR3473.
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132.
During these discussions in the spring of 2008, Wells Fargo never
communicated to the participants that it was considering blowing up the Trust. TR671. When the issue was again discussed in May of 2008, notes from a May 27, 2008 meeting summed up the situation as: “feels like a ticking time bomb w/o (without) telling our clients.” TX279 at 19; see also TR2064-65. 133.
The Business Trust was not disaggregated in the spring of 2008. Instead, in
September 2008, Wells Fargo announced—without notice—that it was disaggregating the Business Trust. Days before, on September 18, 2008, Ms. Hruska-Claeys sent an email to Joshua Brenny—a “contractor through a consulting agency” tasked with helping Ms. Hruska-Claeys write the communication to the participants informing them of the disaggregation. TR2091-93; TR3038. The email, which was entitled “The Big Bang,” described how the communication was to inform the clients of “why this is the most wonderful idea.” TX47; see also TR2093. It also contrasted the spring discussions with the September decision: The May version of this process is that clients would be given the “choice” to carve out or not – the reviewers at that time couldn’t agree on how much lipstick to put on either pig! (some thought there was too much gloss or support for one version; other readers thought the pros supported the opposite conclusion. Good thing one written piece can serve both constituencies!). TX47 at 87. 134.
Although the Securities Lending Agreement required pooling, after the Big
Bang, Wells Fargo never comingled the investment pools again. TR672; TR2092.
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135.
Disaggregation visited the “cruel and unusual” outcome on all participants,
who now had fractional pieces of securities with final maturity dates going out decades— as long as the year 2047 and beyond. See, e.g., TX37304 at 02-05; TR1315-19. 3. 136.
Wells Fargo’s concealment
Wells Fargo intentionally failed to disclose important information to the
Plaintiffs, time and time again. 137.
The reason for the concealment—and affirmative misrepresentations—is
clear. Wells Fargo was concerned, in the words of Wells Fargo executives, about a “run on the bank.” TX190 at 23; TX1612 at 99; TR1891-92 (Smith testifying that Hogan was concerned about creating a run on the bank); TR1933-35 (Smith testifying that he wanted SLP to be a going concern and did not want to create a run on the bank); TR3392-93 (Hogan was concerned that communication with participants could create run on the bank). As Ms. Hruska-Claeys wrote, one of the “simple ground rules” of the SLP was: “We never admit to ‘having problems.’” TX280 at 54; TR3047-3048 (Hruska-Claeys wrote in an email that they had a philosophy to never admit problems); see also TX212 (“I think it is a bad bad idea to answer these questions right now (everything we say will be held against us).”); TR3046-47 (Hruska-Claeys testimony that she wrote that in an email). The bank “need[ed] people to stay in pool.” TX192 at 26; TR2964-66 (HruskaClaeys testifying that Smith needed participants to stay in the pools); see also TX201 at 16 (“Mike N: Meltdown scenario—if everyone runs out the door.”); TR3457-60 (Hogan testifying that meltdown scenario could occur if everyone runs out the door.).
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138.
Thus, the recommendation was that participants “hold the course and not
exit now.” TX27688 at 00; see also TR668 (Geczy testifying that November 20 letter suggested that participants should stay the course); TR2051 (Smith testifying that in January 2008 SLP recommended that clients stay the course); TR3345 (Hogan testifying that Wells Fargo recommended participants stay in the program). Wells Fargo repeatedly advised Plaintiffs to stay in the program, representing, for example, that the bank had “positioned the portfolio for improvement in the market.” E.g., TX31033 at 63. The ERISA Plaintiffs relied on Wells Fargo’s representations that they should stay in the program. TR6303-04; TR6478-79; TR6481; TR6545; TR6651; see also TR6298; see, e.g., TX33314 at 71. 139.
In December 2007, when Wells Fargo learned that the Victoria SIV was
taking steps to prepare for an enforcement action, it decided to notify only Minnesota Life and any others that were “particularly sensitive to this type of information.” TX1946; see also TR2078-80; TR3477-81. Wells Fargo decided that it was unnecessary to notify the other participants, including the ERISA Plaintiffs, because it would only “feed more worries” and “clients would become more concerned.” TX1946; see also TR2079; TR3479. Mr. Hogan admitted that this type of selective notification constituted treating participants “unequally.” TR3481.
Failing to disclose that the NAV “broke the buck.” 140.
In June 2007, the NAV in the CI Term pool fell below its $10/share stated
value (i.e. “broke the buck”), and had in all pools by September 2007. TX181 (“We had an issue arise in the Collateral Investment Term Trust today... the NAV went from 10.00 42
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to 9.99 due to the price drop for SLM Corp....”); TX186 at 31 (“NAVs have always rounded to $10.00. CI Term–off in June ... EY, CI – off $10 in late Aug.”); TR1494 (Smith testifying that all NAVs were below $10 as of August 28); TR2082-83 (same). Up to this time, the NAVs for the pools had always rounded to $10. TX192 at 27; TR2967 (Hruska-Claeys testifying regarding statement in TX192); TX186 at 31 (“NAVs have always rounded to $10.00”). 141.
For a fund intended to have a stable $10 value, breaking the buck was a
“very significant event.” TR629 (Geczy testimony). Wells Fargo did not disclose that the pools were below par until the November 2007 newsletter. TX34 at 31; TR646 (Geczy testifying that November 20 newsletter was first disclosure).
Retroactively recalculating the NAV and using “ploys” to increase the NAV. 142.
After learning that the pools were below par, Wells Fargo immediately
began devising methods to artificially boost the NAV. The SLP Risk Manager referred to these methods as “ploys.” TX50; TR2960 (Hruska-Claeys admitting to word “ploys”). One such ploy used by Wells Fargo was to increase the amount of securities on loan, despite the deteriorating investment portfolios. TX181 (“[I]f we grow the Cit term pool with new term trades and get an array of better priced investments in here our nav issue may dissipate....”); TX182 (additional $300M needed to round to $10); TR631-33 (Geczy testifying regarding increased term lending); TR1798-1807 (Smith testifying additional $300M needed to round up to $10). 143.
Another ploy used by Wells Fargo involved repeatedly retroactively
recalculating the NAV under less conservative valuation rules to diminish the shortfall. 43
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TR1926-27 (Smith testimony that valuation rules prior to recalculation were more conservative); TR1972-73 (Smith testimony that recalculation intended to increase NAV); TR2934-42; TR2960 (Hruska-Claeys testimony about retroactive recalculation); TR3412-16 (Hogan testimony regarding recalculation); TR3812 (same); TR3818 (Hogan admits historical NAVs were recalculated retroactively); TX50 (“ploys” to increase NAV); TX48 at 02 (“Bob is looking into how much this would improve our NAVs, but it would be meaningful.”). Wells Fargo never disclosed this information. TR1840-41 (participants were not told that SLP retroactively recalculated the NAV); TR2061 (the world did not know about the recalculation).
Failing to disclose the deteriorating quality of the collateral portfolio and removals from the approved list. 144.
In August 2007, Wells Cap performed a “full sector review of the SIV
sector” and removed 35 names (i.e. issuers) from the approved list. TX38. In an email to Mr. Hogan, Mr. Smith noted that “we will own most of them.” Id. By September 2007, it was clear to SLP personnel that 35 of the 170 names held in the SLP collateral portfolio, constituting over $7.3 billion of the $27.3 billion portfolio, were on the “Removed” or “Watch List.” TX183. This represented 20 percent of the names and 27 percent of the total collateral value. TR635 (Geczy testifying about 20% and 27%); TR1821-23 (Smith testifying about the removals and that it was important information); TR3049-51 (Hruska-Claeys testimony about 20% and 27% and that it was not disclosed); TR3224-25 (same); TR4775 (Adams confirming 20% and 27%).
44
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145.
Wells Fargo never disclosed this information. TR663-64 (Geczy testimony
that November 2007 newsletter did not disclose 20% and 27% on removed list); TR182426 (Smith testifying that September 2007 letter did not disclose 27%); TR1839-40 (same re: November letter); TR3049-51 (Hruska-Claeys testimony about 20% and 27% and that it was not disclosed); TR3224-25 (same). 146.
All participants received monthly newsletters from Wells Fargo regarding
the SLP. TR2164-65. In the summer and fall of 2007, Wells Fargo sent all participants monthly newsletters that concealed and misrepresented material information regarding the collateral investment pool. For example:
The June 2007 newsletter stated that Wells Fargo had not “increase[ed] the risk profile of the collateral reinvestment portfolio.” See, e.g., TX33445 at 25.
The August 2007 newsletter stated that “the risk profile of the reinvestment portfolio” had not increased, and “preservation of principal, liquidity and high quality” remained priorities. See, e.g., TX31215 at 47.
The September 2007 newsletter stated that Wells Fargo had “moved to further reduce the risk posture in our collateral portfolios from our usual conservative stance.” See, e.g., TX31209 at 45.
The September 2007 newsletter stated that Wells Fargo was, “in all cases …. investing in a considerably more conservative fashion than the investment guidelines would allow.” Id. at 44.
The September 2007 newsletter represented that, in the summer and fall of 2007, while there was increasing illiquidity in the markets generally, this was beneficial to Wells Fargo securities lending clients because “we have benefited from higher yields.” Id. at 45.
