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UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA Blue Cross and Blue Shield of Minnesota, as Administrator of the Blue Cross and Blue Shield of Case No: 11-cv-2529 Minnesota Pension Equity Plan; CentraCare Health DWF/KMM System, on Behalf of Itself and the Sisters of the Order of Saint Benedict Retirement Plan; Supplemental Benefit Committee of the International Truck and Engine Corp. Retiree Supplemental Benefit Trust, as Administrator of the International Truck and Engine Corp Retiree WELLS FARGO BANK, Supplemental Benefit Trust; Jerome Foundation; Meijer, N.A.’S PROPOSED Inc., as Administrator of the Meijer OMP Pension Plan FINDINGS OF FACT and Meijer Hourly Pension Plan, Participants in the AND CONCLUSIONS OF Meijer Master Pension Trust; Nebraska Methodist Health LAW System, Inc., on Behalf of Itself, and as Administrator of the Nebraska Methodist Hospital Foundation, the Nebraska Methodist Health System Retirement Account Plan, and the Jennie Edmundson Memorial Hospital Employee Retirement Plan; North Memorial Health Care, on Behalf of Itself and as Administrator of the North Memorial Health Care Pension Plan; The Order of Saint Benedict, as the St. John’s University Endowment and the St. John’s Abbey Endowment; The Twin City HospitalsMinnesota Nurses Association Pension Plan Committee, as Administrator of the Twin City Hospitals-Minnesota Nurses Association Pension Plan; Administrative Committee of the Joint Hospitals Pension Board, as Administrator of the Twin City Hospitals Pension Plan for Licensed Practical Nurses; The Board of Trustees of the Tuckpointers Local 52 Pension Trust Fund, as administrator of the Tuckpointers Local 52 Pension Trust Fund, and the Board of Trustees of the Chicago Area Joint Welfare Committee for the Pointing, Cleaning and Caulking Industry Local 52, as administrator for the Chicago Area Joint Welfare Committee for the Pointing, Cleaning and Caulking Industry Local 52; The El Paso County Retirement Plan, Plaintiffs, v. Wells Fargo Bank, N.A., Defendant.

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TABLE OF CONTENTS Page I.

INTRODUCTORY STATEMENT .......................................................................... 1

II.

FINDINGS OF FACT .............................................................................................. 4 A.

Parties ............................................................................................................ 4 1.

Wells Fargo ........................................................................................ 4

2.

Plaintiffs ............................................................................................. 5

B.

Wells Fargo’s Marketing of the Securities Lending Program ...................... 7

C.

The Structure of the Program ........................................................................ 9

D.

E.

F.

G.

1.

The Securities Lending Agreement .................................................... 9

2.

The Wells Fargo Trust for Securities Lending................................... 9

3.

Separate Accounts ............................................................................ 16

The Securities Lending Team and its Resources ........................................ 16 1.

Wells Capital Management and the Approved List ......................... 19

2.

WCM’s Use of the Rating Agencies ................................................ 21

Securities Lending’s Portfolio Management Strategy ................................ 22 1.

General Strategy ............................................................................... 22

2.

Wells Fargo Monitored the Portfolio and Took Steps to Reduce Risk Throughout 2007......................................................... 23

3.

Plaintiffs’ Criticisms of Wells Fargo’s Portfolio Management Are Not Supported by the Evidence................................................. 25

Structured Investment Vehicles .................................................................. 28 1.

The Nature of SIVs .......................................................................... 28

2.

Plaintiffs’ Criticisms of SIVs Are Not Supported by the Evidence ........................................................................................... 30

3.

SIVs Were Consistent with the Investment Guidelines ................... 32

Investments at Issue..................................................................................... 34 1.

Cheyne .............................................................................................. 34

2.

Victoria ............................................................................................. 40

3.

Lehman ............................................................................................. 42

4.

Asset Backed Securities ................................................................... 45

H.

Wells Fargo’s Efforts to Improve the NAV ................................................ 47

I.

Securities Lending’s Disclosures ................................................................ 50 i

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TABLE OF CONTENTS Page

J.

1.

Securities Lending’s Disclosures Generally .................................... 50

2.

Securities Lending’s Disclosures in 2007 ........................................ 51

3.

Securities Lending’s Advice to Hold the Course ............................. 53

Wells Fargo Responded to the Financial Crisis By Acting in the Best Interests of All Participants ......................................................................... 53

III.

PROCEDURAL HISTORY ................................................................................... 57

IV.

CONCLUSIONS OF LAW .................................................................................... 61 A.

B.

V.

The ERISA Plaintiffs Are Bound By The Jury’s Determination That Wells Fargo Did Not Breach Its Fiduciary Duty......................................... 61 1.

The Factual And Legal Issues That Undergird The ERISA Plaintiffs’ Claims Are Identical To The Issues Decided By The Jury In Resolving the Common Law Fiduciary Duty Claims............................................................................................... 63

2.

The Jury’s Verdict Has Sufficient Finality to Support Issue Preclusion ......................................................................................... 64

3.

The Privity Requirement is Clearly Established Here ..................... 67

4.

The ERISA Plaintiffs Had a Full and Fair Opportunity to Litigate the Breach of Fiduciary Duty Issue .................................... 73

5.

Conclusion ........................................................................................ 73

Plaintiffs Failed to Prove a Breach of Fiduciary Duty ................................ 74 1.

Plaintiffs Failed to Prove a Breach of the Duty of Prudence ........... 75

2.

Plaintiffs Failed to Prove a Violation of the Investment Guidelines......................................................................................... 82

3.

Plaintiffs Failed to Prove a Breach of the Duty of Loyalty ............. 86

4.

Plaintiffs Failed to Prove a Breach of the Duty of Disclosure ......... 90

5.

Plaintiffs Failed to Prove a Breach of the Duty of Impartiality ....... 94

6.

Plaintiffs Failed to Prove Causation ................................................. 96

CONCLUSION .................................................................................................... 100

ii

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TABLE OF AUTHORITIES Page(s) FEDERAL CASES Arizona v. California, 530 U.S. 392 (2000) ..................................................................................................... 62 Armstrong v. LaSalle Bank Nat. Ass’n, 446 F.3d 728 (7th Cir. 2006) ....................................................................................... 89 Barry v. West, 503 F. Supp. 2d 313 (D. D.C. 2007) ...................................................................... 97, 99 Bd. of Trustees of Operating Engineers Pension Trust v. JPMorgan Chase Bank, Nat. Ass’n, 2013 WL 1234818 (S.D.N.Y. Mar. 27, 2013) ............................................................. 82 Braden v. Wal-Mart Stores, 588 F.3d 585 (8th Cir. 2009) ................................................................................ passim Caterino v. Barry, 8 F.3d 878 (1st Cir. 1993) ............................................................................................ 89 Chicago District Council of Carpenters Welfare Fund v. Caremark, Inc., 474 F.3d 463 (7th Cir. 2007) ....................................................................................... 88 Conkright v. Frommert, 559 U.S. 506 (2010) ..................................................................................................... 83 DeBruyne v. Equitable Life Assur. Soc. of U.S., 920 F.2d 457 (7th Cir. 1990) ....................................................................................... 76 Donavan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982)......................................................................................... 86 Erickson v. Horing, 2001 WL 1640142 (D. Minn. 2001) ...................................................................... 65, 67 Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) ..................................................................................................... 83 Green v. UPS Health & Welfare Package for Ret. Emps., 746 F. Supp. 2d 921 (N.D. Ill. 2009) ........................................................................... 83

i

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TABLE OF AUTHORITIES Page(s) Harley v. Minn. Mining & Mfg. Co., 42 F. Supp. 2d 898 (D. Minn. 1999) aff’d sub nom. Harley v. Minn. Min. & Mfg. Co., 284 F.3d 901 (8th Cir. 2002) ................................................................. 97, 98 Hickman v. Tosco Corp., 840 F.2d 564 (8th Cir. 1988) ....................................................................................... 96 John Morrell v. Local Union 304A of United Food and Commercial Workers, AFL-CIO, 913 F.2d 544 (8th Cir. 1990) ..................................................................... 65, 66, 67, 74 Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639 (8th Cir. 2007) ....................................................................................... 90 Krepps v. Reiner, 377 Fed. App’x 65 (2d Cir. 2010)................................................................................ 62 Indep. Sch. Dist. No. 283 v. S.D., 88 F.3d 556 (8th Cir. 1996) ......................................................................................... 62 In re Lehman Bros. Sec. & ERISA Litig., 2011 WL 4632885 (S.D.N.Y. Oct. 5, 2011), vacated and remanded on other grounds by, Rinehart v. Akers, 134 S. Ct. 2900 (2014) ............................................... 91 Lummus Co. v. Commonwealth Oil Refining Co., 297 F.2d 80 (2d Cir. 1961)..................................................................................... 66, 67 Marshall v. Glass/Metal Ass’n & Glaziers & Glassworkers Pension Plan, 507 F. Supp. 378 (D. Haw. 1980) ................................................................................ 80 Martin v. Feilen, 965 F.2d 660 (8th Cir. 1992) ................................................................................. 96, 97 Meehan v. Atl. Mut. Ins. Co., 2008 WL 268805 (E.D.N.Y. Jan. 30, 2008) ................................................................ 98 Metzler v. Graham, 112 F.3d 207 (5th Cir. 1997) ....................................................................................... 79 Morrison v. MoneyGram Int’l, Inc., 607 F. Supp. 2d 1033 (D. Minn. 2009) ........................................................................ 95 Mowbray v. Cameron County, Texas, 274 F.3d 269 (5th Cir. 2001) ....................................................................................... 62 ii

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TABLE OF AUTHORITIES Page(s) Ossman v. Diana Corp., 825 F. Supp. 870 (D. Minn. 1993) ......................................................................... 67, 74 Patten v. N. Trust Co., 703 F. Supp. 2d 799 (N.D. Ill. 2010) ........................................................................... 91 Pegram v. Herdrich, 530 U.S. 211 (2000) ..................................................................................................... 95 Pension Benefit Guarantee Corp. v. Morgan Stanley Investment, 712 F.3d 705 (2d Cir. 2013)................................................................................... 76, 80 Plaut v. Spendthrift Farm, Inc., 514 U.S. 211 (1995) ..................................................................................................... 62 Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915 (8th Cir. 1994) ............................................................................. 75, 78, 98 Sandoval v. Simmons, 622 F. Supp. 1174 (C.D. Ill. 1985) .............................................................................. 80 Shea v. Esensten, 107 F.3d 625 (8th Cir. 1997) ....................................................................................... 90 Silverman v. Mut. Ben. Life Ins. Co., 138 F.3d 98 (2d Cir. 1998)........................................................................................... 97 St. Paul Fire and Marine v. Compaq Computer Corp., 539 F.3d 809 (8th Cir. 2008) ....................................................................................... 61 In re State St. Bank & Trust Co. Fixed Income Funds Inv. Litig., 842 F. Supp. 2d 614 (S.D.N.Y. 2012).......................................................................... 87 Tibble v. Edison Int’l, 2010 WL 2757153 (C.D. Cal. July 8, 2010), vacated and remanded on other grounds by, 843 F.3d 1187 (9th Cir. 2016)............................................................ 83, 87 Tibble v. Edison Int'l, 639 F. Supp. 2d 1074 (C.D. Cal. 2009), vacated and remanded on other grounds by, 843 F.3d 1187 (9th Cir. 2016).................................................................. 83 University of Texas Southwestern Med. Center v. Nassar, 133 S.Ct. 2517 (2013) .................................................................................................. 97

iii

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TABLE OF AUTHORITIES Page(s) Uselton v. Commercial Lovelace Motor Freight, Inc., 940 F.2d 564 (10th Cir. 1991) ..................................................................................... 91 Varity Corp. v. Howe, 516 U.S. 489 (1996) ..................................................................................................... 94 In re WorldCom, Inc., 263 F. Supp. 2d 745 (S.D.N.Y. 2003).......................................................................... 95 In re Xcel Energy, Inc. Sec. Deriv. & ERISA Litig., 312 F. Supp. 2d 1165 (D. Minn. 2004) ........................................................................ 75 STATE CASES Margo-Kraft Distributors, Inc. v. Minneapolis Gas Co., 200 N.W.2d 45 (Minn. 1972)................................................................................ passim Northwestern Nat. Life Ins. Co. v. County of Hennepin, 572 N.W.2d 51 (Minn. 1997)................................................................................ passim Reil v. Benjamin, 584 N.W.2d 442 (Minn. App. 1998) ................................................................ 70, 71, 72 Rucker v. Schmidt, 794 N.W.2d 114 (Minn. 2011)............................................................................... 72, 74 State ex rel. Friends of the Riverfront v. City of Minneapolis, 751 N.W.2d 586 (Minn. App. 2008) .......................................................... 65, 71, 72, 73 In re Trust Known as Great N. Iron Ore Properties, 263 N.W.2d 610 (Minn.1978)...................................................................................... 94 FEDERAL STATUTES 11 U.S.C. § 1104(a)(1)(D) ........................................................................................... 82, 83 12 U.S.C. § 1002(21)(A) ................................................................................................... 96 28 U.S.C. § 1291 (1988) .................................................................................................... 66 29 U.S.C. § 1104(a)(1) ...................................................................................................... 86 29 U.S.C. §1104(a)(1)(B) .................................................................................................. 75 29 U.S.C. § 1104(a)(1)(C) ................................................................................................. 79 iv

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TABLE OF AUTHORITIES Page(s) FEDERAL REGULATIONS 12 C.F.R. § 9.18 ................................................................................................................. 10 12 C.F.R. § 9.18(b)(1) ....................................................................................................... 10 29 C.F.R. § 2550.40a-1(b)(2)(i) ........................................................................................ 76 Revisions to Rules Regulation Money Market Funds, Investment Company Act Release, No. 21837 (Mar. 21, 1996) [61 Fed. Reg. 13956 (Mar. 28, 1996)] .......................................................................................... 15, 86 OTHER AUTHORITIES 18 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure (1981) § 4434 ...................................................................................... 66 H.R. Rep. No. 1280, 93d Cong., 2d Sess. (1974), reprinted in 1974 U.S. Code Cong. & Admin. News 5038 (Conference report at 304) ............................................ 79 Restatement (Second) of Agency § 268 ............................................................................ 61 Restatement (Second) of Judgments § 13 ................................................................... 65, 66

v

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I.