The October 2007 newsletter stated that Wells Fargo securities lending clients were benefiting from “increased earnings from wider spreads and favorable pricing in the commercial paper markets.” See, e.g., TX31092.
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The November 2007 newsletter, while informing Plaintiffs—for the first time—that SIVs were in the collateral portfolio and the NAV had broken the buck, stated that the collateral investments had only a “small exposure … overall to asset-backed securities.” See, e.g., TX31094.
The January 2008 newsletter stated that “the portfolio maintains good liquidity.” See, e.g., TX31206. Failing to disclose that the collateral portfolio was more than eight times riskier than any Wells Fargo Money Market Fund.
147.
In the fall of 2007, Wells Capital performed an evaluation of the SLP
portfolio. TR373-384 (Geczy testimony about Wells Capital evaluation); TR1814 (Smith testimony about Wells Capital analysis); TR4834-37 (Sylvester testimony regarding Wells Capital analysis). This analysis revealed that the securities lending portfolio had an 826 percent increased risk over Wells Fargo’s money market funds. TX151 at 40; TR373-384 (Geczy testimony about Wells Capital evaluation); TR1814 (Smith testimony about Wells Capital analysis); TR4834-37 (Sylvester testimony regarding Wells Capital analysis); TR5025 (same). 148.
Wells Fargo never disclosed this information. TR663 (Geczy testimony that
the November letter did not disclose 826%); TR1840 (Smith testimony that November letter did not disclose 826%); TR2060 (Smith testimony that the world did not know about the 826% increased risk).
Failing to disclose that the SLP was overexposed to real estate and subprime investments and that Wells Fargo did not monitor real estate or subprime exposure. 149.
The SLP was overexposed to real estate and subprime investments and
heavily invested in SIVs. See, e.g., TX213 at p. 2 (“All of these issues are heavily 46
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involved in sub-prime paper....”); TR750-52; TR2075-76; TX197 at 72 (showing total portfolio exposure of 28% in asset-backed commercial paper and 13% in SIVs); TR531; TR3289-90; TX490 at p. 13 (showing CI Term portfolio exposure of 29.5% in SIVs); TR544. 150.
Also, Wells Fargo failed to monitor real estate or subprime exposure in the
portfolios. TX492 at 18 (need to monitor levels of SIVs, subprime housing, etc.); TR1796-97 (Smith testimony that SLP did not have tools in place to monitor SIVs, subprime housing, etc.); see also TR2763; TR2954 (Hruska-Claeys testifying that SLP did not monitor underlying subprime exposure); TR4725. Wells Fargo never disclosed this information. See TR1834-36; see also TX33518.
Failing to disclose that the SLP lacked resources and was operating on a “shoestring.” 151.
In the fall of 2007, Wells Fargo’s senior management recognized that they
had neglected risk management in the SLP and that the program had inadequate resources given its size. TX186 at 31-32 (“Mike N – he just happened to notice that we are running $25 b[illion] on a shoestring – he’s not spent much time on this or risk management – other operations w/ this size have a great deal more resources”); TR2926 (Hruska-Claeys testimony that notes were accurate). In particular, the SLP was operating a $25 billion program on a “shoestring.” TX186 at 31; TR636-41 (Geczy testimony regarding “shoestring” and resources). Mr. Hogan indicated that the SLP was now “on the radar screen” and that more resources would be available to the SLP. TX186 at 32-33 (“on the radar screen”); TX492.
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152.
The initial request for additional resources recognized that portfolio
management was an area of need, noting that “we do a number of investment related things ad hoc-- 1) upon request, 2) in case of emergency, 3) when we happen to remember or on some other basis rather than as a regularly scheduled P[ortfolio] M[anagement]-level activity.” TX492 at 16; see also id. at 17-21 (listing 19 categories of “Investment Related Resource Needs”); TR1793-96 (Smith testimony regarding TX492); TR2950-60 (Hruska-Claeys testimony regarding TX492).Wells Fargo never disclosed this information. TR665 (Geczy: shoestring not disclosed in November letter); TR1842 (Smith testimony that operating on a shoestring and inadequate resources not disclosed in November letter).
Failing to disclose that Wells Fargo changed the rights of Plaintiffs to exit the program. 153.
The Confidential Memorandum for the EY and CI Term pools provides that
redemptions from the Business Trust will be made in cash. TX32807 at 27 (CI Term: “Payment for redeemed Shares will be made in cash within seven days....”); TX32808 at 40 (EY: same). However, the SLP management committee met in early March 2008 and implemented a new policy that eliminated cash redemptions. TX222 at 92. The new policy required all exiting clients to take a “distribution in kind” from the SLP portfolio holdings. Id.; TR2040. Wells Fargo never disclosed this changed policy to participants before it was implemented. See TR1651-52.
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III.
FACTS SPECIFIC TO EACH PLAINTIFF A.
BCBSMN Pension Plan
154.
BCBSMN Pension Plan (“BCBSMN”) and Wells Fargo executed a
Securities Lending Agreement on September 19, 2000. TX33137. They executed a Subscription Agreement for the CI Term Trust on April 18, 2006. TX32789. It is undisputed that BCBSMN never signed a Subscription Agreement for the Enhanced Yield Fund but was automatically transferred into the EY Fund. 155.
BCBSMN entered into the SLP and continued to loan securities in reliance
on Wells Fargo’s representations that the program was safe with little risk. TR6173-74; TR6178; TR6186. It further relied on Wells Fargo’s representations that the collateral investments would be liquid, that cash collateral from the loaned securities would be invested in short-term and high-grade money market instruments, that the primary considerations for Wells Fargo’s investment of the collateral would be safety of principal and liquidity, and that they could recall their loaned securities for any reason at any time. TX33137 at ¶¶ 2(f), 4; TR6167-69. 156.
BCBSMN relied on Wells Fargo to monitor the investments and to disclose
all important information and to explain the significance of the information that was provided. TR6179-80. 157.
In 2007, as the Wells Fargo collateral investment portfolio became
increasingly vulnerable and illiquid, Wells Fargo significantly increased the level of BCBSMN’s participation in the SLP. In April 2007, the BCBSMN Pension Plan had a
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monthly average loan balance of $20.8 million in securities lending. TX33960A. In October 2007, BCBSMN had a monthly average loan balance of $40.3 million. Id. 158.
BCBSMN received the November 2007 Wells Fargo monthly newsletter.
TR6191-93; see TX33142. Upon receipt, BCBSMN inquired of Wells Fargo to talk about exiting the program and was told by Wells Fargo that BCBSMN should stay in the program and stay the course. TR6191; TR6194-96. BCBSMN relied on Wells Fargo and stayed the course. TR6194-96. 159.
In
January
and
February
2008,
there
were
conversations
and
correspondence between Wells Fargo and BCBSMN concerning BCBSMN’s desire to exit the SLP. TR6196-6201; see, e.g., TX34461. Wells Fargo reiterated that BCBSMN should hold the course, but BCBSMN decided to exit in order to limit its losses. TR620102. Wells Fargo also told BCBSMN that BCBSMN would be responsible for any collateral losses if it exited the program. TR6200. 160.
BCBSMN exited the SLP in April 2008 by paying Wells Fargo’s demand
of $444,995, which was the amount of the collateral losses as calculated by Wells Fargo. TR6202-03; TR6210; TX34059B. BCBSMN did not receive collateral when it exited and does not have a collateral account at Wells Fargo. TR6210-11. 161.
Had Wells Fargo disclosed the material information that it was required to
under its fiduciary obligations by September 2007, BCBSMN would have exited the SLP without any losses. TR6186-88. 162.
BCBSMN expressly reserves its rights to recover all allowable ERISA
remedies resulting from Wells Fargo’s breaches of its fiduciary duties. BCBSMN will 50
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submit detailed Proposed Findings of Fact and Conclusions of Law regarding remedies, as well as a supporting brief, on August 18, 2017, as agreed to by the parties and approved by the Court. Dkt. Nos. 697, 698. BCBSMN also expressly reserves its rights to move the Court post-judgment for attorney fees, costs, and prejudgment interest, which are also remedies available under ERISA, should the Court enter judgment in favor of the ERISA Plaintiffs. Id. B.
Meijer Pension Trust
163.
Meijer Pension Trust and Wells Fargo executed a Securities Lending
Agreement and Subscription Agreement for both the CI Term Trust and Enhanced Yield Trust on July 20, 2006. TX33053. 164.
Meijer Pension Trust entered into the SLP and continued to loan securities
in reliance on Wells Fargo’s representations that the program was safe with little risk. TR6258-59; TR6262-63; TR6266; TR6270. It further relied on Wells Fargo’s representations that the collateral investments would be liquid, that cash collateral from the loaned securities would be invested in short-term and high-grade money market instruments, that the primary considerations for Wells Fargo’s investment of the collateral would be safety of principal and liquidity, and that they could recall their loaned securities for any reason at any time. TX33053 at ¶¶ 2(f), 4; TR6257-62. 165.
In staying in the program, Meijer Pension Trust also relied on the
safeguards that were represented to reduce risk and the representation that collateral was only purchased from an approved list. TX31087 at 66; TR6282-83; TR6286-88.
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166.