INTRODUCTORY STATEMENT Plaintiffs assert common law and statutory claims against Wells Fargo arising

from their participation in the Wells Fargo securities lending program (“Securities Lending”). Six Plaintiffs (the “Non-ERISA Plaintiffs”) assert state law claims for breach of fiduciary duty, breach of contract, fraud, negligent misrepresentation, and violations of consumer protection statutes. The other six Plaintiffs (the “ERISA Plaintiffs”) assert a single claim for breach of fiduciary duty under the Employee Retirement Income Security Act (“ERISA”). Two Plaintiffs have brought both state law and ERISA claims. Over the course of a seven-week jury and bench trial, the ERISA and Non-ERISA Plaintiffs sought to prove their claims against Wells Fargo with essentially the same documents, the same witnesses, and the same arguments. They failed. The jury weighed the evidence, considered the arguments of counsel, and returned a unanimous verdict on all non-ERISA claims for Wells Fargo. Dkt. No. 557 (Special Verdict Form). In their proposed findings of fact and conclusions of law, the ERISA Plaintiffs undoubtedly will argue that the ten jurors got it wrong. They will urge this Court to review the same evidence that the jury did—the same documents, the same testimony, the same arguments—and make findings based on that evidence that are directly contrary to the express and implicit findings of the jury. In short, the ERISA Plaintiffs will urge this Court to repudiate the jury’s verdict. The Court should decline to do so. The factual and legal issues underlying the common law fiduciary duty claims and the ERISA fiduciary duty claims were the same. For this very reason, Plaintiffs themselves argued successfully before trial that the 1

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“liability case for ERISA and Non-ERISA Plaintiffs can be heard by the Court and the jury at the same time and on the same evidence.” Dkt. No. 308, Plaintiffs’ Opp. to Wells Fargo Bank, N.A.’s Mot. for Bench Trial of Non-ERISA Fiduciary Duty Claims (“Bench Trial Opp.”) at 21 (emphasis added). That is precisely how the trial unfolded. The ERISA Plaintiffs and the NonERISA Plaintiffs advanced their case jointly through their shared counsel. While the ERISA Plaintiffs were not technically parties to the jury trial, their interests and that of the Non-ERISA Plaintiffs could not have been more closely aligned. And the ERISA Plaintiffs unquestionably had as much involvement in selecting evidence, formulating strategy, and crafting arguments to the jury as the Non-ERISA Plaintiffs did. As described below, the prerequisites of collateral estoppel under (controlling) Minnesota law are clearly satisfied here. See § IV.A, infra. Accordingly, the jury’s verdict is dispositive of the ERISA Plaintiffs’ claims, just as it resolved the Non-ERISA Plaintiffs’ state law claims. Even if the Court declines to give preclusive effect to the jury’s verdict, it should reach the same conclusion as the jury did: the ERISA Plaintiffs fell well short of meeting their burden of proving a breach of fiduciary duty. As demonstrated below, the evidence presented at trial established that: 

Wells Fargo exercised due care and prudence.  Wells Fargo adhered to the applicable investment guidelines for the securities lending portfolios, and invested more conservatively than those guidelines required.

2

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 Wells Fargo conducted substantial diligence on every investment that it made for the securities lending portfolios.  The securities lending team consisted of experienced professionals, who were provided the resources they needed to navigate the program through the financial crisis.  Wells Fargo monitored the securities lending portfolio’s exposure to the subprime mortgage market.  Far from “stretching for yield,” in 2007, Wells Fargo aggressively reduced risk in the securities lending portfolio.  The securities lending program’s losses came in the context of a oncein-a-century financial crisis—the severity and timing of which was not reasonably foreseeable. 

Wells Fargo acted in the best interests of its clients.  Wells Fargo knowingly relinquished additional yield—and thus profit to the bank—in order to reduce investment risk in the securities lending portfolios.  Wells Fargo voluntarily waived its share of fees for clients affected by the few issuers in the program that defaulted, operating the securities lending program at a loss for years.  Wells Fargo’s concern with a “run on the fund” was motivated not by desire to protect Wells Fargo’s interests, but by its recognition that such a run would harm clients.  Wells Fargo did not hesitate to take actions that were adverse to brokers, such as Lehman, where it concluded that those actions were necessary to protect its clients.  Wells Fargo’s decision to “blow up” the Business Trust was motivated solely by a desire to do what was fair and equitable for all clients. Indeed, Wells Fargo made this difficult decision knowing that it would impose upon Wells Fargo significantly more costs and administrative burdens than the alternative of leaving the Business Trust in place.



Wells Fargo’s representations to Plaintiffs were truthful, and Wells Fargo timely disclosed material facts.

3

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 Wells Fargo’s representations that it would invest the securities lending portfolio in high-quality, money market instruments were accurate.  Wells Fargo disclosed the objective, material facts about the securities lending portfolios—i.e., the (few) defaults in the program, the net asset value (“NAV”) of shares in the trust, and the terms on which Plaintiffs could redeem their shares.  In deciding when to disclose material facts, Wells Fargo properly and in good faith balanced its disclosure obligations with its duty to act in the best interest of all of its clients.  The “facts” that Wells Fargo purportedly did not disclose were not material. 

Wells Fargo treated clients impartially.  Wells Fargo treated all similarly situated clients equally.  Wells Fargo’s actions with respect to the Wells Fargo money market funds that participated in securities lending did not involve the assets of any ERISA plan, and therefore did not implicate any fiduciary duty under ERISA.

In the face of these facts, Plaintiffs no doubt will fall back on their strategy of plucking isolated statements out of context, ascribing ill-motives to people who did their utmost for their clients under the most trying circumstances, and stubbornly repeating factual allegations that have been conclusively disproved time and again. The jury saw through these tactics, and this Court should as well. II.

FINDINGS OF FACT A.

Parties 1.

1.

Wells Fargo

Wells Fargo Bank, N.A. (“Wells Fargo”), is a national banking association

with its main office in Sioux Falls, South Dakota. Third Am. Compl. ¶ 25; Answer to

4

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Third Am. Compl. ¶ 25. Wells Fargo is an indirect subsidiary of Wells Fargo & Company. Id. 2. 2.

Plaintiffs

Blue Cross Blue Shield of Minnesota Pension Equity Plan (“Blue Cross”)

is an ERISA plan for the employees of Blue Cross Blue Shield of Minnesota. Blue Cross joined the securities lending program on September 29, 2000 and subsequently subscribed to both the EY Fund and CI Term Trust (defined below). TX33137; TX32790. Upon exiting the program in April 2008, Blue Cross paid $444,995 to cover the loss in value of its shares of the Business Trust (defined below). TX39038 (demonstrative);1 Tr. 6210:13-6211:6 (Orner); id. at 6232:3-11. 3.

International Truck and Engine Supplemental Benefit Plan (“International

Truck”) is an ERISA plan for the employees of International Truck (n/k/a Navistar Corporation). Tr. 6631:20-6632:2 (Viola); id. at 6643:24-25. International Truck joined the securities lending program in January of 2003, subscribing to the EY Fund, and later the CI Term Trust. TX33293; TX32809. In June 2011, International Truck exited the program, maintained certain collateral assets, and paid $6,980,072 to cover the shortfall in its cash collateral account. TX39048. 4.

Jennie Edmundson Memorial Hospital Pension Plan (“Nebraska

Methodist”) is an ERISA plan for the employees of the Jennie Edmundson Memorial 1

To help illustrate certain concepts, Wells Fargo cites certain demonstrative exhibits in its proposed findings. Wells Fargo and Plaintiffs agree that such exhibits are admitted for demonstrative purposes only and are not part of the record. 5

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Hospital, which is owned by the Nebraska Methodist Health System. Jansky Trial Dep. 4:16-21. In August 1999, Nebraska Methodist joined the securities lending program, later subscribing to both the EY Fund and CI Term Trust. TX36671; TX32817; TX32818. At the time of trial, Nebraska Methodist remained in the program and maintained possession of certain collateral assets. Jansky Trial Dep. 34:5-7; id. at 35:510. 5.

Meijer Pension Trust (“Meijer”) is an ERISA plan for the employees of

Meijer, Inc. and related entities. Tr. 6246:9-15 (Julien). Meijer joined the securities lending program in July of 2006, subscribing to both the EY Fund and the CI Term Trust. TX33053. At the time of trial, Meijer remained in the securities lending program and maintained possession of certain collateral assets. Tr. 622:20-24 (Julien). 6.

Tuckpointers Local 52 Health and Welfare Fund is an ERISA plan that

provides health care benefits for its plan members and their dependents. The Tuckpointers Local 52 Pension Fund is an ERISA plan that provides retirement benefits to plan members and their beneficiaries. Tr. 6463:1-8 (Rivkin). These plans are referred to collectively as “Tuckpointers.” Tuckpointers joined the securities lending program in March of 2007, subscribing to the EY Fund and CI Term Trust. TX32915; TX32916; TX32917; TX32919; TX32920; TX36672. At the time of trial, it remained in the program and maintained possession of certain collateral assets. Tr. 6488:2-12 (Rivkin). 7.

Twin City Hospitals-Minnesota Nurses Association Pension Plan (“TC-

MNA”) is an ERISA plan for the Minnesota Nursing Association Union. Twin City Hospitals Licensed Practical Nurses Pension Plan (“TC-LPN”) is an ERISA plan for the 6

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licensed practical nurses. Tr. 6522:25-623:6 (Slocum); id. at 6523:23-6524:5. TC-MNA and TC-LPN joined the securities lending program in 2004, subscribing to the EY Fund and later the CI Term Trust. TX33222; TX33223; TX33225; TX33226. At the time of trial, TC-MNA remained in the securities lending program and maintained possession of certain collateral assets. Tr. 6550:10-12 (Slocum). TC-LPN exited the program in October 2010, paying $23,159 to cover the shortfall in its cash collateral account. Id. at 6550:25-6551:10; TX34057A.2 B.

Wells Fargo’s Marketing of the Securities Lending Program

8.

Wells Fargo marketed its securities lending program as an opportunity for

clients to earn additional revenue that could be used to beat performance benchmarks, offset custodial fees, and increase earnings without interrupting the client’s overall investment strategy. TX11784 at 5. Wells Fargo represented that the securities lending program had been “consistently profitable” and that cash collateral would be invested in low-risk “money market instruments.” Id. at 12. 9.

These representations were accurate. Since its inception in 1982, the

securities lending program was consistently profitable for its clients. Tr. 3568:12-17 (Hogan). It was also accurate that the securities lending program invested in money 2

Plaintiff North Memorial Health Care asserted non-ERISA claims on behalf of itself and an ERISA claim on behalf of the North Memorial Health Care Pension Plan, an ERISA plan. Third Am. Compl. ¶ 224. Because of the commingled nature of North Memorial’s participation in the securities lending program, the parties agreed to submit North Memorial’s entire claim to the jury. See June 12, 2003 Pretrial Conference, Tr. 533:1-4 (Plaintiffs’ counsel: “As [Wells Fargo’s] counsel stated, there is one client North Memorial where there were commingled funds, and that is all going to go to the jury because they were commingled, it wasn’t separated out.”). 7

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market instruments. During the relevant period, money market funds invested in securities issued by structured investment vehicles, asset-backed securities, and Lehman corporate notes—precisely the securities that are at issue in this case. Tr. 815:2-9 (Geczy); id. at 819:11-22; id. at 5260:20-5261:3 (Glucksman); id. at 5275:1-13. 10.

Wells Fargo did not market its program as risk free or suggested that a

client’s investment was guaranteed. Rather, Wells Fargo’s marketing materials disclosed that securities lending entailed investment risks, including credit risk, interest rate risk, and liquidity risk. TX11784 at 13; TX33314 at 8; TX35443 at 5; TX36760 at 12; TX36764 at 12. As one Plaintiff representative stated, the risks disclosed by Wells Fargo were the same risks that materialized in the program during the 2007-2008 financial crisis. Tr. 6655:4-17 (Viola). 11.

Wells Fargo’s marketing materials also described safeguards intended to

protect against these investment risks. TX11784 at 13. For example, Wells Fargo represented that a credit analyst developed a “pre-approved list” of investments, that the securities lending portfolios were managed by a certified financial analyst, that investments were monitored, that a percentage of the portfolio was kept on demand, and that the weighted average maturity of the portfolio was tracked. Id. These representations were true. See Findings of Fact (“FOF”) ¶¶ 45; 57-66; 74.

8

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C.

The Structure of the Program 1.

12.

The Securities Lending Agreement

Each Plaintiff entered into a securities lending agreement (“SLA”) with

Wells Fargo, the terms of which were materially the same. TX33137; TX32801; TX32811; TX36671; TX33027; TX33223; TX33222; TX32916; TX32915. 13.

Pursuant to the SLA, Wells Fargo agreed to loan Plaintiffs’ securities to

borrowers and to require each loan, when made, to be collateralized in the amount of 102% of the market value of the loaned security. TX33137 at 2. Collateral could take the form of U.S. Government securities, letters of credit, or cash. Id. 14.

Wells Fargo agreed to invest any cash collateral in “short term money

market instruments” where “[t]he prime consideration for the investment portfolio shall be safety of principal and liquidity requirements.” Id. 15.

Finally, Wells Fargo agreed to assume the risk of loss arising from

fraudulent or negligent operation of the securities lending program. For their part, Plaintiffs agreed to assume “all risk of loss arising out of collateral investment loss and any resulting collateral deficiencies.” Id. at 4. 2. 16.

The Wells Fargo Trust for Securities Lending

Wells Fargo invested cash collateral that it received from borrowers of

Plaintiffs’ securities in one of two Series of the Wells Fargo Trust for Securities Lending (the “Business Trust”). The Business Trust was established in 2000 and funded the following year. TX37; Tr. 3067:10-11 (Hruska-Claeys). Wells Fargo served as the Trustee of the Business Trust. TX37 at 1. 9

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17.

The governing document for the Business Trust was the Declaration of

Trust. Id. at 1. Wells Fargo’s practice was to provide a copy of the Declaration of Trust only upon request, which was consistent with industry standards at the time. Tr. 3089:13-18 (Hruska-Claeys). Most notably, OCC Regulation 9, which governs the fiduciary activities of national banks, provides that a bank administering a collective investment fund “shall establish and maintain each collective investment fund in accordance with a written plan” and directs that the bank “shall make a copy of the Plan available for public inspection at its main office during all banking hours, and shall provide a copy of the Plan to any person who requests it.” 12 C.F.R. § 9.18(b)(1). 18.

While the Business Trust was not a collective investment fund and

therefore was not governed by this provision of Regulation 9, Securities Lending looked to Regulation 9 as a “roadmap” for administering the Business Trust. Tr. 3091:3-9 (Hruska-Claeys). Several prospective and existing participants requested a copy of the Declaration of Trust. In each case, Wells Fargo provided a copy. Id. at 3086:4-3087:4. 19.

The Declaration of Trust provided that beneficial interests in the Business

Trust would be divided into shares of one or more separate and distinct Series established by the trustee. Id. at 8, Declaration of Trust § 4.3. The trustee was further authorized to designate the relative rights and preferences of each Series. Id. 20.

Pursuant to this authority, Wells Fargo established three Series of the

Business Trust: the Enhanced Yield Fund (“EY Fund”), the Collateral Investment Trust

10

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(“CI Open Fund”), and the Collateral Investment for Term Loans Trust (“CI Term Trust”). Third Am. Compl. ¶ 78; Answer to Third Am. Compl. ¶ 78.3 21.

Plaintiffs subscribed to both the EY Fund and CI Term Trust, except for the

LPN Plan, which only subscribed to the EY Fund. TX22118. (a) 22.

The Confidential Memoranda and Declaration of Trust

Wells Fargo provided each Plaintiff with a Confidential Memorandum that

summarized the terms, objectives, and risks of an investment in a Series of the Business Trust. TX32790: TX31220; TX31219; TX32814; TX32874; TX32818; TX32827; TX32826; TX33218; TX33219; TX32838; TX32837; TX32826; TX33218; TX33219; TX32838; TX32837. The Confidential Memorandum stated that it was qualified in its entirety by the Declaration of Trust. See, e.g., TX32790 at 1. 23.

The Confidential Memorandum disclosed that subscribers could lose

money by investing in the Series. For example, the Confidential Memorandum stated that a subscriber to a Series “will be entitled to share in the income and gains and losses of that Series.” Id. at 4 (emphasis added). 24.

Under the heading “Investment Objectives,” the Confidential Memorandum

stated that the Series sought “to achieve a positive return compared to the daily Fed Funds rate by investing in high-quality United States dollar-denominated securities where the prime considerations for such investments are safety of principal and daily liquidity 3

Because Plaintiffs did not invest in the CI Open Fund, any further references to the Business Trust or Business Trust portfolios refer only to the EY Fund and CI Term Trust unless otherwise stated. 11

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requirements.” Id. at 7.4 The Confidential Memorandum made clear that there was no guarantee the Series would meet this objective: “The [Fund] will endeavor to maintain a stable $10.00 price per Share, although no assurance can be given that it will achieve its investment objective or maintain a stable Share value.” Id. (emphasis added). 25.

Under the heading “Risk Factors,” the Confidential Memorandum disclosed

that “[t]he value of the Shares will change with the change in the value of the [Series’s] investments.” Id. at 10 (emphasis added). Plaintiffs were informed that among the reasons the value of their shares could change was investment risk, including credit risk, interest rate risk, and liquidity risk. Id. at 10-11. (b) 26.

The Subscription Agreements

Each Plaintiff received and executed at least one Subscription Agreement

whereby it subscribed to the EY Fund or the CI Term Trust. TX32789; TX33293; TX32802; TX32813; TX32812; TX32817; TX32816; TX33030; TX32825; TX33225; TX33224; TX33226; TX32919; TX32920; TX32917; TX36672; TX32918. 27.

By entering into a Subscription Agreement, each Plaintiff “adopt[ed],

accept[ed], and acknowledge[d] that it [was] bound by all the terms and conditions of the Declaration of Trust, and [was] subject to all duties, rights and obligations created therein with respect to a Shareholder.” TX32789 at 1.

4

“Fed Funds” refers to the federal funds rate, a rate that is a common benchmark in securities lending. Tr. 2133:20-2135:3 (Smith); id. at 2134:18-23. Collateral reinvestments generally need to earn a return above the federal funds rate in order to generate positive income for clients. Id. at 2135:7-15. 12

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28.

Each Plaintiff also made several representations and warranties to Wells

Fargo in the Subscription Agreement, including that it had “such knowledge and experience in financial, investment and business matters that the Subscriber is capable of evaluating the merits and risks” of such an investment. Id. at 2. 29.

Finally, each Plaintiff represented that it had reviewed its “financial

condition and commitments,” and was “satisfied that it [had] adequate means of providing for the Subscriber’s financial needs and possible contingencies and [had] assets or sources of income that, taken together are more than sufficient so that the Subscriber can bear the risk of the loss of the Subscriber’s entire investment in such Shares.” Id. (c) 30.

The Investment Guidelines

Wells Fargo established investment guidelines for the EY Fund and CI

Term Trust, copies of which were provided to the Plaintiffs. TX33179; TX32803; TX32976; TX32820; TX32819; TX32830; TX32829; TX32828; TX33180; TZX32832; TX32840; TX32840; TX32839. 31.

The investment guidelines for the CI Term Trust and EY Fund contain

identical “Investment Objectives”: A “positive return compared to the daily Fed Funds rate by investing in high-quality, U.S. dollar-denominated securities, where the prime considerations . . . shall be preservation of principal and daily liquidity requirements.” TX33179 at 1; TX32803 at 1. 32.

As described below, the investment guidelines set forth “Portfolio

Guidelines” that the Business Trust would follow in seeking to achieve the Fund’s investment objectives. 13

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33.

Quality. Any investment had to be rated in the highest short-term rating

category by one of two Nationally Recognized Statistical Reporting Organizations (“NRSRO”). Id. If the issuer did not have a short-term rating, its long-term rating had to be in the “A” or better category. Every security purchased for the Business Trust satisfied this guideline at the time of purchase. Tr. 2137:3-2138:10 (Smith). 34.

Issue Selection. The investment guidelines authorized a wide range of

fixed-income issuers, including U.S Treasuries, “debt obligations, including commercial paper,” “asset-backed securities” (“ABS”), “mortgage-backed securities” (“MBS”), and “corporate notes, bonds and debentures.” TX33179 at 1; TX32803 at 1. The securities at issue in this case fell into one of these categories. Tr. 2140:2-2142:5 (Smith). 35.

Maturity. The maximum maturity or average life of any security was five

years. TX33179 at 2; TX32803 at 2. Every security purchased for the Business Trust complied with this maturity constraint at the time of purchase. Tr. 2145:6-14 (Smith); id. at 4652:2-22 (Adams). 36.

Diversification. The guidelines provided that a “[m]aximum of 25% of the

Portfolio [would] be invested in any industry or sector, except the financial services or banking industry.” TX33179 at 2; TX32803 at 2. The Business Trust’s portfolios complied with this constraint. Tr. 2151:3-6 (Smith). 37.

Liquidity. The guidelines provided that a “[m]aximum of 15% of the

portfolio will be invested in illiquid instruments.” TX33179 at 2; TX32803 at 2. The Confidential Memoranda for both Series further provided that a maximum of 15% of the

14

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funds’ total assets “may be invested in illiquid securities as that term is defined in the SEC’s Rule 2a-7.” TX32790 at 8. 38.

The Securities and Exchange Commission (“SEC”) has declared that, for

purposes of Rule 2a-7, it “considers a security to be illiquid if it cannot be disposed of within seven days in the ordinary course of business at approximately the price which the [money market] fund has valued it.” Revisions to Rules Regulation Money Market Funds, Investment Company Act Release, No. 21837 (Mar. 21, 1996), 61 Fed. Reg. 13956 , 13966 (Mar. 28, 1996) [hereinafter “Revisions to Rules”]. Securities Lending complied with the guidelines’ liquidity constraint as well. Tr. 2154:4 (Smith); id. at 3537:23-3538 (Hogan).5 39.

Compliance standards. “Compliance with all guidelines [was] determined

at the time of purchase.” TX33179 at 2; TX32976 at 2. 40.

The rationale for measuring compliance at the time of purchase was that,

given the daily fluctuations in the size and composition of the portfolio, that was the only time a portfolio manager could ensure that an investment complied with the guidelines. Tr. at 4612:19-4613:4 (Adams); id. at 4615:2-15.

5

Plaintiffs argued at trial that Wells Fargo violated the 15% limit because, in a March 2008 letter to a client, Bob Smith, the head of Securities Lending, stated that “[a]s a percentage of all trust assets, the liquid portion is 67% for the Enhanced Yield Trust and 23% for the CI Term Trust.” TX42A. The jury implicitly rejected this argument. As portfolio manager Roger Adams (who drafted the relevant portion of the letter) testified, the percentages cited in Smith’s letter were “measurements of the overnight cash equivalent, the liquid cash portion of the portfolio, and have no reference to market illiquidity.” Tr. 4806:4-10 (Adams). 15

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41.

The guidelines also state that the compliance manager or other designee

“shall review the portfolio against guidelines daily to ensure compliance . . . and shall report this compliance to the management on a monthly basis.” TX33179 at 2; TX32976 at 2. This clause refers to the “back-end” compliance check that was performed daily to review investments made the day before, and it is therefore consistent with the “time of purchase” standard. Tr. 4616:9-20 (Adams). 3. 42.

Separate Accounts

In addition to the clients who subscribed to the Business Trust, the

securities lending program also maintained separate accounts for individual clients. Tr. 1930:8-18 (Smith); id. at 2802:3-14. 43.

Wells Fargo’s money market funds were among the clients who

participated in the securities lending program through separate accounts. Tr. 3498:243499:14 (Hogan). In April 2008, the responsibility for the money market funds’ securities lending portfolios was transferred from Securities Lending to Wells Capital Management (“WCM”), a subsidiary of Wells Fargo that managed the money market funds. Tr. 3515:25; id. at 4800:23-4801:7 (Adams); id. at 4953:2-9 (Sylvester); TX157. D.

The Securities Lending Team and its Resources

44.

From 1995 to 2010, the Securities Lending team was led by Bob Smith.

Smith, who holds a bachelor’s degree in accounting and a master’s degree in business administration, has worked in the financial services industry since 1978. Tr. 2280:2-21 (Smith); id. at 2282:8-10. During the relevant period, Smith reported to Mike Hogan, an executive in Wells Fargo’s Asset Management Group. Id. at 1412:10-18. 16

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45.

Roger Adams, the senior portfolio manager for the securities lending

program, holds a finance degree from the University of Minnesota and has been a CFA since 1992. Id. 4608:8-21 (Adams). As of 2007, he had more than twenty years of experience as a portfolio manager. Id. at 4608:22-24. 46.

Lucinda Hruska-Claeys, the Product and Risk Manager, had worked in

securities lending since 2001. She earned a law degree from the University of Minnesota. Id. at 2825:16-24 (Hruska-Claeys); id. at 2826:21-2827:25; id. at 3180:11-18. 47.

Laurissa Ahlstrand, the Director of Operations and Technology, started

working for the securities lending program in 1997. Id. at 5087:22-23 (Ahlstrand). She holds a bachelor’s and a master’s degree in accounting. Id. at 5087:7-11. 48.

In addition to these senior managers, the Securities Lending team included

operations analysts, compliance officers, junior portfolio managers, and traders. Tr. 2266:19-23 (Smith); id. at 3374:25-3375:7(Hogan); id. at 3574:8-17. 49.

The securities lending unit was organized around various committees, the

most important of which was the Securities Lending Risk Management Executive Committee, or “SLRMEC.” SLRMEC met monthly and was responsible for all aspects of the securities lending program, including compliance, risk management, and investments. TX29 at 1; Tr. 3330:4-16 (Hogan). 50.

SLRMEC members included the Securities Lending managers named

above, Mike Hogan, and representatives from Wells Fargo’s legal and audit divisions, Institutional Trust Services, Trust Operations, and Institutional Risk Committee.

17

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Tr. 1471:5-16 (Smith). Securities Lending thus could draw upon the expertise and resources of other units within Wells Fargo. Id. at 2267:2-12. 51.

Securities Lending also availed itself of resources outside of Wells Fargo.

For example, it retained Jackson National Life (“JNL”) as an independent fund accountant to, among other things, calculate daily the NAV of the Business Trust portfolios. Id. at 3580:16-3581:3 (Hogan). Securities Lending also turned to its outside auditor, KPMG, for accounting guidance. Id. at 3581:20-3582:5. 52.

Smith testified that senior management gave him an “open wallet” to

develop risk-management and compliance tools. Tr. 2265:10-13 (Smith). Wells Fargo never denied a request for resources from the Securities Lending team. Id. at 2264:12-16; id. at 3573:23-3574:4 (Hogan). 53.

During the financial crisis in late 2007 and 2008, Securities Lending’s

resource needs increased. Id. at 3141:8-21 (Hruska-Claeys); 3574:5-25 (Hogan). Wells Fargo’s leadership made clear that Securities Lending could have any additional resources that it needed to navigate the crisis, id. at 3150:11-21 (Hruska-Claeys), and, in fact, more resources were provided, including staff, technology, and other support. Id. at 2264:17-13 (Smith); id. at 3575:16-20 (Hogan). 54.