Meijer Pension Trust relied on Wells Fargo to monitor the investments, to
disclose all important information, and to explain the significance of the information that was provided. TR6273-75. 167.
In 2007, as the Wells Fargo collateral investment portfolio became
increasingly vulnerable and illiquid, Wells Fargo significantly increased the level of Meijer Pension Trust’s participation in the SLP. In April 2007, Meijer Pension Trust had a monthly average loan balance of $144.2 million in securities lending. TX33974A. In October 2007, Meijer Pension Trust had a monthly average loan balance of $191.7 million. Id. 168.
Meijer Pension Trust received the November 2007 Wells Fargo monthly
newsletter. TX31094; TR6295-96. In reliance on the representations made in this letter, and subsequent representations by Wells Fargo, Meijer Pension Trust stayed in the program. TR6298; TR6303-04. Wells Fargo advised Meijer Pension Trust that it believed the market conditions would improve and that Meijer Pension Trust should stay in the program rather than suffer losses that would occur if Meijer Pension Trust exited. TR6304. 169.
Losses continued to mount through 2008 and Wells Fargo continued to
advise that Meijer Pension Trust should stay in the program. See, e.g., TX15154; TR6307-10. 170.
Had Wells Fargo disclosed the material information that it was required to
under its fiduciary obligations by September 2007, Meijer Pension Trust would have
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exited the SLP without any losses. TR6295 (testimony that Meijer Pension Trust would have “very strongly considered” exiting). 171.
At the time of trial, Meijer Pension Trust remained in the SLP. As of June
30, 2013, Wells Fargo’s exit demand for Meijer Pension Trust to get out of the program and get its loaned securities back was $7,325,554. TX34052B; TR6323. At the time of the parties’ bench trial, Wells Fargo maintained an account for Meijer Pension Trust containing the pro rata share of the collateral that Meijer Pension Trust received when Wells Fargo disaggregated the Trust. TR6322-23. Meijer Pension Trust did not wish to retain the collateral, preferring for Wells Fargo to keep the collateral assets, if Meijer Pension Trust was made whole for all of its securities lending losses and associated costs. Id. 172.
Meijer Pension Trust expressly reserves its rights to recover all allowable
ERISA remedies resulting from Wells Fargo’s breaches of its fiduciary duties. Meijer Pension Trust will submit detailed Proposed Findings of Fact and Conclusions of Law regarding remedies, as well as a supporting brief, on August 18, 2017, as agreed to by the parties and approved by the Court. Dkt. Nos. 697, 698. Meijer Pension Trust also expressly reserves its rights to move the Court post-judgment for attorney fees, costs, and prejudgment interest, which are also remedies available under ERISA, should the Court enter judgment in favor of the ERISA Plaintiffs. Id. C.
Tuckpointers Local 52 Plans
173.
The Tuckpointers Local 52 Pension Plan and the Tuckpointers Local 52
Health & Welfare Fund (“Tuckpointers Local 52 Plans”) executed Securities Lending 53
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Agreements with Wells Fargo on March 1, 2007. TX32915; TX32916. The two Plans also executed Subscription Agreements for the CI term and EY Funds with Wells Fargo on March 1, 2007. TX32917; TX32919; TX32920; TX36672. 174.
The Tuckpointers Local 52 Plans entered into the SLP and continued to
loan securities in reliance on Wells Fargo’s representations, transmitted through the Tuckpointer’s investment consultant, that the program was safe and that there was little risk. TR6469-70; TR6487-88. They further relied on Wells Fargo’s representations that the collateral investments would be liquid and that the primary considerations for Wells Fargo’s investment of the collateral would be safety of principal and liquidity. TR646970; see also TR6478. 175.
The Tuckpointers Local 52 Plans relied on Wells Fargo to monitor the
investments and to disclose all important information. TR6474-76. 176.
In 2007, as the Wells Fargo collateral investment portfolio became
increasingly vulnerable and illiquid, Wells Fargo significantly increased the level of Tuckpointers Local 52 Plans’ participation in the SLP. In April 2007, the Tuckpointers Local 52 Plans had a combined monthly average loan balance of $12.5 million in securities lending. TX33988A. In October 2007, the Tuckpointers Local 52 Plans had a monthly average loan balance of $40.6 million. Id. 177.
The Tuckpointers Local 52 Plans first became aware of the problems in the
SLP in the spring of 2008 when its outside investment consultant called Tuckpointers to share the information. TR6476. The consultant thereafter met with the Tuckpointer’s Board of Trustees to discuss the matter. Id.; TX34386. Through the consultant, Wells 54
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Fargo recommended that the Tuckpointers remain in the program. TR6479; TX34386 at 138. 178.
Based on this recommendation, the Tuckpointers Local 52 Plans remained
in the program. TR6479. Over the next few months their losses went up significantly. Id. 179.
Had Wells Fargo disclosed the material information that it was required to
under its fiduciary obligations prior to November 2007, the Tuckpointers Local 52 Plans would not have entered into the SLP. TR6470. 180.
At the time of trial, the Tuckpointers Local 52 Plans remained in the SLP.
As of June 30, 2013, Wells Fargo’s exit demand for Tuckpointers Local 52 Plans to get out of the program and get their loaned securities back was $1,628,041. TX34052B; TR6488. Wells Fargo maintained an account for the Tuckpointers Local 52 Plans containing the pro rata share of the collateral that Tuckpointers received when Wells Fargo disaggregated the Trust. See TR6488. Tuckpointers did not wish to retain the collateral, preferring for Wells Fargo to keep the collateral assets, if Tuckpointers was made whole for all of its securities lending losses and associated costs. Id. 181.
Tuckpointers Local 52 Plans expressly reserves its rights to recover all
allowable ERISA remedies resulting from Wells Fargo’s breaches of its fiduciary duties. Tuckpointers Local 52 Plans will submit detailed Proposed Findings of Fact and Conclusions of Law regarding remedies, as well as a supporting brief, on August 18, 2017, as agreed to by the parties and approved by the Court. Dkt. Nos. 697, 698. Tuckpointers Local 52 Plans also expressly reserves its rights to move the Court postjudgment for attorney fees, costs, and prejudgment interest, which are also remedies 55
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available under ERISA, should the Court enter judgment in favor of the ERISA Plaintiffs. Id. D.
Nurses Pension Plans
182.
The Nurses Pension Plan and Nurses LPN Pension Plan (“Nurses Pension
Plans”) and Wells Fargo executed Securities Lending Agreements on August 17, 2004. TX33222; TX33223. The Nurses Pension Plans executed a Subscription Agreement for the CI Term Trust on August 17, 2004 and a Subscription Agreement for the EY Trust on April 13, 2006. TX33224; TX33226. The Nurses LPN Pension Plan executed a Subscription Agreement for the EY Trust on August 17, 2004. TX33225. It did not participate in the CI Term Trust. 183.
The Nurses Pension Plans entered into the SLP and continued to loan
securities in reliance on Wells Fargo’s representations that the program was safe and that there was little risk. TR6527-28. They further relied on Wells Fargo’s representations that the collateral investments would be liquid, that cash collateral from the loaned securities would be invested in short-term and high-grade money market instruments and that the primary considerations for Wells Fargo’s investment of the collateral would be safety of principal and liquidity. TX33222 at ¶ 2(f); TR6531-33; TR6539-42. 184.
The Nurses Pension Plans relied on Wells Fargo to monitor the investments
and to disclose all important information and to explain the significance of the information that was provided. TR6534-36. 185.
The Nurses Pension Plans received the November 2007 Wells Fargo
monthly newsletter. TR6542-43; see TX33230. Based on representations made by Wells 56
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Fargo that the markets would return to normal and the portfolios would come back, the Nurses Pension Plans remained in the program. TR6545; see TX33230. 186.
Had Wells Fargo disclosed the material information that it was required to
under its fiduciary obligations by September 2007, the Nurses Pension Plans would have exited the SLP without any losses. TR6540-42. 187.
In October 2010, the Nurses LPN Pension Plan ended the lending of its
securities by Wells Fargo, paying Wells Fargo’s exit demand of $23,159. TX34059B; TR6550-51. Deducting amounts that have been paid back to it since its exit, the Nurses LPN Pension Plan’s stipulated out-of-pocket loss as of March 31, 2013 was $16,905. Id. Wells Fargo continued to hold SLP collateral for the Nurses LPN Pension Plan in an escrow account post-trial, but Ms. Slocum testified that it does not wish to retain the collateral—and Wells Fargo can have it—if the Nurses LPN Pension Plan is made whole. TR6550-52. 188.
At the time of trial, the Nurses Pension Plan remained in the SLP. As of
June 30, 2013, Wells Fargo’s exit demand for the Nurses Pension Plan to get out of the program and get its loaned securities back was $1,991,043. TX34052B; TR6551. Wells Fargo continued to hold SLP collateral for the Nurses Pension Plan in an escrow account at the time of trial. See TR6550-52. The Nurses Pension Plan did not wish to retain the collateral, preferring for Wells Fargo to keep the collateral assets, if the Nurses Pension Plan was made whole for all of its securities lending losses and associated costs. Id. 189.