Plaintiffs have alleged that Securities Lending lacked sufficient resources,

but did not support that allegation with persuasive evidence. For example, Plaintiffs cited a comment in a set of handwritten notes of an October 2007 meeting between Securities Lending’s senior managers and Mike Hogan. TX186. According to the notes, Hogan said that his superior, Mike Niedermeyer, had told him that he had just noticed that “we 18

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[i.e., Wells Fargo] are running $25b on a shoe string.” Id. at 5. However, it is not clear that Niedermeyer actually expressed or held the view ascribed to him in the October 2007 notes. Hogan testified that, while he recalls Niedermeyer raising questions about whether Securities Lending had sufficient resources, he does not recall Niedermeyer expressing a point of view on the issue. Tr. 3575:1-15 (Hogan). 55.

In addition, Hogan personally did not agree that Securities Lending was run

on a “shoe string,” id., and every Wells Fargo witness who was asked about the “shoestring” comment likewise disagreed with it. Id. at 2278:7-8 (Smith) (“Q: Do you think that the Securities Lending Program was run on a shoestring, sir? A: No, I do not.”); id. at 2520:21-23); id. at 3575:1-6 (Hogan). 1. 56.

Wells Capital Management and the Approved List

Securities Lending engaged Wells Capital Management (“WCM”), a

wholly-owned subsidiary of Wells Fargo, to perform credit research on issuers of fixed income securities. Tr. 4616:25-4617:5 (Adams). 57.

Matthew Grimes was the head of WCM’s credit team, which also

performed credit research for Wells Fargo’s money market funds. Id. at 5422:2-18; id. at 5423:4-5424:5; id. at 5425:1-9. He was a certified financial analyst holding a master’s in business administration from the University of Minnesota and, as of 2007, had more than ten years of experience as a credit analyst. Id. Grimes led a team of seven credit analysts. Id.

19

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58.

WCM’s credit team maintained an “Approved List” of fixed-income

issuers. Id. at 5425:10-18. Securities Lending’s portfolio managers could not purchase a security unless it was on the Approved List. Id. 59.

To get on the Approved List, an issuer had to undergo an internal review by

WCM. Id. at 5425:19-5426:3. Based on this review, issuers were assigned a credit score, which ranged from 1 to 5, with 1 signifying the best credit and 5 the lowest-rated credit. Id. at 5426:4-23; id. at 5450:8-5451:4. 60.

In 2007, an issuer needed a WCM score of 2.85 or better to qualify for the

Approved List. Id. at 4617:9-20 (Adams). As a matter of internal policy, Securities Lending took a more conservative approach, only purchasing issuers that had a WCM credit score below 2.72. Id. at 4639:18-23. 61.

With the exception of certain asset-backed securities purchased by Galliard

Capital Management (discussed below), all of the securities purchased by Securities Lending for the Business Trust portfolios were on the Approved List at the time of purchase. Tr. 3530:18-21 (Hogan); id. at 3531:10-19. 62.

WCM frequently updated the Approved List and shared these updates with

Securities Lending. Id. at 5427:9-14 (Grimes). 63.

In the regular course of business, WCM would remove issuers from the

Approved List. Id. at 4619:21-23 (Adams). Removal of an issuer from the Approved List did not require the sale of that security. Id. at 2519:11-15 (Smith); id. at 3354:203355:25 (Hogan); id. at 5585:6-20 (Grimes). Indeed, users of the Approved List, including WCM, regularly retained securities that had been removed from the Approved 20

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List where they concluded that it was prudent to do so. Tr. 4924:7-4925 (Sylvester); id. at 4956:16-25. 64.

When an issuer was removed from the Approved List, Adams would

determine whether the Securities Lending portfolios held any securities from that issuer. Tr. 4620:7-22 (Adams). If it did, Adams would contact the responsible WCM credit analyst to determine whether the issuer presented a default risk. Id. 65.

The final decision on whether to hold a security was made by the securities

lending program’s Management Committee (Smith, Hruska-Claeys, and Ahlstrand) in consultation with Adams. Id. at 4620:23-4621:9.6 2. 66.

WCM’s Use of the Rating Agencies

In evaluating an issuer’s credit, WCM considered the ratings assigned by

Standard & Poors (“S&P”) and Moody’s, two of the NRSROs. Tr. at 5439:5-20 (Grimes). Grimes’s credit group paid both S&P and Moody’s for credit research and other services. Id. at 5491:24-5492:9. 67.

Rating agencies are also compensated by issuers. Tr. 322:24-323:9

(Geczy). At times, the SEC has been critical of this “issuer pays” model on the grounds that it creates the potential for a conflict of interest. Id. at 322:24-323:6. However, the SEC still requires money market funds to consider rating agency ratings in their credit 6

Securities Lending’s policy for issuers that were removed from the Approved List was consistent with WCM’s policy, which also provided that the portfolio manager could decide to retain a security that had been removed from the Approved List. See TX401 at 1; Tr. 4768:2-3 (Adams) (“My understanding is that our internal policy comported with the Wells Cap policy.”). 21

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analyses, and the issuer pays model remains in effect today. Id. at 744:17-745:16; id. at 5357:21-25 (Glucksman). 68.

As of 2007, the rating agencies had an extremely strong track record: From

1993 to 2007, the default rate for AAA-rated structured finance securities was .02 percent (i.e. 2 defaults for every 10,000 AAA-rated securities). Tr. 5390:6-5391:1 (Peavy). Highly-rated corporate securities had similarly low default rates over the same period. Id. at 5392:5-21. Plaintiffs’ own expert, Professor Christopher Geczy, acknowledged that the historical default rate for AAA-rated securities was approximately .02 percent. Id. at 743:20-744:3 (Geczy). 69.

Notwithstanding this record, Grimes and his team did not rely exclusively

on the rating agency ratings for their credit research, but instead considered the ratings as just one factor in their analysis. Id. at 5578:6-23 (Grimes); TX172. E.

Securities Lending’s Portfolio Management Strategy 1.

70.

General Strategy

Adams pursued a consistent strategy in constructing the Business Trust

portfolios. In particular, he invested approximately one-third of the portfolio in overnight securities; one-third in securities that matured in 90 days or less; and the remaining onethird in floating-rate notes, which typically had maturities of two years or less. Tr. 4623:8-22 (Adams); TX177-1 at 3; TX197 at 5. At times, Adams would increase the liquid portion of the portfolio (i.e., the percentage invested in very short-term securities) above one-third to address the cash-flow needs of the program. TX177-1 at 3.

22

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71.

In making individual investment decisions for a portfolio, Adams

considered the needs of the portfolio, where an investment fit within the portfolio’s short and long-term strategy, and other factors. Tr. at 4611:4-16. 72.

This approach had proven successful. Between 1995 and 2007, Securities

Lending clients did not have any investment losses, despite numerous financial crises over the same period. Id. at 2607:4-14 (Smith); id. at 4661:23-4662:14 (Adams); id. at 5287:4-12 (Glucksman). 2. 73.

Wells Fargo Monitored the Portfolio and Took Steps to Reduce Risk Throughout 2007

The Securities Lending team monitored the Business Trust portfolios,

including their liquidity, maturities, issuer concentrations, and asset quality. See, e.g., TX177-1 at 2-3; TX197 at 3; Tr. 4655:25-4658:6 (Adams). By early 2007, the team was aware of problems in the subprime prime mortgage market. Tr. 4625:19-4626:2 (Adams). They therefore analyzed the Business Trust portfolio’s exposure to the subprime mortgage market and, even though they concluded that such exposure was minimal, they took proactive steps to mitigate risk. 74.

On March 14, 2007, for example, Grimes shared with the Securities

Lending team a memorandum that analyzed the asset-backed commercial paper (“ABCP”) market’s exposure to subprime mortgages. TX428. With respect to SIVs, Grimes’s memorandum observed: Structured Investment Vehicles and Securities Arbitrage conduits both purchase mortgage securities. Both SIV’s and Securities Arbitrage programs have sector diversification limits. For the programs that we purchase in this space, we 23

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again look for asset quality, diversification, strong liquidity, and a strong manager track record. Both of these sectors have limited subprime exposure. Id. at 2. 75.

At the March 20, 2007 meeting of SLRMEC, the Securities Lending team

further discussed the subprime mortgage sector, concluding the securities lending portfolios had little subprime exposure. TX4918 at 16. 76.

Despite this conclusion, Securities Lending took increasingly aggressive

actions in 2007 to reduce risk in the Business Trust portfolios, including by reducing maturities of new purchases. 77.

In April 2007, for example, Securities Lending adopted temporary maturity

limits for new purchases of securities. TX1255. These voluntary guidelines generally limited new investments to securities with maturities of two years or less, while sharply restricting the percentage of securities with maturities between one and two years that could be held in the portfolios. Id. at 3. 78.

At the time, Securities Lending was following an internal policy that

generally limited the maturity of securities that could be purchased to a maximum of three years. Id. at 2 (“Our current internal policy has been to further limit the maturity of variable rate issues purchased for these accounts to a maximum of three years with a limit of no more than 10% of the portfolio maturing between two and three years.”). By contrast, the maximum maturity (or WAL) under the investment guidelines for the Business Trust portfolios was 5 years. TX32803 at 2; TX32976 at 2. Thus, Securities

24

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Lending voluntarily followed maturity limitations that were more conservative than required by the investment guidelines. Tr. 4632:4-23 (Adams). 79.

In July 2007, Securities Lending adopted new rules that reduced risk further

by limiting the exposure of the securities lending portfolios to ABCP. TX248 at 18. Securities Lending recognized that these rules would reduce yield and thus profit to be shared by participants and Wells Fargo. Tr. 4637:6-4638:9 (Adams). 80.

In August 2007, Securities Lending adopted more conservative internal

guidelines. TX185. Under the new guidelines, Securities Lending would not purchase a security from an issuer unless it carried a WCM credit score of 2.60 or better (as compared to the previous cutoff of 2.72). The new guidelines limited new purchases to a maximum maturity of one month. Tr. 4639:12-23 (Adams). 81.

The evidence concerning the returns for the Business Trust’s investments

confirms that Securities Lending pursued a conservative investment strategy. Historically, the Business Trust portfolios earned a return that was only a few basis points above the risk-free rate. TX1822. If Securities Lending had been “stretching for yield,” the investment returns would have been higher. Tr. 2355:3-22 (Smith). 3. 82.

Plaintiffs’ Criticisms of Wells Fargo’s Portfolio Management Were Not Supported by the Evidence

Plaintiffs’ criticisms of Securities Lending’s investment decisions were not

supported by the evidence. 83.

First, Plaintiffs alleged that in 2007 Wells Fargo “stretched for yield”—that

is, increased risk by investing in longer-dated securities—in the pursuit of higher profits. 25

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As support for this allegation, Plaintiffs point to handwritten notes of a January 10, 2007 meeting of the Securities Lending team, including Smith, Hruska-Claeys, Adams, and Ahlstrand. TX245. The notes attribute the following statement to Adams: “To get bang in this econ environ – take more risk.” Id. 84.

As Adams testified, however, his comment responded to a question about

whether the securities lending program could increase yield for its clients. Tr. 4647:174648:3 (Adams). As in any economic environment, the program would have to take more risk to earn a higher return. Id. But Adams testified that Securities Lending did not, in fact, take more risk. Id. at 4648:22-4649:2. The contemporaneous evidence discussed above corroborates Adams’s testimony. 85.

In addition to the January 2007 handwritten notes, Plaintiffs point to an

email that Adams sent to Hogan in November 2007, where he stated that “a very large portion of [the securities lending program’s] longer-dated assets were purchased within the last year.” TX705. But as Adams explained in his testimony (and as he expressly noted in his email), a “large portion” of Securities Lending’s longer dated assets had been purchased in the year before November 2007 because of normal portfolio turnover, not because the securities lending program was buying securities with longer maturities than it had purchased in the past. Tr. 3448:17-18 (Hogan) (“That is just a function of how the maturities schedule, always.”); id. at 4640:23-4642:7 (Adams). 86.

Second, Plaintiffs cite a WCM portfolio credit risk analysis of the securities

lending portfolio from November 2007, which they claim showed that the securities lending portfolio had 826% more risk than Wells Fargo’s money market fund. TX151; 26

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TX152.7 However, the WellsCap model was designed to assess risk in a money market fund, not a securities lending portfolio. Tr. 2521:12-25 (Smith); id. at 3523:6012 (Hogan). This distinction is important: money market funds are limited to investing in securities with maturities of 13 months or less. Id. at 810:21-23 (Geczy). In contrast, the Business Trust’s investment guidelines authorized investments with maturities as long as five years. TX32803 at 2; TX32976 at 2. 87.

The WellsCap model therefore attributed more risk to longer-dated

maturities. Tr. 4835:20-4836:24 (Sylvester). Because the securities lending program could invest in securities with longer maturities than a money market fund, one would expect the securities lending portfolio to receive a higher score under the WellsCap model. Id. at 4835:20-4836:15. Indeed, Sylvester of WCM observed at the time that “most of the [Portfolio Credit Risk]” was coming from the “longer end of the portfolio.” TX152. The “longer end of the portfolio” was still well below the maximum maturity allowed under the Business Trust investment guidelines. Id. at 1 (“Although their policy allows them to buy securities with a maximum final maturity (or in the case of ABS, maximum WAL) of five years, the longest security outside of the ABS sector is about 2 ½ years”); Tr. 4940:19-25 (Sylvester) (over 50% of portfolio was under 14 days).

7

WCM applied the WellsCap model to the securities lending portfolio, which was nearly three times the size of the Business Trust portfolios at issue in this case. Tr. 3299:13-23 (Hruska-Claeys) (explaining that EY Fund and CI Term Trust made up about $10 billion of the $27 billion securities lending portfolio); id. at 4843:6-8 (Sylvester) (noting that the analysis was not limited to the EY Fund and CI Term Portfolios). There was no evidence of how the Business Trust portfolios alone would have scored under the WellsCap model. 27

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88.

In addition to applying the WellsCap model, WCM also ran the securities

lending portfolio through a Moody’s credit risk model, which took into account the maturity of the securities lending portfolio. Tr. 4848:1-10 (Sylvester). Assuming a threeyear portfolio—two years less than the maximum maturity for the Business Trust portfolios—the securities lending portfolio carried only 71.7% of the allowable risk of a AAA-rated security. Id. at 4839:7-11; TX151; TX152 at 1. F.

Structured Investment Vehicles 1.

89.

The Nature of SIVs

The Business Trust purchased senior notes (corporate notes or commercial

paper) issued by structured investment vehicles (“SIVs”). Tr. 4663:25-4665:1 (Adams). 90.

An “SIV” was a type of investment vehicle that operated on a business

model similar to that of banks. Tr. at 957:2-23 (Geczy); id. at 958:22-959:3. SIVs raised capital by issuing short-term commercial paper, medium term notes (MTNs), and other debt. SIVs invested in longer-term assets, which generally consisted of highly-rated and diversified portfolios of securities. Id. at 5260:14-16 (Glucksman). SIVs sought to earn a profit on the “spread” between the interest that they paid on their debt and the interest that they earned from their assets. Id. at 334:25-335:3 (Geczy). 91.

The first SIV was established in 1988. Tr. 5261:24-5262:7 (Glucksman).

Between 1988 and the fall of 2007—a period that included several major financial crises—no SIV defaulted on its debt obligations or even experienced a ratings downgrade. Id. at 696:24-697:7 (Geczy); id. at 5286:5-18 (Glucksman); id. at 5393:6-10 (Peavy). As Adams testified, SIV-issued securities “were some the highest quality, most 28

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liquid investments available in the marketplace” prior to the financial crisis. Id. at 4666:10-12 (Adams). 92.

In early August of 2007, the market for ABCP (including SIVs) began

experiencing a liquidity crisis, as the market’s concerns over subprime mortgages turned into a panic. Id. at 5291:20-5292:25 (Glucksman); id. at 5296:13-5297:6. Virtually overnight, SIVs lost the ability to issue short-term paper. Id. 93.

By November of 2007, as one Wells Fargo employee commented in an

email at the time, it was obvious that the “SIV business model doesn’t work.” TX154 at 3. That was not obvious before the fall of 2007. Tr. 5304:1-6 (Glucksman). As the email also noted, money market funds invested in SIVs. TX154 at 3. Indeed, money market funds were so heavily invested in SIVs that, as problems with SIVs emerged in the fall of 2007, investors were concerned about the possibility of a “run” on money market funds. Tr. 960:17-9161:2 (Geczy). 94.

Wells Fargo’s own money market funds were significant investors in SIV

securities. As of October 2007, those funds held $6.5 billion of SIV securities. TX1122. Wells Fargo’s prime money market funds invested at least 10% of their portfolios in SIV securities, which was comparable to the concentration of SIVs in the combined Enhanced Yield and CI Term portfolios. Id.; TX34 at 2; Tr. 4956:2-7 (Sylvester) (testifying that as of August 2007, Wells Fargo money market funds had about 7 or 8 billion dollars invested in SIV securities).

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2. 95.

Plaintiffs’ Criticisms of SIVs Are Not Supported by the Evidence

Plaintiffs contend that SIV securities were inappropriate investments for the

Business Trust portfolios. At trial, Plaintiffs advanced this argument largely through the testimony of their expert, Professor Christopher Geczy. None of Geczy’s arguments are persuasive or supported by the evidence. 96.

First, Geczy opined that SIVs were “fundamentally fragile” because they

funded longer-term assets with shorter-term liabilities. Tr. 250:20-21 (Geczy); id. at 331:13-21; id. at 334:16-335:3. But there was nothing unique or inherently problematic about funding longer-term assets with shorter-term liabilities. This is how banks and money market funds operate. Id. at 957:2-23; id. at 958:22-959:3. 97.

Plaintiffs failed to show that the problems that SIVs ultimately experienced

were reasonably foreseeable before the financial crisis. Despite his opinion that SIVs were “fundamentally fragile,” for example, Geczy did not identify any article before the financial crisis predicting the failure of SIVs. Id. at 704:9-21. 98.

Second, Geczy testified that, in 2005, the SIV market changed in two ways

that increased risk: (1) SIVs began issuing subordinated debt and (2) institutions other than banks started sponsoring SIVs. Id. at 336:18-336:2; id. at 358:6-12. 99.

As to the first change, the evidence showed that far from increasing risk,

the use of subordinated debt reduced the risk to senior noteholders—including Securities Lending, which only purchased senior notes. Id. at 5267:12-5270:6 (Glucksman).

30

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Because the subordinated debt was junior in priority to the senior notes, it protected senior noteholders. Id. at 5266:10-5267:3. 100.

As to the second change, the evidence at trial was that the absence of bank

sponsorship for some SIVs was a long-standing phenomenon. For example, the Victoria SIV, which was not sponsored by a bank, was established in 2002. TX420 at 2; TX423. Nor is there evidence that SIVs that lacked a bank sponsor were more likely to default than those that had such a sponsor. 101.

Third, Geczy testified that SIVs were “complex” investments and that a

conservative portfolio should only invest in simple securities. Tr. 417:14-418:1-17 (Geczy). However, the SIV securities purchased by the Business Trust—commercial paper and MTNs—were no more complex than standard commercial paper or corporate notes, id. at 4665:12-24 (Adams); id. at 4955:16-22 (Sylvester), which Plaintiffs do not claim would have been inherently inappropriate. 102.

While a SIV’s internal structure itself could be described as complex, there

is no evidence that SIVs were any more complicated than a bank or non-financial corporate issuer. Furthermore, as Wells Fargo’s expert Myron Glucksman explained in his testimony, the internal complexity of SIVs was designed to protect senior noteholders from losses. Tr. 5266:3-5267:11. 103.

Fourth, Geczy described SIVs as a “black box” because they did not

disclose the individual securities in their portfolios to investors. Tr. 331:3-12 (Geczy). But the same “black box” label could be applied to other issuers, like banks, which also limit the information they give investors. As Matt Grimes of WCM testified: “At most 31

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every level, whether we were looking at a bank or corporate entity, there would be some level of information where you would not be able to receive everything that is underlying the company.” Id. at 5436:15-18 (Grimes). 104.

While SIVs did not disclose their individual assets to investors, they

regularly disclosed consolidated portfolio information, including ratings quality, geographic concentration, and sector allocation. Tr. 5439:23-25 (Grimes); id. at 5273:235274:10 (Glucksman). In evaluating a SIV’s asset quality, Grimes relied on the ratings assigned by the rating agencies, which were given complete information about the SIV’s portfolios. Id. at 5439:3-35. And Grimes testified that even if he had had a list of a SIV’s underlying assets, his credit analysis would not have changed: he still would have analyzed the portfolio on a consolidated basis. Id. at 5490:18-5191:16. 3. 105.

SIVs Were Consistent with the Investment Guidelines

Between 2004 and 2007, Securities Lending purchased 175 senior notes

(i.e., commercial paper and medium term notes) from SIVs. Tr. 5288:5-14 (Glucksman). All but five matured at par. Id. 106.

These securities were consistent with the investment guidelines for both the

EY Fund and CI Term Trust. 107.

First, the SIV securities purchased by Securities Lending satisfied the

investment guidelines’ quality constraints. Those securities had the highest possible short-term or long-term credit ratings. Id. at 5271:8-11; id. at 5288:8-12.

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108.

Second, the SIV securities satisfied the investment guidelines’ Issue

Selection constraint, because SIV senior notes were “corporate notes” and “debt obligations.” Tr. 4664:2-5 (Adams); id. at 4664:19-23. 109.

Third, the SIV securities purchased by Securities Lending had maturities of

two years or less and therefore satisfied the maturity constraints in the investment guidelines. Tr. 4663:25-4664:5 (Adams).8 110.

Fourth, each SIV security purchased by Securities Lending was liquid at the

time of purchase. Tr. 4666:6-12 (Adams). While the market for SIV securities became illiquid in the fall of 2007, the emergence of that market illiquidity did not violate the liquidity constraint in the guidelines, for the reasons explained below. See Conclusions of Law ¶¶ 268-272. 111.

Finally, the SIV securities satisfied the diversification constraint. While the

concentration of SIVs in the CI Term Trust at times exceeded 25%, Wells Fargo witnesses credibly testified that SIVs were part of the financial services or banking industry, which was not subject to the 25% diversification limit in the guidelines. Tr. 4666:17-4667:3 (Adams); id. at 3382:22-3383:3 (Hogan).

8

At trial, Plaintiffs implied that the Cheyne securities purchased by securities lending had a maturity date of 2050. Tr. 133:21-134:4 (opening statement). In fact, 2050 is the final stated maturity of the restructured Cheyne security (Gryphon), whereas the Cheyne security that was actually purchased by securities lending had a two-year maturity. Id. at 1022:19-24 (Geczy). 33

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G.

Investments at Issue

112.

In the financial crisis of 2007-2008, clients of the securities lending

program experienced losses on their cash collateral investments for the first time in the program’s history. Tr. at 2607:4-14 (Smith). Plaintiffs’ losses stem almost entirely from the defaults on securities from three issuers: (1) Cheyne, (2) Victoria, and (3) Lehman. Tr. 3586:17-22 (Hogan). Plaintiffs also incurred small losses on certain asset-backed securities (“ABS”). Id. at 3560:8-3561:2 (Hogan); id. at 4689:24-4690:3 (Adams); TX34045A. 1. 113.

Cheyne

The Business Trust purchased twenty senior notes issued by an SIV called

Cheyne, all but three of which matured at par. TX405 at 2; Tr. 4667:23-4668:10 (Adams). 114.

Grimes first placed Cheyne on the Approved List on May 11, 2006,

assigning it a credit score of 2.68. TX405 at 2. At the time, Cheyne’s senior notes had the highest possible ratings from both S&P and Moody’s. Id. 115.

Grimes monitored Cheyne for approximately a year before placing it on the

Approved List. Tr. 5438:4-10 (Grimes). His credit research included reviewing Cheyne’s pool reports; meetings with Cheyne’s administrators; and meetings with the rating agency representatives. Id. at 11-5439:2-5441:18. Grimes’s credit file for Cheyne (which includes materials from both before and after Cheyne was placed on the Approved List) reflects his diligence: the file spans more than 1,500 double-sided pages. TX28658; Tr. 5442:21-5443:16 (Grimes). 34

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116.

Grimes continued to monitor Cheyne after placing it on the Approved List.

Tr. 5494:7-5495:3 (Grimes). On May 1, 2007, for example, Grimes completed an annual review of Cheyne and assigned it a slightly better credit score. TX1396; Tr. 5495:245496:11 (Grimes). 117.

On July 2, 2007, Securities Lending made its last purchase of a Cheyne

security on behalf of the Business Trust: a senior note with a two-year maturity. TX28611; Tr. 4671:3-15 (Adams). 118.

On July 10, 2007, Grimes placed a 32-day maturity limit on new purchases

of Cheyne. TX14824. The maturity limit prohibited any further purchases of Cheyne securities unless they matured (that is, paid out) in 32 days or less. Id.; Tr. 4672:10-24 (Adams). Grimes explained that he was imposing this limit on new purchases in response to S&P’s announcement that it was downgrading or placing on credit watch for a potential downgrade over 600 residential mortgage-backed securities. TX14824. 119.

Upon learning of the 32-day limit, Adams contacted Grimes to discuss

Cheyne. Based on that conversation, Securities Lending concluded that Cheyne presented minimal credit risk, though they would not make any further purchases of Cheyne securities of any maturity. Tr. 4673:15-22 (Adams).9

9

In July 2007 Wells Fargo’s money market funds sold their holdings of Cheyne securities that had maturities longer than 32 days. Tr. 5013:12-24 (Sylvester). There is no evidence that Securities Lending was aware of this at the time. 35

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120.

Shortly thereafter, Cheyne announced that none of its assets was affected

by any of the recent rating downgrades, including the rating actions that had prompted Grimes to place Cheyne on a 32-day maturity limit. TX28658 at 1173. 121.

On August 14, 2007, Grimes removed Cheyne from the Approved List,

even though Cheyne still maintained its AAA credit ratings. TX410. In an email to Securities Lending, Grimes stated: “I don’t want the positions [in Cheyne] added to, but you are not required to sell at this time.” Id. 122.

After receiving Grimes’s email, Adams contacted Grimes to discuss

whether Cheyne presented a default risk. Tr. 4675:9-15 (Adams). Based on that discussion, he concluded that Cheyne remained a minimal credit risk. Id. Accordingly, Securities Lending did not try to sell its Cheyne securities. Id. 123.

On August 28, 2007, Cheyne breached a capital-loss test, which triggered

an “enforcement event.” TX413. While the enforcement event required the appointment of a receiver, Cheyne remained solvent. TX14837 at 2. Cheyne’s senior notes retained their investment grade credit ratings. TX413; Tr. 2405:13-19 (Smith). 124.

Hogan, Smith, and Adams immediately decided to stop all further

purchases of SIV securities and other ABCP. TX413. 125.

In addition, on the same day Cheyne entered enforcement, a Wells Fargo

executive told Hogan that Wells Fargo should be “extremely active in any conference calls by [Cheyne’s] trustee, in requesting any info that the trustee will share and active in developing an informal network with other holders [of senior notes].” TX413. Securities Lending carried out this directive. Tr. 3602:1-16 (Hogan). 36

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126.

On August 29, 2007, Grimes contacted Cheyne to gather information.

TX1143. Based on the call, Wells Fargo understood that Cheyne would not be forced into liquidation, that Cheyne was still solvent, and that Cheyne was continuing to make payments on its notes. TX1143; Tr. 2413:3-16 (Smith); id. at 2414:2-10. 127.

About this time, Smith spearheaded the creation of an informal creditors’

committee to protect the interests of senior noteholders during Cheyne’s restructuring. Tr. 2414:11-2415:14 (Smith). 128.