The Nurses Pension Plan expressly reserves its rights to recover all
allowable ERISA remedies resulting from Wells Fargo’s breaches of its fiduciary duties. 57
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The Nurses Pension Plan will submit detailed Proposed Findings of Fact and Conclusions of Law regarding remedies, as well as a supporting brief, on August 18, 2017, as agreed to by the parties and approved by the Court. Dkt. Nos. 697, 698. The Nurses Pension Plan also expressly reserves its rights to move the Court post-judgment for attorney fees, costs, and prejudgment interest, which are also remedies available under ERISA, should the Court enter judgment in favor of the ERISA Plaintiffs. Id. E. 190.
International Truck Retiree Trust The International Truck Retiree Trust (“International Truck”) and Wells
Fargo executed a Securities Lending Agreement and a Subscription Agreement for the EY Trust on January 17, 2003. TX32801; TX33293. They executed a Subscription Agreement for the CI Term Trust on April 11, 2006. TX32802. 191.
International Truck entered into the SLP and continued to loan securities in
reliance on Wells Fargo’s representations that the program was safe and that there was little risk. TX11784 at 11 (“while preserving principal and liquidity”) and 16 (“while taking minimal risk”); TR6636-39. It further relied on Wells Fargo’s representations that the collateral investments would be liquid, that cash collateral from the loaned securities would be invested in short-term and high-grade money market instruments and that the primary considerations for Wells Fargo’s investment of the collateral would be safety of principal and liquidity. TX11784 at 11; TR6636-39. 192.
In entering into, and staying in the program, International Truck also relied
on the safeguards that were represented to reduce risk and the representation that collateral was only purchased from an approved list. TX11784 at 12; TR6639-40. 58
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193.
International Truck relied on Wells Fargo to monitor the investments and to
disclose all important information. TR6644. 194.
International Truck received the November 2007 Wells Fargo monthly
newsletter. TX33309; TR6648-49. Upon receipt, International Truck arranged to have representatives of Wells Fargo make a presentation on the status of the SLP. TR6649. On February 13, 2008, Mr. Smith and Tom Thurston of Wells Fargo made such a presentation. TX33314; TR6650-51. They recommended that International Truck remain in the program. TX33314 at 71; TR6651. International Truck relied on this recommendation and followed it. Id. 195.
Losses continued to mount and in June or July of 2011, International Truck
ended its relationship—including securities lending—with Wells Fargo. TR6651-52. International Truck paid Wells Fargo’s exit demand of $8,482,597. TX34059B; TR665253. Deducting amounts that have been paid back to it since exit, International Truck’s stipulated out-of-pocket loss as of March 31, 2013 was $6,980,072. Id. International Truck continues to hold SLP collateral that it received when it exited. See TR6653. International Truck does not wish to retain the collateral—and Wells Fargo can have it— if International Truck is made whole for all of its securities lending losses and associated costs. TR6653. 196.
Had Wells Fargo disclosed the material information that it was required to
under its fiduciary obligations by September 2007, International Truck would have exited the SLP without any losses. TR6648.
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197.
International Truck expressly reserves its rights to recover all allowable
ERISA remedies resulting from Wells Fargo’s breaches of its fiduciary duties. International Truck will submit detailed Proposed Findings of Fact and Conclusions of Law regarding remedies, as well as a supporting brief, on August 18, 2017, as agreed to by the parties and approved by the Court. Dkt. Nos. 697, 698. International Truck also expressly reserves its rights to move the Court post-judgment for attorney fees, costs, and prejudgment interest, which are also remedies available under ERISA, should the Court enter judgment in favor of the ERISA Plaintiffs. Id. F.
Jennie Edmundson (Nebraska Methodist)
198.
Nebraska Methodist and Wells Fargo executed a Securities Lending
Agreement in 1999. It is undisputed that the Agreement was applicable only to nonERISA Nebraska Methodist entities. The Agreement was amended on July 26, 2002 to add, inter alia, the Jennie Edmundson Memorial Hospital Pension Plan (“Jennie Edmundson”). TX12528 at 95-96. A Subscription Agreement for the EY Trust was also executed on that date. Id. at 02. A Subscription Agreement for the CI Term Trust was executed on April 1, 2006. TX32816. 199.
Jennie Edmundson entered into the SLP and continued to loan securities in
reliance on Wells Fargo’s representations that the program was safe and that there was little risk. Jansky (2013) Clip Report at 12:18-21:4. It further relied on Wells Fargo’s representations that the collateral investments would be invested in “2a-7 type – First Tier money market instruments, letters of credit and treasuries/agencies.” Id. at 12:1813:25; TX32986 at 24. It further relied on Wells Fargo’s representations that the 60
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investments would be liquid, that cash collateral from the loaned securities would be invested in short-term and high-grade money market instruments and that the primary considerations for Wells Fargo’s investment of the collateral would be safety of principal and liquidity. TX32986 at 28; Jansky (2013) Clip Report at 15:7-24:4; TX36671 at ¶ 2(f); see also TX12528 at 95-96. 200.
In entering into, and staying in the program, Jennie Edmundson also relied
on the safeguards that were represented to reduce risk and the representation that collateral was only purchased from an approved list. TX32986 at 29; Jansky (2013) Clip Report at 14:6-16:4. 201.
Jennie Edmundson relied on Wells Fargo to monitor the investments and to
disclose all important information, and to explain the significance of the information that was provided. Jansky (2013) Clip Report at 23:22-26:04; 27:16-28:05. 202.
Jennie Edmundson received the November 2007 Wells Fargo monthly
newsletter. TX33009; Jansky (2013) Clip Report at 31:13-25. Upon receipt, Jennie Edmundson made contact with Wells Fargo to discuss the situation and arranged to have representatives of Wells Fargo make a presentation on the status of the SLP. Jansky (2013) Clip Report at 32:07-33:04. In March 2008, Mr. Smith and Dave Stidger of Wells Fargo made such a presentation. TX33011; Jansky (2013) Clip Report at 32:25-33:07. They recommended that Jennie Edmundson remain in the program. TX33011 at 13; Jansky (2013) Clip Report at 33:08-34:07. Jennie Edmundson relied on this recommendation and followed it. Id.
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203.
Jennie Edmundson remains in the SLP. As of June 30, 2013, Wells Fargo’s
exit demand for Jennie Edmundson to get out of the program and get its loaned securities back was $134,051. TX34052B. Wells Fargo maintains an account for Jennie Edmundson containing the pro rata share of the collateral that it received when Wells Fargo disaggregated the Trust. See Jansky (2013) Clip Report at 36:20-37:06. Jennie Edmundson did not wish to retain the collateral, preferring instead for Wells Fargo to keep the assets, if Jennie Edmundson was made whole for all of its securities lending losses and associated costs. Id. 204.
Had Wells Fargo disclosed the material information that it was required to
under its fiduciary obligations by September 2007, Jennie Edmundson would have exited the SLP without any losses. Jansky (2013) Clip Report at 29:08-31:12. 205.
The Jennie Edmundson Plan expressly reserves its rights to recover all
allowable ERISA remedies resulting from Wells Fargo’s breaches of its fiduciary duties. Jennie Edmundson will submit detailed Proposed Findings of Fact and Conclusions of Law regarding remedies, as well as a supporting brief, on August 18, 2017, as agreed to by the parties and approved by the Court. Dkt. Nos. 697, 698. The Jennie Edmundson Plan also expressly reserves its rights to move the Court post-judgment for attorney fees, costs, and prejudgment interest, which are also remedies available under ERISA, should the Court enter judgment in favor of the ERISA Plaintiffs. Id.
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IV.
WELLS FARGO’S BREACHES OF ITS FIDUCIARY DUTIES CAUSED PLAINTIFFS’ LOSSES A.
Business Cycles Are Foreseeable, and Did Not Cause Plaintiffs’ Losses
206.
Business cycles—including abrupt and dramatic market declines—are
inevitable, as history demonstrates. TR388-91. (Geczy testimony on business cycles). This is a well-known fact-of-life to investment professionals. Id. Thus, prudent investment managers know that portfolios must be constructed with the understanding that business cycles will repeat. TR390-91. 207.
The credit crisis was foreseeable, as Wells Fargo’s own top officers have
publicly stated. The Chairman of Wells Fargo, Richard Kovacevich has repeatedly said that the bank was well aware of the nature of business cycles. Mr. Kovacevich testified that there are normal business cycles and there are normal ups and downs. Kovacevich Clip Report at 70:20-71:20. He further testified that these ups and downs could be avoided if appropriate conduct was engaged in. Id. at 71:21-24. The practices to be avoided included “reaching for yield.” Id. at 71:25-72:7. 208.
A securities lending portfolio manager must take into consideration the
concept of business cycles or market cycles in constructing a portfolio. TR388. It is absolutely critical that a portfolio manager plan for such cycles which can be extreme or abrupt and can be caused by different factors. TR388-89. Thus, in Wells Fargo’s own words, investments—“primarily of a simple nature”—must be selected “that will get the best pricing in any market.” TX170 at 20; TR1698-99.
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209.
Top SLP management knew that Wells Fargo should plan for market
downturns. SLP Portfolio Manager Adams, for example, wrote years ago of the need to plan for “the ‘surprise’ event.” TX170 at 20; TR417; TR1698-99. Mr. Hogan sent the top SLP managers an email to remind them of the adage: “‘hope for the best but plan for the worst’ ….” TX40; TR3436-37. Mr. Adams instructed the SLP Asset Liability Committee as early as 2003 that: “liquidity is the name of the game and we need to select those securities, primarily of a simple nature, that will get the best pricing in any market.” TX170 at 20; TR1698-99; Mr. Hogan also instructed the SLP team that: “[W]e need to establish investment risk management as our highest priority.” TX40; TR3435. Wells Fargo was also specifically aware that “structured paper is hard to price in difficult market conditions.” TR416-17. 210.
Mr. Kovacevich also believes that financial institutions—not general
economic factors—were the cause of the credit crisis. He stated: This time, financial institutions themselves caused the problem, not broad economic factors, not the economic cycle, not misguided fiscal or monetary policy, not an oil crisis or a market disruption. Let’s be honest. This problem was caused by a total disregard by financial institutions’ management of basic risk management of fundamentals, even common sense, coupled with a serious lapse in ethical behavior. TX383 at 81-82. B.
Wells Fargo’s Breaches of its Fiduciary Duties Caused Plaintiffs’ Losses
211.
As set forth above, Wells Fargo failed to conform to fiduciary standards
and its conduct constitutes a breach of its fiduciary duties to the ERISA Plaintiffs under Section 404(a) of ERISA; 29 U.S.C §1104(a). 64
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212.
Based on all of the facts set forth in his testimony, Professor Geczy testified
that Wells Fargo’s breaches of fiduciary duty were a substantial contributing factor in each Plaintiff’s damages. TR682. 213.
Each Plaintiff testified that they relied on Wells Fargo’s representations to
enter into and stay in the program (including after November 2007) thus holding them hostage, increasing their losses, and for all ERISA Plaintiffs other than BCBSMN, forcing Plaintiffs to take an in-kind distribution of Wells Fargo’s impaired collateral assets. See, e.g., TR6303-04; TR6478-79; TR6481; TR6545; TR6651; Jansky (2013) Clip Report 33:8-34:7; see also TR6298; see, e.g., TX33314 at 71. 214.
Each Plaintiff testified that had Wells Fargo met their fiduciary duties of
disclosure by September 2007—when they could still exit with no losses—they would have either not entered the program or would have exited the SLP, and thus incurred no losses. TR6186-88 (BCBSMN); TR6294-95 (Meijer); TR6470 (Tuckpointers Plans); TR6541-42 (Nurses Plans); TR6647-48 (International Truck); Jansky Clip Report at 29:8-31:12 (Jennie Edmundson). 215.
The appropriate benchmark—as Professor Geczy testified—would be Rule
2a-7 money market funds, in which investors (with only one exception) suffered no losses during the financial crisis. See, e.g., TR548-54 (Wells Fargo money market fund provided little disadvantage in terms of returns and did not lose any money in the economic downturn); TR675-76 (an SLP run like a 2a-7 should not have lost money in this economic cycle); TR822 (zero losses would have been appropriate, like the Wells Fargo Advantage Funds). Only one 2a-7 fund “broke the buck” in this downturn. TR96865
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69; TR5349. Moreover, Wells Fargo’s own Rule 2a-7 funds—managed by Wells Capital—did not “break the buck” and had held no Cheyne or Lehman investments at the time those investments crashed. TR932 (Wells Fargo Advantage Fund lost no money); TR4981-82 (Advantage Fund sold its Cheyne in July 2007 and its Lehman before the bankruptcy). Thus, had the SLP been managed prudently, and consistent with Wells Fargo’s representations and fiduciary obligations, no Plaintiff would have suffered losses. TR675-76; see also TR822.
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PROPOSED CONCLUSIONS OF LAW REGARDING THE ERISA PLAINTIFFS’ BREACH OF FIDUCIARY DUTY CLAIMS I.
JURISDICTION 1.
Jurisdiction is proper in this Court under 29 U.S.C. §1132(e)(1) to the
extent that Plaintiffs seek relief under ERISA §404(a); 29 U.S.C §1104(a). Venue is also proper in this Court under ERISA §502(e)(2), 29 U.S.C §1132(e)(2). II.
THE ERISA PLAINTIFFS ARE ENTITLED TO JUDGMENT ON THEIR BREACH OF FIDUCIARY DUTY CLAIMS 2.
There is no dispute that Wells Fargo was the Plaintiffs’ fiduciary under
ERISA. Wells Fargo’s counsel conceded at trial that it owed a fiduciary duty. TR1213 (“Because we concede in this case, Wells Fargo does, that the fiduciary duty applies to Wells... In the answers to the RFA’s in this case here, Wells Fargo admitted that it had a fiduciary duty....”). Wells Fargo also acknowledged in Section 3.3 of the Declaration of Trust that it was a fiduciary under ERISA with respect to its management of the Business Trust pools. TX7886. Accordingly, Wells Fargo is bound by the strict fiduciary standards set forth in ERISA. 3.
Under ERISA, “a breach of fiduciary duty claim involves a three-step
analysis.” Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917 (8th Cir. 1994). The Plaintiffs must prove “a breach of fiduciary duty and a prima facie case of loss to the plan.” Id. The burden then shifts to the fiduciary to prove that the loss “was not caused by ... the breach of duty.” Id. (quotation omitted). 4.
The ERISA Plaintiffs have timely brought their ERISA breach of fiduciary
duty claims. For the reasons explained in the ERISA Plaintiffs’ prior Proposed Findings
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of Fact and Conclusions of Law, no statute of limitations bars Plaintiffs’ claims. Dkt. 596 at 91-93. A.
The Court Is Not Bound by the Jury’s Verdict on the Non-ERISA Plaintiffs’ Breach of Fiduciary Duty Claims
5.
The Court may act as the fact-finder on the ERISA Plaintiffs’ breach of
fiduciary duty claims unencumbered by the jury’s verdict relating to the common-law claims of the non-ERISA Plaintiffs. Dkts. 677, 696. Wells Fargo consented to the Court acting as ERISA fact-finder and waived any argument of collateral estoppel based upon the jury’s verdict on the common-law claims. Id.; see also Dkt. 695; Dkt. 685; Dkt. 668; Dkt. 665 (ERISA Plaintiffs’ submissions post-remand explaining why collateral estoppel does not apply here); Dkt. 635; Dkt. 619; Dkt. 608; Dkt. 605 (ERISA Plaintiffs’ post-trial submissions resisting the application of collateral estoppel). 6.
The preemptive nature of ERISA means is an additional reason that this
Court must act as a fact-finder unconstrained by the jury’s verdict on the state commonlaw claims of the non-ERISA Plaintiffs, in order to respect Congress’s intent that ERISA—not the common law—should govern claims against fiduciaries of ERISA plans. See Dkt. 665 at 17-21 (ERISA Plaintiffs’ post-remand submission outlining how ERISA’s preemptive nature would make the applicable of collateral estoppel inappropriate in these circumstances).
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B.
Wells Fargo’s Fiduciary Duties Under ERISA
7.
ERISA §404(a) sets forth a non-exhaustive list of fiduciary duties. See 29
U.S.C. §1104(a)(1); Bixler v. Cent. Pa. Teamsters Health & Welfare Fund, 12 F.3d 1292, 1299 (3rd Cir. 1993). These fiduciary duties are regarded as “the highest known to the law.” Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 598 (8th Cir. 2009) (emphasis added) (quotation omitted). 8.
Subdivision (A) of ERISA §404(a)(1) imposes the duty of loyalty—a duty
to act “solely in the interest of the participants and beneficiaries” and “for the exclusive purpose of providing benefits to participants and their beneficiaries.” 29 U.S.C. §1104(a)(1)(A). In describing this duty, the Eighth Circuit has quoted Justice Stewart: Under principles of equity, a trustee bears an unwavering duty of complete loyalty to the beneficiary of the trust, to the exclusion of the interests of all other parties. Restatement (Second) of Trusts § 170(1) (1957); 2 A. Scott, Law of Trusts § 170 (1967). To deter the trustee from all temptation and to prevent any possible injury to the beneficiary, the rule against a trustee dividing his loyalty must be enforced with “uncompromising rigidity.” Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (Cardozo, C.J.). Robbins v. Prosser’s Moving & Storage Co., 700 F.2d 433, 439 (8th Cir. 2009) (emphasis added) (quoting NLRB v. Amax Coal Co., 453 U.S. 322, 329-30 (1981)). 9.
The duty of loyalty includes a duty of disclosure: “The duty to disclose
material information is the core of a fiduciary’s responsibility, animating the common law of trusts long before the enactment of ERISA.” Shea v. Esensten, 107 F.3d 625, 628 (8th Cir. 1997) (quotation omitted).
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10.
Loyalty also includes a duty of candor: “[L]ying is inconsistent with the
duty of loyalty owed by all fiduciaries and codified in section 404(a)(1) of ERISA.” Varity Corp v. Howe, 516 U.S. 489, 506 (1996) (quotation omitted). 11.