On September 4, 2007, the accounting firm, Deloitte & Touche LLP, was

appointed as Cheyne’s receiver. Id. at 2416:14-2417:4. Deloitte organized several conference calls with Cheyne’s creditors, which Smith attended. TX14837; TX14840; Tr. 2417:12-18 (Smith). During these calls, Deloitte gave a positive assessment of Cheyne’s asset quality. TX14837 at 3 (“The portfolio does not cause us any particular concern and after initial review, it looks to be relatively sound.”); TX14840 at 2 (“[N]one of these assets have been downgraded; they are all of a decent grade.”). 129.

On September 20, 2007, Smith advised the Securities Lending team that

they should not discuss Cheyne outside the group. TX185. Smith was concerned that disclosing Cheyne’s enforcement event at that time could lead to a “run on the fund”: that is, that participants would rush to redeem their shares out of panic. Tr. 2436:3-14 (Smith); id. at 2436:24-2437:11; id. at 3603:10-17 (Hogan). 130.

While a run on the fund would not harm Wells Fargo, it likely would harm

many participants in the Business Trust. Tr. at 3592:20:3593:14 (Hruska-Claeys). If there were a run on the fund, the “participants who left first would be getting the liquidity 37

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in the fund, and people that left last would be getting the assets that [Securities Lending would] probably have to sell at a loss and so they would sustain realized losses,” meaning that “[i]f there was a run on the fund, the participants that left earlier would be treated better than the participants who left later.” Id. at 2440:3-6 (Smith); id. at. 2439:152440:23. As one Wells Fargo employee stated in an internal email at the time: “It seems the patient approach is the one that will benefit the [Business] Trust and all the holders. If there is a rush for the door, all will be damaged.” TX167. 131.

At this time, there were indications that Cheyne’s senior notes would be

repaid in full. On September 25, 2007, Securities Lending learned that Cheyne’s receiver had received several refinancing proposals, including proposals to repay senior notes in full. TX14842 at 10. 132.

On October 8, 2007, the Royal Bank of Scotland (“RBS”) made a formal

restructuring proposal for Cheyne that would guarantee repayment of Cheyne’s senior notes in full within a year. TX14844 at 3; Tr. 2456:20-23 (Smith). 133.

On October 17, 2007, Cheyne declared an “insolvency event,” which meant

that it would no longer pay its debts as they came due. TX27462. 134.

Despite Cheyne’s insolvency event, RBS continued to pursue its

restructuring proposal. Tr. 2462:10-14 (Smith); id. at 2467:21-2468:8. By this point, Goldman Sachs was pursuing a restructuring of Cheyne that would repay Cheyne’s senior notes in full. TX28255; id. at 2, 7; Tr. 2464:8-13, 2465:25-2466:3 (Smith). 135.

On October 22, 2007, Cheyne announced that it was in exclusive talks with

RBS. TX1413. Securities Lending viewed this development as a strong sign that a 38

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transaction with RBS would go through and that Securities Lending would be repaid in full on its Cheyne holdings. Tr. 2479:8-17 (Smith). 136.

The exclusivity period expired on October 30, 2007, but Cheyne’s

negotiations with RBS continued. TX1065 (internal Securities Lending email noting that exclusivity had apparently terminated but noting that “[w]e also have no information that would lead us to believe that any of the underlying asset portfolios of Cheyne has been downgraded or is failing to perform as anticipated”). 137.

About November 13, 2007, RBS withdrew from negotiations, TX28764,

leading Wells Fargo to conclude that Cheyne likely would repay its senior notes about 90% of par, rather than in full. TX202; Tr. 3606:26-360714 (Hogan). 138.

In the next newsletter to Business Trust clients, on November 20, 2007, the

Securities Lending team disclosed all of the material facts concerning Cheyne, as they understood those facts at the time. TX33009. 139.

Cheyne’s senior notes were restructured into pass-through notes called

“Gryphon.” Gryphon notes have since paid principal and interest each month, which Wells Fargo then passes along to the Plaintiffs. TX37434 (provisionally received); TX37438 (provisionally received); Tr. 5139:17-5142:13 (Ahlstrand); id. at 5143:25146:4. As of March 31, 2013, the total recovery from the original Cheyne securities and the Gryphon notes was 59.2% of the original par value. TX37434; TX29541 (demonstrative); Tr. 5092:1-16 (Ahlstrand); id. at 5139:17-5142:13; id. at 5289:175290:5.

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2. 140.

Victoria

Securities Lending purchased ten senior notes from the Victoria SIV for the

Business Trust’s portfolios. Tr. 4668:17-4669:6 (Adams). All but two of these securities matured at par. Id. at 4669:13-24. 141.

Grimes first placed Victoria on the Approved List on July 18, 2006,

assigning it a WCM credit score of 2.632. TX420 at 2. At the time, Victoria senior notes were rated AAA by S&P and Moody’s. Id. 142.

Before placing Victoria on the Approved List, Grimes monitored Victoria

for more than four years. Tr. 5483:25-5485:2 (Grimes). In particular, he reviewed Victoria’s assets, and met with Victoria’s managers and with rating agency representatives. Id. As he did with Cheyne, Grimes maintained a large credit file on Victoria. TX28657; Tr. 5484:3-21 (Grimes). 143.

Grimes continued monitoring Victoria after placing it on the Approved

List. Tr. 5494:7-5495:3 (Grimes); id. at 5497:18-20. On July 24, 2007, Grimes completed his regular annual review of Victoria. TX421. He assigned Victoria a WCM credit score of 2.598, slightly above its initial score. Id. 144.

Victoria had comparatively little exposure to the subprime mortgage

market. TX428 at 2; TX2066 at 3-7; Tr. 5273:5-11 (Glucksman); id. at 5564:13-5565:5 (Grimes). As investors fled ABCP of all types in the fall of 2007, however, Victoria increasingly struggled to fund its liabilities. TX2042; TX423; Tr. 5292:3-5293:12 (Glucksman).

40

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145.

Grimes tracked these developments. On August 23, 2007, Grimes

suspended further purchases of Victoria and other SIV securities, explaining in an email to Securities Lending that he was conducting a “full sector review” of the SIV sector. TX38. Later that month, Grimes removed Victoria from the Approved List. At the time, its senior notes still maintained the highest possible credit ratings. TX414; Tr. at 5498:211 (Grimes). 146.

Securities Lending concluded that Victoria was not a significant default risk

and therefore decided not to incur losses for their clients by selling the Victoria notes held by the Business Trust. Tr. 4676:2-10 (Adams); id. at 4677:2-15. 147.

Wells Fargo’s money market funds also held Victoria securities and

similarly concluded that it was in the best interest of their shareholders to continue holding those and other SIV securities, which were viewed as presenting a “minimal credit risk.” TX508 at 3; Tr. 5080:2-16 (Sylvester). 148.

On January 4, 2008, Securities Lending concluded that Victoria would

enter enforcement the following week. TX14863. Adams sought bids from brokers on Securities Lending’s Victoria paper, but there were none. Id. 149.

On January 7, 2008, Securities Lending sent a letter to participants in the

Business Trust disclosing that Victoria was likely to enter enforcement. TX33683-1. Victoria entered into enforcement soon thereafter. Tr. 2534:1-4 (Smith). 150.

The Victoria senior notes were later restructured into pass-through notes,

which trade under “VFNC.” For the original Victoria securities and the VFNC passthrough notes, the total recovery as of March 31, 2013 represented 64.2% of the original 41

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par value. TX37438; TX29541; Tr. 5143:2-5146:4 (Ahlstrand); id. at 5289:17-5290:5 (Glucksman). 3. 151.

Lehman

The Business Trust made several investments in senior notes of Lehman,

which was then one of the five largest and most respected broker-dealers in the United States. Tr. 4677:16-4678:3 (Adams); id. at 3634:24-3635:7 (Hogan). Securities Lending made its last investment in a Lehman corporate note in February of 2007. Tr. 2538:24 (Smith); id. at 3633:13-21 (Hogan).10 152.

Although the Securities Lending team did not expect Lehman to fail, they

did have concerns about Lehman’s financial condition as the liquidity crisis continued in early 2008. TX1354. These concerns were heightened when, in March of 2008, another broker dealer, Bear Stearns & Co., collapsed and was then acquired by J.P. Morgan as part of a rescue coordinated by the federal government. Tr. 2543:4-20 (Smith); id. at 3184:2-12 (Hruska-Claeys); TX14876. 153.

In May of 2008, a Wells Fargo credit analyst prepared a lengthy report that

compared Lehman to Bear Stearns. TX1367. The analyst concluded that “what happened to Bear is unlikely to occur at Lehman” because of Lehman’s relatively stronger liquidity and access to the Federal Reserve’s discount window. Id.

10

Securities Lending disclosed to participants that Lehman was one of the Business Trust’s top ten investments. TX11818 at 12; TX13633. Securities Lending also disclosed that Lehman was one of the top borrowers of securities from the securities lending program. TX11818 at 8. 42

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154.

In June 2008, Wells Fargo’s money market funds began limiting their

exposure to Lehman to overnight repurchase agreements only. TX535. David Sylvester, who managed the money market funds, testified that he did not view Lehman as a default risk at that time. But he was concerned that Lehman’s stock was being targeted by shortsellers, who would make it more difficult for Lehman to raise additional capital. Tr. 4968:22-4969:13 (Sylvester); TX535. 155.

On June 12, 2008, WCM suspended Lehman from the Approved List,

TX525, only to place it back on the Approved List (with a 32-day limit for new purchases) less than a week later. TX716. In returning Lehman to the Approved List, the WCM credit analyst responsible for Lehman explained that she had spoken with Lehman’s treasury office that day and was “comfortable with their liquidity as well as their repo exposures.” Id. She added that Lehman had sold $5.5 billion of debt in the public markets since March of that year and that Lehman had prefunded all of its 2008 maturing debt. Id. 156.

On July 25, 2008, Wells Fargo’s institutional credit research group

downgraded Lehman’s broker quality rating, or “BQR,” from 5 to 6. TX518; TX522. The BQR was an internal, proprietary rating that measured a broker’s perceived creditworthiness. Tr. 3636:23-3637:3 (Hogan). A broker’s BQR determined how much credit Wells Fargo would extend to the broker. Id. By downgrading Lehman’s BQR, Wells Fargo reduced the amount that Lehman could borrow from Securities Lending. Id. 157.

Wells Fargo did not disclose publicly Lehman’s BQR downgrade because it

considered the BQR to be proprietary and confidential information, id. at 3638:2243

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3639:12, and it also was concerned that disclosing the BQR downgrade could add to Lehman’s problems and make it less likely that Securities Lending clients would be repaid on their Lehman securities. Id. 158.

In late August of 2008, Securities Lending contacted several brokers to

solicit bids on a $100 million Lehman corporate note that was maturing on October 22, 2008. TX517. Lehman offered to repurchase its notes at a price of 98.98 (i.e., 99 cents on the dollar). Id. 159.

Securities Lending viewed Lehman’s willingness to repurchase its own

notes at nearly par as a strong sign of the broker’s viability, reasoning that a company that was on the brink of failure would not bid nearly $100 million to repurchase one of its own notes. Tr. 2552:7-13 (Smith); id. at 4686:12-16 (Adams). Because Lehman appeared to present little default risk, Securities Lending did not sell its Lehman notes. Id. at 4686:14-16. 160.

Wells Fargo continued to keep a close eye on Lehman. On September 12,

2008, a WCM analyst emailed Securities Lending that, while Lehman was on credit watch negative, its ratings were still investment grade and that, according to S&P, “Lehman’s near term liquidity is satisfactory.” Id. 161.

On the same day, Securities Lending managers participated in a telephonic

meeting with several Wells Fargo executives to discuss whether to sell Securities Lending’s Lehman notes. Tr. 4687:2-21 (Adams). The consensus was that Securities Lending should not sell the notes because this would unnecessarily realize losses for Securities Lending clients and because Lehman was unlikely to fail. Tr. 3642:2244

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3643:11 (Hogan); id. at 4687:22-4688:4 (Adams). Sylvester, whose money market funds had exited their positions in Lehman earlier that year, concurred in this view. Id. at 4971:8-4973:12 (Sylvester). 162.

Three days later, Lehman filed for bankruptcy. The Securities Lending

team was shocked by Lehman’s failure. Id. at 4688:12-13 (Adams); id. at 4973:1-12 (Sylvester). 163.

Several money market funds held Lehman securities at the time of

Lehman’s bankruptcy. One of these money market funds, the Reserve Primary Fund, “broke the buck” because of its Lehman holdings, which in turn triggered a run on money market funds by investors. Tr. 965:25-968:2 (Geczy). The run ended when the federal government guaranteed investments in money market funds. Id. at 969:16-970:4; id. at 5362:22-5363:4 (Glucksman). 164.

Since September 2008, Lehman’s bankruptcy estate has been collecting and

liquidating assets, the proceeds of which are distributed to its creditors. Wells Fargo receives semi-annual payments from the estate. As of March 31, 2013, those payments totaled 14.5% of the original par value. Tr. 5146:6-5149:18. Wells Fargo passes all of these payments along to the participants (including Plaintiffs) that hold the Lehman bonds. Id.; TX13835-1. 4. 165.

Asset Backed Securities

The Business Trust invested in asset-backed securities, a type of security

that was authorized by the investment guidelines. TX32803 at 1; TX32976 at 1. Most of the Business Trust’s ABS investments were held in a small portion of the EY Fund that 45

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was managed by Galliard, a wholly-owned subsidiary of Wells Fargo with expertise in ABS. Tr. 4621:10-15 (Adams). 166.

Securities Lending retained Galliard to manage approximately 3.5 percent

of the EY Fund. Id. at 4621:16-20. Galliard invested in senior and super-senior tranches of ABS, most of which was AAA-rated. Id. at 4626:21-4627:22; id. at 5293:21-5 (Glucksman); id. at 5301:1-20. These senior tranches were protected by several levels of lower-priority debt, such as mezzanine and subordinated notes. Id. at 5301:1-20. This meant that an asset-back security would have to incur significant losses before senior tranches lost any principal. Id.; TX29548 (demonstrative illustrating RMBS security with 25.70% subordination for the super-senior tranche). Before the financial crisis, the investment community viewed these types of securities as safe and conservative. Tr. 5303:13-17 (Glucksman). 167.

In determining the maturity of ABS, Securities Lending used the “weighted

average life” (“WAL”), rather than the security’s stated maturity. Id. at Tr. 4650:164651:17 (Adams). This was consistent with the investment guidelines, which provided that “the maximum maturity or average life of any security will be five years or less.” TX32803 at 2 (emphasis added). The guidelines further provided that “[f]or securities using weighted life for the maximum maturity determinant, the industry convention for these types of securities will be used.” Id. 168.

WAL is the industry convention for calculating the maturity date of ABS.

Tr. 2148:22-24 (Smith); id. at 2149:13-16; (Adams). By contrast, stated maturity is an inappropriate measure of maturity for ABS. Id. at 1027:2-11 (Geczy). 46

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169.

The WAL of every asset-backed security in the Business Trust was three

years or less at the time of purchase. Id. at 4652:2-18 (Adams); TX177-1 at 5. 170.

Although the asset-backed securities purchased by Securities Lending

complied with the investment guidelines, they were not immune to the financial crisis. As the market for asset-backed securities collapsed, the Business Trust’s ABS became less liquid and did not mature as quickly as originally expected. Tr. 4689:24-4690:10 (Adams). 171.

Many of these securities have since matured at par, resulting in no

investment losses. Tr. 5151:14-5152:15. The remaining asset-backed securities are paying principal and interest every month, and those payments are passed on by Wells Fargo to the Plaintiffs and other participants who hold those securities in their collateral accounts or separate accounts. Id. at 5152:16-5153:8. As of March 31, 2013, the total recovery for the Galliard asset-backed securities represented 80.1% of the original par value for those securities. TX29543 (demonstrative); Tr. 5293:13-5294:18. H.

Wells Fargo’s Efforts to Improve the NAV

172.

Securities Lending closely monitored the fluctuations in the NAV for the

EY Fund and CI Term Trust portfolios. Id. at 3125:1-9 (Hruska-Claeys). Since the inception of the Business Trust, for example, Securities Lending would “stress test” the portfolios every month. Id. at 2218:15-2219:2 (Smith); id. at 3160:1-3 (Hruska-Claeys). These “break-a-buck” tests consisted of calculating NAV under different assumptions about future interest rates and other economic variables. Id.

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173.

Securities Lending’s written procedures provided that management should

be notified if the NAV deviated from the stated NAV (i.e., $10 per share) by more than .5 percent. Id. at 3157:5-3159:21; TX27758. This one-half-of-one-percent “corridor” was similar to the “safe harbor” employed by most Rule 2a-7 money market funds, which also seek a stable NAV. Tr. 3671:17-3672:3 (Hogan). 174.

The securities lending program did not have a written policy that prescribed

what the program should do if the calculated NAV fell significantly below $10 per share. Until the fall of 2007, it had not needed one: while the NAV had fluctuated slightly, it had always rounded to $10 per share. Id. at 3116:8 (Hruska-Claeys); id. at 3124:22-25; id. at 3156:17-25. 175.

In June of 2007, however, the NAV for the CI Term Trust rounded to $9.99

per share due to a price decline in a security in the portfolio (which later matured at par). Tr. 2239:1-8 (Smith); TX181. The Securities Lending team explored several methods to increase the NAV, so that it again rounded up to $10 per share, including (a) investing additional collateral from term loans in overnight securities, (b) withholding spread income from the portfolio investments, and (c) verifying prices of securities. Tr. 3147:213 (Hruska-Claeys); id. at 3271:9-3272:3; id. at 3678:4-3679:22 (Hogan). 176.

These methods were not improper. To the contrary, Wells Fargo’s goal in

trying to improve the NAV was to help its clients. Tr. 3679:22 (Hogan). 177.

By July of 2007, the NAV for the CI Term Trust had returned to $10. Id. at

3656:14-16 (Hogan). In August, however, the CI Term Trust’s NAV again dropped. By September, there were periods during which the CI Term Trust’s NAV fell below $9.95 48

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and thus was outside the corridor set forth in Securities Lending’s policies. Id. at 3115:10-19 (Hruska-Claeys); id. at 3135:19-3136:10; TX186-1 at 5. During the same period, the EY Fund’s NAV also came under pressure, as it no longer rounded to $10. Id. 178.

In another effort to improve the NAV, Wells Fargo—in consultation with

JNL and KPMG—determined that it would change slightly the method by which it calculated the NAV. Id. at 3672:4-12; id. at 3673:8-16. 179.

Wells Fargo applied this valuation methodology retroactively by having its

outside fund accountant, JNL, reprocess prior transactions in the Business Trust using the new methodology. Id. at 3674:10-24. Wells Fargo discussed this reprocessing with its outside auditors at KPMG, who raised no objections. Id. at 3677:9-13; id. at 3205:193206:9 (Hruska-Claeys); TX1612-1. 180.

Wells Fargo later discovered that JNL had made an error when it had

initially reprocessed the transactions. Tr. 3681:5-17 (Hogan). As a result of this error, twenty-six clients had been allowed to redeem their shares in the CI Term Trust at a time when the NAV for the CI Term Trust was below $9.95. Id. at 1256:21-1257:3 (Geczy); id. at 3683:4-15 (Hogan); id. at 3685:14-22. One of these clients, Public Safety of Arizona (“PSA”), had exited completely from the securities lending program, because it was transferring its securities to a different bank custodian. Id. 3110:4-3111:7 (HruskaClaeys); id. at 3658:1-21 (Hogan). Because it was allowed to redeem some of its shares at $10 per share when the NAV was below $9.95 per share, PSA was “overpaid” for its shares by $664,000. Id. at 1256:17-20 (Geczy); id. at 3690:7-19 (Hogan). Another client

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who was overpaid for its shares was International Truck, one of the ERISA Plaintiffs here. Id. at 1259:4-14 (Geczy). 181.

Wells Fargo determined that the total amount of the overpayments resulting

from the misapplication of the valuation methodology was $1.17 million. Id. at 3690:7-8 (Hogan). Wells Fargo did not seek to recover the overpayments from participants. Rather, to make the Business Trust whole for this operational error, Wells Fargo contributed $1.17 million to the CI Term portfolio. Id. at 3691:1-3. 182.

In the end, the new valuation methodology did not have any material effect

on the NAV for the CI Term Trust or EY Fund. Id. at 3674:19-24. I.

Securities Lending’s Disclosures 1.

183.

Securities Lending’s Disclosures Generally

Wells Fargo provided regular reports to participants of the Business Trust.

Tr. 2557:11-14 (Smith); id. at 3534:5-10 (Hogan). Every participant received a monthly newsletter that was tailored to the specific portfolio or portfolios in which that participant was invested. Id. at 3612:19-3613:1 (Hogan). Securities Lending also sent participants quarterly performance and earnings reports. TX11818; TX11820; TX13633; TX15007; TX15008; TX15009; TX15088; TX15089. 184.

If a client requested information that was not included in the standard

reports, Securities Lending would provide it. Tr. 2557:11-14 (Smith); id. at 2581:52585:2; id. at 3534:11-3535:1 (Hogan); TX27875. 185.

In addition to responding to client requests, the Securities Lending team

understood that there was an affirmative duty to provide clients with material information 50

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about the Business Trust. Id. at 1968:21-1969:4 (Smith); id. at 3035:3-13 (HruskaClaeys); id. at 3328:3-6 (Hogan). 2. 186.

Securities Lending’s Disclosures in 2007

By the summer of 2007, the Securities Lending team recognized that the

financial markets were entering a period of increasing uncertainty: credit spreads on fixed income investments had been widening, which signaled a market perception of greater risk. TX33681; Tr. 2355:7-17 (Smith). 187.

In its monthly newsletters during this period, Securities Lending discussed

the increasing market uncertainty. In the September 2007 newsletter, for example, Wells Fargo stated: “Investors operating in the short-term fixed income markets, as we do in investing the collateral reinvestment portfolios, experienced unprecedented turmoil during the month of August.” TX33681 (emphasis added). 188.

Wells Fargo then explained the steps that it had been taking to mitigate

risks in the program “during this time of market volatility.” Id. For example, Wells Fargo stated that it had “reviewed the guidelines for each portfolio and, in all cases, are investing in a considerably more conservative fashion than the investment guidelines would allow.” Id. This statement was accurate: as discussed above, Wells Fargo was adhering to internal investment policies that were more conservative than the investment guidelines for either the EY Fund or CI Term Trust. TX1255 at 2. 189.

Securities Lending’s October 2007 newsletter struck a similarly cautious

note. TX33682. After explaining that clients would receive higher earnings than the prior month due to widening spreads and favorable pricing, Wells Fargo noted the 51

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uncertainty of the current economic environment: “These abnormal conditions are difficult to predict due to the day to day volatility and the uncertainty in the credit markets. We know there will be change, we just don’t know when or of what magnitude.” Id. Wells Fargo concluded the letter by stating its concern with “the current challenging investment environment.” Id. at 2. 190.

As noted above, the November 2007 letter disclosed Cheyne’s enforcement

event and status, including that Securities Lending had determined that Cheyne’s fair value was “currently 90% of par.” TX33009 at 2. The letter also disclosed other significant information relating to the Business Trust’s investments: 

The “recent systemic liquidity pressures and the ‘credit crunch’ emanating from concerns about subprime mortgages have created unprecedented market disruptions.”



Investor “concerns over asset-backed securities have resulted in limited or no short-term financing for” SIVs.



The EY Fund and CI Term Trust held 12.25% of their combined portfolios in SIV securities.



The NAV for the CI Term Trust had fallen below $9.95 and Securities Lending had moved to a floating NAV as of this date.



The EY Fund’s NAV was currently at $9.95, and Securities Lending would process future activity in the EY Fund at a floating NAV.



Securities Lending would meet any significant redemptions with in-kind distributions to “ensure that all clients remaining in the trusts not see their positions unfairly diluted.”

Id. at 2-3.

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3. 191.

Securities Lending’s Advice to Hold the Course

None of the Plaintiffs exited from the securities lending program in

response to the November 2007 letter. Tr. 6194:10-6199:24 (Orner); id. at 6648:206650:9 (Viola); id. at 6655:19-6656:12; id. at 6437:3-6438:3 (Julien); id. at 6504:146505:3 (Rivkin); id. at 6545:12-21 (Slocum); id. at 6547:13-6548:25; Jansky Trial Dep. at 32:7-16. Most reached out to Wells Fargo for information and advice. Id. Smith, Adams, and other Wells Fargo representatives responded by discussing Plaintiffs’ concerns in numerous telephone calls and in-person meetings. Id. 192.

The Securities Lending team recommended that Plaintiffs and other

participants remain in the program. Tr. 3345:6-17 (Hogan). Based on their experience with previous financial downturns, they expected markets to recover within a few months and participants’ losses to decline. Id.; id. at 3610:15-3611:1; id. at 4662:24-4663:7 (Adams). Some of Plaintiffs’ investment advisors offered similar advice. See, e.g., id. at 6504:14-6505:3. J.

Wells Fargo Responded to the Financial Crisis By Acting in the Best Interests of All Participants

193.

Unlike the previous financial crises that the Securities Lending team had

experienced, the financial crisis that began in 2007 did not abate within a few months. Instead, it grew more severe. Id. at 3585:2-4 (Hogan). Although they did not know it at the time, the Securities Lending team was witnessing the beginnings of the worst financial crisis since the Great Depression—one that would bring the United States and other major economies “nearly to their knees.” Id. at 849:17-850:3 (Geczy). While it

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may have been foreseeable that a financial crisis would occur eventually, the timing and severity of this financial crisis was not anticipated by the vast majority of investors. Id. at 3586:7-11 (Hogan); Id. at 5303:1-6 (Glucksman); id. at5404:2-15 (Peavy); TX27538 at 1 (December 18, 2007 email from Wells Fargo senior executive noting “unprecedented illiquidity and market crisis in money markets”). 194.

The Securities Lending team’s actions during this unprecedented crisis

were motivated by a desire to do what they believed was in the best interest of all participants in the Business Trust. 195.

First, effective October 17, 2007, Wells Fargo waived its share of the

revenue for those clients invested in a portfolio that held Cheyne. It did the same for portfolios invested in Victoria following Victoria’s enforcement event in January 2008. TX12589 at 3; TX36759 at 1; TX202 at 1 (“I talked with Dave Hoyt about the concept that I don’t think we should collect our share of a split until the combination of the investor earnings and any price loss are certain to be positive.”); Tr. 2514:9-19 (Smith). 196.

Wells Fargo operated the securities lending program for several years at a

loss, allocating all revenue (above the rebate paid to borrowers) to its clients. Id. at 2514:25-2515:10; id. at 2515:11-13; id. at 3610:15-20 (Hogan) (noting that, during the period that Wells Fargo waived its share of revenues, “[t]here were still reasonably attractive earnings”). 197.

Second, Securities Lending adopted and implemented redemption policies

to ensure that all participants were treated equally and to guard against the possibility that one participant’s actions would harm other participants. Tr. 3164:11-23 (Hruska-Claeys). 54

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Initially, Securities Lending decided to process all daily activity in the Business Trust at the “floating” NAV, that is, the NAV’s then-market value, rather than $10 per share. Id. at 2511:16-20 (Smith). This policy was necessary to ensure that all participants in the Business Trust were treated fairly. Id. at 2512:8-12 (Smith); TX27538 at 1. If Wells Fargo had continued processing transactions at $10 per share, any further redemptions would have diluted existing shareholders. See, e.g., Tr. 3663:15-18 (Hogan) (explaining that “if the net asset value is 9.94 or 9.93, there are losses unrealized, perhaps realized, within the pools, and if we let clients out at $10 per share, that’s more than the pool is actually worth”); id. at 3665:10-13. 198.