Subdivision (B) of ERISA §404(a)(1) imposes a duty of care and
prudence—a duty to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” 29 U.S.C. §1104(a)(1)(B). “[T]he duty of prudence trumps the instructions of a plan document.” Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2468 (2014). The fiduciary must undertake “an independent investigation of the merits of an investment and … use appropriate, prudent methods in conducting the investigation.” Harley v. Minn. Mining & Mfg. Co., 42 F. Supp. 2d 898, 906 (D. Minn. 1999) (emphasis added). ERISA duties, derived from trust law, imposes “a continuing duty to monitor trust investment and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selection investments at the outset.” Tibble v. Edison Int’l, 135 S. Ct. 1823, 1828 (2015) (emphasis added). “Prudence also imposes “an ongoing duty to monitor investments with reasonable diligence and remove plan assets from an investment that is improper.” Id. (emphasis added); see also Chao v. Trust Fund Advisors, 2004 U.S. Dist. LEXIS 4026, *9-10 (D.D.C. Jan. 20, 2004) (“[A] fiduciary’s duties under ERISA apply to the totality of their investment actions.”) (emphasis added) (citation omitted).
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12.
ERISA also incorporates the common law duty of impartiality. Varity
Corp. v. Howe, 516 U.S. 489, 514 (1996) (citing Restatement (Second) of Trusts §183 (1992)). 13.
Subdivision (C) of ERISA §404(a)(1) requires the fiduciary to diversify
plan investments in order to minimize risk. 29 U.S.C. §1104(a)(1)(C); see also Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. at 2467; Brock v. Citizens Bank of Clovis, 841 F.2d 344, 346 (10th Cir. 1988). 14.
Subdivision (D) of ERISA §404(a)(1) requires the fiduciary to discharge its
duties “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [ERISA].” 29 U.S.C. §1104(a)(1)(D). C.
Wells Fargo Breached Its Fiduciary Duties to the ERISA Plaintiffs 1.
15.
Wells Fargo’s collateral investments violated its ERISA fiduciary duties
Based on all of the Findings of Fact set forth herein, Wells Fargo’s overall
management of the collateral investment portfolio violated its fiduciary duties under ERISA. Wells Fargo’s failure to conform to appropriate fiduciary duties, financial standards and prudence in the securities lending portfolio constitutes a breach of its fiduciary duties to the ERISA Plaintiffs under Section 404(a) of ERISA; 29 U.S.C §1104(a). 16.
Based on all of the Findings of Fact set forth herein, Wells Fargo’s
collateral investments violated the terms of the Investment Guidelines governing the
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program, in breach of Wells Fargo’s duty to manage the program and monitor its assets “in accordance with the documents and instruments governing the plan.” 29 U.S.C. §1104(a)(1)(D); see also Dardaganis v. Grace Capital Inc., 889 F.2d 1237, 1241-42 (2d Cir. 1989) (failure to follow investment guidelines creates liability under ERISA “without regard to whether the investment decisions seemed prudent at the time”). For example: Although the Guidelines do not provide for investments in SIVs, both the EY and CI Term pools held investments in SIVs, with the CI Term holding as much as 30% of its assets in SIVs. Wells Fargo’s unsafe, illiquid, and unauthorized investments included, but were not limited to, SIVs, asset-backed securities, and mortgage-backed securities, and Lehman investments violated the Investment Guidelines “prime considerations.” This overexposure to SIVs, which were improper in any amount, also violated the 25% limitation on any individual industry or sector. Wells Fargo also violated the 15% limitation on illiquid investments. By March 2008, the holdings in the CI Term Trust were 77% illiquid, and the EY Fund was 33% illiquid. Wells Fargo did not monitor the SLP’s real estate exposure, and the SLP had substantial and inappropriate real estate and subprime exposure. Wells Fargo failed to monitor compliance with the Guidelines. 17.
Wells Fargo argues that under the Declaration of Trust, it has discretion to
interpret the Investment Guidelines, and therefore it is entitled to an abuse of discretion standard for its interpretation of the Investment Guidelines to permit collateral investments in SIVs. No deference to Wells Fargo’s interpretation is appropriate here. Wells Fargo’s actions were not taken “in its capacity as Trustee,” as required by the Declaration of Trust, there is no evidence of any such interpretation by the “Trustee,” the
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Trust was a sham, and the Trust no longer exists. Even if entitled to such a standard, “[r]eview of an administrator’s decision under an abuse of discretion standard, though deferential, is not tantamount to rubber-stamping the result.” Torres v. UNUM Life Ins. Co. of Am., 405 F.3d 670, 680 (8th Cir. 2005). 18.
In addition, based on all of the Findings of Fact set forth herein, Wells
Fargo violated its fiduciary duties of care, loyalty and prudence in its investment of SLP collateral under Subdivisions (A) and (B) of Section 404(a)(1) of ERISA; 29 U.S.C §1104(a). These findings are independent of any findings regarding Wells Fargo’s violation of the Investment Guidelines. Indeed, even if Wells Fargo’s collateral investments met the Investment Guidelines, Wells Fargo can still be found to violate its fiduciary duties. Cent. States, Se. & Sw. Areas Pension Fund v. Cent. Transp., Inc., 472 U.S. 559, 568 (1985) (“[t]rust documents cannot excuse trustees from their duties under ERISA.”) The subdivisions of Section 404(a)(1) have independent significance. Dardaganis, 889 F.2d at 1241. 19.
As the U.S. Supreme Court made clear in the recent decision of Fifth Third
Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2468 (2014), “the duty of prudence trumps the instructions of a plan document, such as an instruction to invest exclusively in employer stock even if financial goals demand the contrary.” The Supreme Court rejected the idea that a duty of prudence is defined by the aims of a particular plan set out in plan documents, “since in that case the duty of prudence could never conflict with a plan document.” Id. (emphasis added). See also Utilicorp United Inc. v. Kemper Fin. Servs., 741 F. Supp. 1363, 1366 (W.D. Mo. 1989) (“[M]ere adherence to applicable plan 73
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documents under §1104(a)(1)(D) is not sufficient to satisfy the standards of care and loyalty set forth in §1104(a)(1)(A) and (B).)”; Best v. Cyrus, 310 F.3d 932, 934-36 (6th Cir. 2002). In Utilicorp, the court stated: The plain language of 29 U.S.C. § 1104(a)(1), which prescribes the duties of a fiduciary under ERISA, contravenes the essential premise of defendant’s argument, that [defendant] by adhering to the provisions of the [trust] agreement ipso facto satisfied its fiduciary duties. 741 F. Supp. at 1365–66; see also Herman v. NationsBank Trust Co., 126 F.3d 1354, 1369 (11th Cir. 1997). Wells Fargo also failed in its “continuing dut[ies] to monitor” the collateral investments and “remove imprudent ones.” Tibble v. Edison Int’l, 135 S. Ct. at 1828-29. 20.
Based on all of the Findings of Fact set forth herein, the collateral
investments violated Wells Fargo’s duty of prudence under Subdivision (B) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(B). Wells Fargo invested a substantial portion of the portfolio in risky asset-backed and mortgage-backed securities and complex SIVs that were backed by toxic subprime real estate and other problematic assets. Wells Fargo’s overall investment selection resulted in an 826% increased risk over the very type of Rule 2a-7 money market fund that the SLP was represented to be. 21.
Based on all of the Findings of Fact set forth herein, the collateral
investments violated Wells Fargo’s duty to diversify investments under Subdivision (C) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(C). The excessive concentrations in SIVs and illiquid securities, along with the SLP’s high exposure to real estate and subprime, violated Wells Fargo’s fiduciary duties.
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22.
Based on all of the Findings of Fact set forth herein, Wells Fargo violated
its duty of prudence under Subdivision (B) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(B) by failing to prudently monitor the SLP portfolio and to take action when problems with subprime and asset-backed securities began to surface. See Tibble v. Edison Int’l, 135 S. Ct. at 1828-29 (duty of prudence includes “continuing duty to monitor trust investments and remove imprudent ones.”); Harley, 42 F. Supp. 2d at 906 (D. Minn. 1999) (ERISA fiduciary has “an ongoing duty to monitor investments with reasonable diligence and remove plan assets from an investment that is improper.”). “[A] fiduciary who ignores changed circumstances that have increased risk of loss may be deemed imprudent.” Bd. of Trustees of the Operating Engineers Pension Trust v. JPMorgan Chase Bank, N.A., 2013 U.S. Dist. LEXIS 43746, *22 (S.D.N.Y. Mar. 27, 2013). 23.
For example, Wells Fargo ignored warnings about the impending problems
with subprime real estate in late 2006 and early 2007, did not monitor the SLP’s exposure to subprime real estate, and ignored Wells Capital’s policy requiring that securities removed for cause be sold. When problems with SIVs became evident in the summer of 2007, Wells Fargo failed to divest the SLP portfolio of SIVs and purchased more Cheyne while the Wells Fargo 2a-7 funds sold all of their Cheyne. The SLP held Cheyne after it hit a capital loss trigger and suffered a downgrade despite believing it could have sold Cheyne at no discount, and held Victoria despite the ability to sell. Despite ample warning of the impending problems at Lehman—which enabled the Wells Fargo money market funds to eliminate their exposure to Lehman—the SLP continued to hold its 75
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Lehman bonds up until Lehman’s bankruptcy even though it could have sold its Lehman at roughly 99% of par. 24.
Based on all of the Findings of Fact set forth herein, Wells Fargo violated
its duty of loyalty and prudence under Subdivisions (A) and (B) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A) & (B) by (1) not divesting its Cheyne—and even buying more Cheyne—while Wells Fargo’s 2a-7 funds sold it; (2) not buying Victoria out of SLP as the Wells Fargo 2a-7 funds had done; (3) not divesting its Lehman when Wells Fargo’s 2a-7 funds sold it; (4) not divesting its Lehman—and concealing what it knew about Lehman’s troubles—to preserve its relationship with borrowing brokers; and (5) favoring Wells Fargo entities by allowing those in separate accounts to move to the superior resources of Wells Capital Management, while allowing the Business Trust to flounder with SLP management. 25.
Based on all of the Findings of Fact set forth herein, Wells Fargo violated
its duties of care, skill, prudence and diligence under Subdivision (B) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(B) by its inadequate level of resources to manage the SLP and the collateral portfolio. This lack of resources is another breach of Wells Fargo’s fiduciary obligation to operate the SLP “with the care, skill, prudence, and diligence” that a prudent person would use “in the conduct of an enterprise of a like character.” 29 U.S.C. §1104(a)(1)(B).
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2.
Wells Fargo breached its fiduciary duties by changing the Plaintiffs’ redemption rights a.
26.
Forcing Plaintiffs to pay the collateral shortfall while allowing others to exit whole
Based on all of the Findings of Fact set forth herein, Wells Fargo violated
Wells Fargo’s duty of loyalty under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A) by forcing Plaintiffs to pay the collateral shortfall while allowing others to exit whole when the NAV fellow below .5% of $10. Before November 20, 2007, participants had always been permitted to exit the SLP at the stated NAV of $10. Wells Fargo had no written policy in place on how to handle exits from the program if the NAV dropped below the stated NAV. Wells Fargo had no oral or written policy on how to process exits if the NAV was outside of .5% of $10. 27.
Based on all the Findings of Fact set forth herein, Wells Fargo violated
Wells Fargo’s duty of loyalty under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A) by its “unethical” retroactive recalculation of the NAV to hide the shortfall from allowing other participants to leave the program whole when the NAV had fallen below $10. 28.
Based on all the Findings of Fact set forth herein, Wells Fargo’s conduct
also violated Wells Fargo’s duty of loyalty under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A), by putting the bank’s interests before the interests of the Plaintiffs, since Wells Fargo’s decision was (1) to protect its own self-interest and to prevent a “run on the bank,” further breaching its duty of loyalty to the Plaintiffs; (2) to protect its relationships with brokers over its fiduciary obligations to the Plaintiffs,
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further breaching its duty of loyalty to the Plaintiffs; and (3) favored other entities over the Plaintiffs by allowing PSA to exit for cash with no losses. b. 29.
In-kind distribution
Based on all of the Findings of Fact set forth herein, Wells Fargo violated
Wells Fargo’s duty of loyalty under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. § 1104(a)(1)(A) by forcing Plaintiffs to exit through a “Distribution in Kind”—a pro-rata distribution of the devalued/illiquid collateral securities. 30.
Based on all of the Findings of Fact set forth herein, Wells Fargo violated
its fiduciary duty under Subdivision (D) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(D), by violating the terms of the Securities Lending Agreements and Subscription Agreements governing the program by forcing Plaintiffs to take an in-kind distribution as a condition of exit. 31.
Based on all of the Findings of Fact set forth herein, Wells Fargo’s conduct
also violated Wells Fargo’s duty of loyalty under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A), by putting the bank’s interests before the interests of the Plaintiffs, since Wells Fargo’s decision was (1) to protect its own self-interest and to prevent a “run on the bank,” further breaching its duty of loyalty to the Plaintiffs; (2) to protect its relationships with brokers over its fiduciary obligations to the Plaintiffs, further breaching its duty of loyalty to the Plaintiffs; and (3) favored other entities over the Plaintiffs by allowing PSA to exit for cash with no losses.
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c. 32.
Blowing up the Trust
Based on all of the Findings of Fact set forth herein, Wells Fargo violated
Wells Fargo’s duty of loyalty under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A) by disaggregating the Business Trust, and placing each Plaintiff in a separate account with a pro-rata distribution of the devalued/illiquid collateral securities. 33.
Based on all of the Findings of Fact set forth herein, Wells Fargo violated
its fiduciary duty under Subdivision (D) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(D), by violating the terms of the Securities Lending Agreements and Subscription Agreements by disaggregating the Business Trust, and placing each Plaintiff in a separate account with a pro-rata distribution of the devalued/illiquid collateral securities. 34.
Based on all of the Findings of Fact set forth herein, Wells Fargo violated
Wells Fargo’s duty of loyalty under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A) by failing to appoint an independent Trustee and instead to conduct the business of the SLP with a “direct conflict for the business trust with interest of the participants.” See TX1780 at 73; see also TR2979-80. 35.
Based on all of the Findings of Fact set forth herein, Wells Fargo’s conduct
also violated Wells Fargo’s duty of loyalty under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A) by putting the bank’s interests before the interests of the Plaintiffs, since Wells Fargo’s decision was (1) to protect its own self-interest and to prevent a “run on the bank,” further breaching its duty of loyalty to the Plaintiffs; and (2) to protect its relationships with brokers over its fiduciary obligations to the Plaintiffs,
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further breaching its duty of loyalty to the Plaintiffs; and (3) favored other entities over the Plaintiffs by allowing PSA to exit for cash with no losses. 36.
Wells Fargo argues that it had the discretion under the Declaration of Trust
to require in-kind distributions and to disaggregate the Trust. As discussed above, if imprudent, Wells Fargo violated its fiduciary obligations, even accepting Wells Fargo’s argument that its actions were consistent with the Declaration of Trust. See Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. at 2468 (duty of prudence “trumps” plan documents); Utilicorp United Inc., 741 F. Supp. at 1366. In Utilicorp, the Trustee was instructed by the plan to liquidate a plan investment on October 14, 1987. 741 F. Supp. at 1365. The Trustee took no action until October 20, the day after “the notorious October 19, 1987 stock-market crash.” Id. The Trustee argued, however, that under the terms of the governing Declaration of Trust it “had up to ten business days in which to effect a written withdrawal request” and that its compliance with the 10-day rule defeated the plan’s claims. Id. The court rejected this argument, noting that “mere adherence to applicable plan documents under §1104(a)(1)(D) is not sufficient to satisfy the standards of care and loyalty.” Id. at 1366. 3. 37.
Wells Fargo’s misrepresentations and concealments breached its fiduciary duties
Based on all of the Findings of Fact set forth herein, Wells Fargo repeatedly
made material misrepresentations to the Plaintiffs. For example, Wells Fargo’s material misrepresentations include:
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Wells Fargo represented that the “prime considerations” for the investments would be “safety of principal and liquidity” and that potential return was of secondary importance. Wells Fargo consistently represented that investments would be in “high grade money market funds” that were similar to a “Rule 2a-7” money market fund. Robert Smith frequently represented that the collateral investments were the “safest in the world.” Wells Fargo’s relationship managers described securities lending as “free money.” Wells Fargo represented that the collateral investments would be on an “approved list.” Wells Fargo represented that it monitored the portfolio daily. Wells Fargo represented that it “purchase[d] short-term securities whose maturities approximately match the loan’s expected maturity.” Wells Fargo represented that the cash collateral would be in a comingled pool. Wells Fargo represented that participants would exit for cash. By June 2007, Wells Fargo had not “increas[ed] the risk profile of the collateral investment portfolio.” By August 2007, “the risk profile of the reinvestment portfolio” had not increased, and “preservation of principal, liquidity and high quality” remained priorities. By September 2007, Wells Fargo had “moved to further reduce the risk posture in our collateral portfolios from our usual conservative stance.” By September 2007, Wells Fargo was, “in all cases …. investing in a considerably more conservative fashion than the investment guidelines would allow.” By the summer and fall of 2007, that although there was increasing illiquidity in the markets generally, this was beneficial to Wells Fargo securities lending clients because “we have benefited from higher yields” and “increased earnings from wider spreads and favorable pricing in the commercial paper markets.”
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Wells Fargo represented that they should remain in the program after being informed about Cheyne in November 2007. 38.
Based on all of the Findings of Fact set forth herein, Wells Fargo, in
addition to the above misrepresentations and concealments, also concealed and failed to disclose material and useful information regarding the Securities Lending Program. For example, as detailed above, Wells Fargo intentionally failed to disclose and concealed the following material facts: That the NAV “broke the buck” during the summer of 2007. That Wells Fargo retroactively recalculated the NAV and used “ploys” to boost it. The deteriorating quality of the collateral portfolio, including that in September 2007, 20% of the names in the SLP portfolio and 27% of the holdings were on the “Removed” or “Watch List.” That Victoria was preparing for an enforcement event in December 2007 (which was selectively disclosed to some SLP participants, but not the Plaintiffs). That the SLP portfolio carried a default-risk score 826% greater than the maximum allowed for any Wells Fargo money market fund. That the SLP was overexposed to subprime and real estate and that Wells Fargo failed to monitor this exposure. That the SLP lacked resources and operated on a “shoestring.” That Wells Fargo unilaterally changed the participants’ redemption rights requiring exiting clients to take a distribution in kind of the impaired collateral holdings, rather than cash. 39.
Based on all of the Findings of Fact set forth herein, Plaintiffs relied on the
representations that Wells Fargo made regarding the Securities Lending Program, and
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relied on Wells Fargo to provide them with all material and useful information regarding the program. 40.
Based on all of the Findings of Fact set forth herein, Wells Fargo breached
its fiduciary duties in its misrepresentations and concealments. Wells Fargo’s misrepresentations and concealments constitute a breach of its fiduciary duties to the ERISA Plaintiffs under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A). See Varity Corp. v. Howe, 516 U.S. 489, 506 (1996) (“[L]ying is inconsistent with the duty of loyalty owed by all fiduciaries and codified in section 404(a)(1) of ERISA.” (quotations omitted)); Shea, 107 F.3d at 628 (duty of disclosure). 41.
Furthermore, based on all of the Findings of Fact set forth herein, Wells
Fargo’s misrepresentations and concealments also violated Wells Fargo’s duty of loyalty under Subdivision (A) of ERISA §404(a)(1); 29 U.S.C. §1104(a)(1)(A) by putting the bank’s interests before the interests of the Plaintiffs. Wells Fargo’s misrepresentations and concealments were (1) to protect its own self-interest and to prevent a “run on the bank,” further breaching its duty of loyalty to the Plaintiffs; (2) to protect its relationships with brokers over its fiduciary obligations to the Plaintiffs, further breaching its duty of loyalty to the Plaintiffs; and (3) favored other entities over the Plaintiffs by providing certain material information to other SLP participants, including certain of its own entities, while withholding that information from the Plaintiffs, further breaching its duty of loyalty to the Plaintiffs. 42.
Wells Fargo’s claim that it had no duty to disclose information absent a
specific request is unavailing. Wells Fargo had an affirmative duty to disclose all material 83
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information. Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639, 644 (8th Cir. 2007) (“[A] fiduciary has a duty to inform when it knows that silence may be harmful.”); Bixler v. Cent. Pa. Teamsters Health & Welfare Fund, 12 F.3d 1292, 1300 (3d Cir. 1993) (“This duty to inform is a constant thread in the relationship between beneficiary and trustee; it entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence might be harmful.”); Anweiler v. Am. Elec. Power Serv. Corp., 3 F.3d 986, 991 (7th Cir. 1993) (“Fiduciaries must also communicate material facts affecting the interests of beneficiaries. This duty exists when a beneficiary asks fiduciaries for information, and even when he or she does not.” (internal citations omitted)). D.
Plaintiffs Have Demonstrated a Prima Facia Case of Loss and Causation and Wells Fargo Has Not Met Its Burden
43.
ERISA plaintiffs bear the burden of proving a breach of duty and a prima
facie case of loss to the plan. Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917 (8th Cir. 1994) (Roth I). The burden then “shifts to the fiduciary to prove that the loss was not caused by ... the breach of duty.” Id. (quotation omitted). 44.
Based on all of the Findings of Fact set forth herein, Plaintiffs have
established a prima facie case of loss caused by Wells Fargo’s breach of fiduciary duties. Plaintiffs have established that their plans incurred losses caused by Wells Fargo’s breaches of fiduciary duty, as reflected in the exit demand that Wells Fargo made to each ERISA Plaintiff. Wells Fargo required that each ERISA Plaintiff pay Wells Fargo the amount of the collateral shortfall in order to recover their loaned securities and exit the
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program. The exit demand that each Plaintiff had either paid or that Wells Fargo was demanding that it pay as of the time of trial is reflected in Table A below:
TABLE A ERISA Plaintiff BCBSMN Meijer Pension Trust International Truck Retiree Trust Jennie Edmundson LPN Plan Nurses Pension Plan Tuckpointers Local 52
SLP Status at Trial Exited Remained Exited Remained Exited Remained Remained
Exit Demand/ Out of Pocket Loss at Trial $ 444,995 $ 7,325,554 $ 6,980,072 $ 134,051 $ 16,905 $ 1,991,043 $ 1,628,041
Dkt. 596 at 85-87. Pursuant to the briefing schedule, Dkts. 697-98, the ERISA Plaintiffs will submit further proposed findings of fact and conclusions of law regarding the appropriate remedies under ERISA to make good to the ERISA Plaintiffs such losses resulting from Wells Fargo’s breaches of fiduciary duty, so as to make the ERISA Plaintiffs whole. 45.
In addition for these losses stemming from the collateral shortfall, the
ERISA Plaintiffs will also seek disgorgement of the fees they paid to Wells Fargo, which will be detailed in the ERISA Plaintiffs’ forthcoming damages-related filings. At the time of trial, the total SLP fees that the ERISA Plaintiffs had paid to Wells Fargo Plaintiffs to be disgorged was $1,610,237. Dkt. 596 at 90. The total amount in custodial fees that the ERISA Plaintiffs had paid to Wells Fargo at the time of trial to be disgorged was $8,646,852. Dkt. 597 at 2 (TX37498A). At the appropriate time, the ERISA Plaintiffs will also move the Court for attorney fees and costs as well as prejudgment interest.
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46.
Based on all of the Findings of Fact set forth herein, Plaintiffs have
established that Wells Fargo’s breaches of fiduciary duty, together and separately, caused their losses. Each Plaintiff relied on Wells Fargo’s representations to enter the program and remain in the program. In addition, each Plaintiff testified that had Wells Fargo met its fiduciary duties of disclosure by September 2007—when they could still exit with no losses—they would have either not entered the program or would have exited the SLP, and thus incurred no losses. 47.
Each Plaintiff also testified that they relied on Wells Fargo’s
recommendation to stay in the program after November 2007, thus holding them hostage, increasing their losses, and for all ERISA Plaintiffs other than BCBSMN, forcing Plaintiffs to take an in-kind distribution of Wells Fargo’s impaired collateral assets. 48.
In addition, had Wells Fargo operated the SLP prudently, in accordance
with its representations, and in accordance with its fiduciary duties as a Rule 2a-7 money market fund, such as the Wells Fargo money market funds managed by Wells Capital which did not “break the buck” during the market downturn, no Plaintiff would have suffered losses, and all Plaintiffs would have been permitted to exit the SLP and obtain the return of their securities, at full value and with no losses. Thus, to the extent a benchmark is necessary, the Court concludes that the appropriate benchmark is a prudently managed Rule 2a-7 money market fund. See COPIC Ins. Co. v. Wells Fargo Bank, N.A., No 09-cv-00041-WDM-BNB, Dkt. 550 at 2 (D. Colo. May 2, 2011) (“COPIC’s claim is that Wells Fargo represented that collateral would be invested in conservative money market-type investments; accordingly, these types of accounts …. 86
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would provide the appropriate benchmark for determining COPIC’s alleged losses.”) (previously filed at Dkts. 80-11 and 332-49). 49.
Based on all of the Findings of Fact set forth herein, Wells Fargo has not
met its burden to establish that its breaches of fiduciary duty did not cause Plaintiffs’ losses. Wells Fargo’s argument that the “credit crisis” caused Plaintiffs’ losses does not meet Wells Fargo’s burden. See Roth v. Sawyer-Cleator Lumber Co., 61 F.3d 599, 605 (8th Cir. 1995) (Roth II) (“If a breach of fiduciary duty caused the Plan to purchase Company stock which declined in value, the causal link between the breach and the loss is established, even if the Company stock would have inevitably declined in value.”); In re State Street Bank & Trust Co. Fixed Income Funds Inv. Litig., 842 F. Supp. 2d 614, 654-55 (S.D.N.Y. 2012) (“When the excessive risks to which State Street exposed the Bond Funds materialized in the summer of 2007, the value of the Plans’ interests in the Bond Funds declined, causing economic loss to each Plan that would not have occurred to the extent that it did if State Street had not breached its duties.”). 50.
The evidence that investors in Wells Fargo’s money market funds did not
suffer losses also refutes Wells Fargo’s contention that it was the “credit crisis” or the “great recession”—rather than Wells Fargo’s breaches—that caused Plaintiffs’ losses. Had Wells Fargo run the SLP like it ran its money market funds, there would have been no losses, notwithstanding the market downturn. 51.
Wells Fargo’s argument that it should not be held liable because it did not
guarantee the Plaintiffs’ investments is without merit. Under ERISA, “finding a fiduciary liable for improperly investing a pension fund’s assets in [a] ... breach of duty case” does 87
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not “make[] him a guarantor” because “[t]he basis for personal liability in each case is the breach of duty, which is not a guarantee but a standard of conduct….” Roth I, 16 F.3d at 920. 52.
Therefore, based on all of the Findings of Fact set forth herein, the Court
concludes that Wells Fargo’s multiple breaches of its fiduciary duties, together and separately, were a substantial contributing factor causing losses to each ERISA Plaintiff, and the ERISA Plaintiffs are entitled to available remedies under ERISA to make them whole.
Dated: July 21, 2017
Respectfully submitted, ROBINS KAPLAN LLP By: /s/Munir R. Meghjee Munir R. Meghjee (#301437) Katherine S. Barrett Wiik (#351155) 2800 LaSalle Plaza 800 LaSalle Avenue Minneapolis, MN 55402-2015
[email protected] [email protected] 612-349-8500 ATTORNEYS FOR ERISA PLAINTIFFS
88207907.2
88