In addition, Securities Lending decided that any significant redemptions of

shares in the Business Trust would be satisfied by in-kind distributions. TX12589 at 3. This policy was intended to “minimize the risk that remaining fund holders could be disproportionately and unfairly burdened with the less liquid investments” as a result of the actions of the exiting participants. TX42A at 1; see also Tr. 2513:2-6 (Smith). 199.

Securities Lending subsequently refined its redemption policy to account

for the differing amounts that participants had on loan: Participants with more than $100 million on loan would receive in-kind distributions; participants with less than $50 million on loan would receive cash for their shares (based on the market NAV); and those participants in-between would be addressed on a case-by-case basis. TX28063 at 1. All transactions processed on the same business day would be at the same NAV “to treat all unit holders equitably.” Id. In adopting this policy, Wells Fargo reasoned that larger client redemptions would deplete liquidity in the pool, while “smaller clients would have 55

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less impact on the liquidity and so they could exit by getting a cash distribution” at the floating NAV. Tr. 3162:20-24 (Hruska-Claeys); id. at 3163:17-22. 200.

In March of 2008, the Securities Lending team concluded that, with the

ongoing illiquidity in the market, “even the smaller clients cashing out of the pool would take away liquidity from all of the participants in the pool, so [they] changed the policy to have all parties exiting from the program taking their vertical slice or pro rata portion into a segregated account.” Id. at 3186:15-22. 201.

About the same time, the Securities Lending team began discussing

whether to carve out clients in the Business Trust into separate pools. Id. at 3183:5-10; TX873. In considering this option, the Securities Lending team had four goals in mind: “(1) Protect all clients, regardless of size, from each other within the pool (i.e., change in balances)[;] (2) Equitable allocation of all assets[;] (3) Wells Fargo fiduciary duty to perform in the best interest of ALL clients[; and] (4) Give clients options for the management of the portfolio, the asset piece size and the sec lending product.” TX873 at 1; see also Tr. 3186:23-3189:18 (Hruska-Claeys). 202.

The Securities Lending team recognized that there were benefits and

drawbacks to a full carve-out. Separate accounts would protect clients against changing balances, ensure that all clients were treated equitably, give clients more options to manage their portfolios, and provide a uniform process for all clients. TX873 at 2; see also Tr. 3188:19-3192:9 (Hruska-Claeys). At the same time, a full carve-out carried the risk that some clients would be allocated small piece sizes of securities, which could be more difficult to sell than large piece sizes. TX873 at 2. Upon weighing the risks and 56

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benefits of a full carve out, Securities Lending decided that clients would be better served by maintaining the Business Trust. 203.

The market turmoil in the wake of Lehman’s bankruptcy forced Securities

Lending to reconsider its decision. See TX12007 at 1. As the markets descended into the worst depths of the Great Recession, Wells Fargo was confronted with two unappealing options: (a) continue the Business Trust, which would leave participants vulnerable to changes in the pools caused by changing market conditions or the actions of other participants; or (b) disaggregate the Business Trust, which would leave each participant with a separate account. Tr. 3168:15-3169:6 (Hruska-Claeys). 204.

On September 19, 2008, less than a week after Lehman’s bankruptcy,

Securities Lending announced the disaggregation of the Business Trust in a letter to clients. TX12007 at 1. 205.

Disaggregation imposed substantial administrative burdens and financial

costs on Wells Fargo. Rather than managing 15 portfolios, Wells Fargo had to manage 115 separate portfolios, each with their own accounting, reporting, trading, and communications needs. Tr. 3166:19-22; id. at 3167:12-18; id. at 3167:19-3168:6. The Securities Lending team recognized that, in light of the severity of the financial crisis, disaggregation was the only feasible approach among a host of bad options. Id. at 2553:23-2558 (Smith); id. at 2555:17-22. III.

PROCEDURAL HISTORY 206.

Plaintiffs filed this lawsuit on September 1, 2011, asserting common law

and statutory claims arising out of their participation in the securities lending program. 57

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The six Non-ERISA Plaintiffs asserted common law claims of breach of fiduciary duty, breach of contract, fraud and negligent misrepresentation, as well as claims for violation of Minnesota consumer protection statutes. Third Am. Compl., Counts I(A), II-VII.11 207.

The factual allegations made by the ERISA and Non-ERISA Plaintiffs are

nearly identical. Compare Third Am. Compl., Count I(a) ¶¶ 264(a)-(q), with Count I(b) ¶¶ 265(a)-(q). In particular, the factual predicate supporting the ERISA fiduciary duty claim is virtually identical to the predicate offered in support of the non-ERISA Minnesota statutory claims, and the claims of breach of contract, fraud, and negligence. See, e.g., Third. Am. Compl., ¶ 302. 208.

For this reason, as Plaintiffs had urged before trial, the liability case on both

the ERISA and Non-ERISA claims was “heard by the Court and the jury at the same time and on the same evidence.” Bench Trial Opp. at 21. During a seven-week trial, the jury heard all of the Non-ERISA claims, receiving evidence and testimony from experts, Wells Fargo witnesses, and expert witnesses from both sides. During the same period, the Court simultaneously heard the same evidence that the jury received in connection with the ERISA claims. All of the Wells Fargo witnesses (Smith, Hruska-Claeys, Hogan,

11

The six Non-ERISA plaintiffs are CentraCare Health System, on Behalf of Itself and the Sisters of the Order of Saint Benedict Retirement Plan; El Paso; The Jerome Foundation; The Order of Saint Benedict, as the St. John’s University Endowment and the St. John’s Abbey Endowment; North Memorial; and Nebraska Methodist Health System, Inc., on Behalf of Itself, and as Administrator of the Nebraska Methodist Hospital Foundation, and the Nebraska Methodist Health System Retirement Account Plan. 58

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Adams, Sylvester, Grimes) who testified, and all of the parties’ expert witnesses who testified, testified during this joint bench and jury phase of the trial. 209.

In a day-and-a-half proceeding immediately following this phase of the

trial, the Court, outside the presence of the jury, heard testimony from representatives of five of the ERISA Plaintiffs. 210.

The ERISA Plaintiff representatives testified about their organizations,

their reasons for subscribing to the Business Trust, the representations that Wells Fargo made to them, Wells Fargo’s disclosures, their response to the losses in the program, and their organizations’ current involvement, if any, with the securities lending program. The substance of their testimony was the same as their Non-ERISA counterparts. 211.

For example, like the Non-ERISA Plaintiff representatives, the ERISA

Plaintiff representatives testified that they received and relied upon the same representations about the prime considerations of “safety of principal and daily liquidity requirements,” and that they believed the Business Trust portfolios presented equivalent risk to a money market fund: ERISA Plaintiff “I understood the risk to be very low, minimal or nil.” Tr. 6259:24 (Julien). “[We understood] [t]hat the risk was extremely negligible like a money market fund type risk.” Tr. 6469:20-24 (Rivkin)

“[T]he understanding was extremely low risk, extremely low return. And this was a vehicle, a service that was benchmarked to the Fed Funds rate.” Tr. 6178:9-11

Non-ERISA Plaintiff “We truly understood the risk to be tiny, miniscule.” Tr. 3881:22 (Gehrig). “We understood that we would be receiving a small amount of income, but because these were money market-type assets, we look at these assets as having virtually no risk.” Tr. 4088:16-19 (Patefield). “[I]t would be managed as a very safe short-term high grade portfolio similar to a money market fund. And to my knowledge there had only been one or two money 59

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(Orner).

“And then looking at a program that would generate income off that collateral, so the minimal risk, the minimal return, something like a money market fund, was discussed.” Tr. 6527:18-21 (Slocum). “Securities lending was as low risk, low term way to reduce some of the custodial fees and it was going to be invested in high-grade money market type instruments with the primary consideration being preservation of capital and liquidity.” Tr. 6647:18-25 (Viola). 212.

market funds that had ever broke the buck or lost principal, so that that risk on the investment loss would be very minimal.” Tr. 4513:7-12 (Johnson). “[T]he safety of principal and liquidity was derived from money market-type securities; so we relied heavily on this statement in entering into the program.” Tr. 4236:19-22 (Klemmer). “There was no risk. There was as much risk as this is in a money market account, and in the history of money market accounts, they’ve never lost money.” Tr. 4423:18-20 (Benusa).

In addition, the Non-ERISA and ERISA Plaintiff representatives gave

virtually identical accounts of Wells Fargo’s disclosures concerning the Business Trust portfolios: Both sets of representatives testified that the November 20, 2007 letter was their first notice of problems in the portfolios, and that, in deciding to remain in the program, they relied on Wells Fargo’s advice to hold the course. Compare Tr. 6194:126195:2 (Orner); id. at 6298:15-22 (Julien); id. at 6544:3-6545:11 (Slocum); id. at 6649:36651:8 (Viola) with Tr. 3914:9-16 (Gehrig); id. at 3915:3-10; id. at 4110:9-24 (Patefield); id. at 4260:3-12 (Klemmer); id. at 4429:7-4430 (Benusa); id. at 4435:14-4436:2; id. at 4532:16-4534:8 (Johnson); Jansky Trial Dep. 32:7-16.12

12

Tuckpointers’ representative testified that Tuckpointers’ investment consultant received copies of Wells Fargo’s monthly newsletters. Tr. 6473:1-7 (Rivkin). The consultant did not inform Tuckpointers of the issues disclosed in the November 20, 2007 newsletter until the Spring of 2008. Id. at 6476:4-10; id. at 6502:19-23; TX34386. Of (footnote continued) 60

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213.

Apart from testimony concerning their specific interactions with Wells

Fargo, the ERISA Plaintiffs did not present any evidence concerning Wells Fargo’s conduct that was not also heard and considered by the jury. IV.

CONCLUSIONS OF LAW A.

The ERISA Plaintiffs Are Bound By The Jury’s Determination That Wells Fargo Did Not Breach Its Fiduciary Duty

214.

Under Minnesota law, the ERISA Plaintiffs are bound by the jury’s

determination that Wells Fargo did not breach its fiduciary duty to the Non-ERISA Plaintiffs. 215.

Because this Court’s jurisdiction over the Non-ERISA Plaintiffs’

Minnesota law claims for breach of fiduciary duty was based on diversity, the preclusive effect of the jury’s verdict is determined under Minnesota law. See St. Paul Fire and Marine v. Compaq Computer Corp., 539 F.3d 809, 822 (8th Cir. 2008) (“Although the judgment in St. Paul’s recoupment action was rendered in the federal district court, we apply Minnesota law on the substantive question of res judicata because state law controls this issue in a diversity action”). 216.

Under Minnesota law, issue preclusion (often referred to as collateral

estoppel) applies “when the following elements have been satisfied: ‘(1) the issue was identical to one in a prior adjudication; (2) there was a final judgment on the merits; (3) the estopped party was a party or in privity with a party to the prior adjudication; and (4)

course, the knowledge of Tuckpointers’ consultant is imputable to Tuckpointers as a matter of agency law. Restatement (Second) of Agency § 268. 61

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the estopped party was given a full and fair opportunity to be heard on the adjudicated issue.’” Northwestern Nat. Life Ins. Co. v. County of Hennepin, 572 N.W.2d 51, 54 (Minn. 1997) (citation omitted). As set forth below, each of these elements is satisfied here. See ¶¶ 220-243, infra. 217.

However, on March 14, 2017, this Court found that Wells Fargo waived its

right to apply the preclusive effect of the non-ERISA jury verdict to the ERISA Plaintiffs’ claims. Dkt. No. 677.13 218.

This Court may raise and apply the doctrine of collateral estoppel sua

sponte even if there was a waiver. See Arizona v. California, 530 U.S. 392, 412 (2000) (observing that res judicata might be raised sua sponte in “special circumstances”); Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 231 (1995) (“[A]s many Federal Courts of Appeals have held, waivers of res judicata need not always be accepted—that trial courts may in appropriate cases raise the res judicata bar on their own motion.”); Krepps v. Reiner, 377 Fed. App’x 65, 67 (2d Cir. 2010) (holding a district court did not err in applying res judicata sua sponte even though the party had not asserted the defense and noting that “‘a court is free to raise [res judicata] sua sponte, even if the parties have seemingly waived it.’” (citation omitted)); Mowbray v. Cameron County, Texas, 274 F.3d 269, 281–82 (5th Cir. 2001) (upholding a district court's dismissal sua sponte on res judicata grounds); Indep. Sch. Dist. No. 283 v. S.D., 88 F.3d 556, 562 n.5 (8th Cir. 1996)

13

Wells Fargo maintains that there was no waiver of collateral estoppel. See, e.g., Dkt. Nos. 604, 609, 631, 661, and 684. 62

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(affirming dismissal of claims under principles of issue and claim preclusion even though preclusion was not pled and holding that “[p]reclusion may be raised by the court because ‘benefits of precluding relitigation of issues finally decided run not only to the litigants, but also to the judicial system.’” (citation omitted)). 219.

This Court raises and applies the doctrine of collateral estoppel sua sponte

and finds that the ERISA Plaintiffs are bound by the non-ERISA jury’s determination that Wells Fargo did not breach its fiduciary duties. Sua sponte application of the doctrine of collateral estoppel is necessary to preserve the integrity of the judicial process by ensuring that the judgment here is consistent with the jury’s determination of factual issues common to both the non-ERISA and ERISA claims, thereby avoiding conflicting decisions on the same operative facts. 1.

220.

The Factual And Legal Issues That Undergird The ERISA Plaintiffs’ Claims Are Identical To The Issues Decided By The Jury In Resolving the Common Law Fiduciary Duty Claims

The first prerequisite to the application of collateral estoppel under

Minnesota law involves a showing that the factual and legal issues involved in the two proceedings are the same. Northwestern, 572 N.W.2d at 54. This requirement is satisfied here. Plaintiffs proposed prior to trial that “the liability case for ERISA and Non-ERISA Plaintiffs can be heard by the Court and the jury at the same time and on the same evidence.” Bench Trial Opp. at 21 (emphasis added). Plaintiffs explained that this approach was appropriate because “[e]xperts for both Plaintiffs and Wells Fargo agree that Wells Fargo’s fiduciary duties are virtually identical for both ERISA and non-ERISA plaintiffs, for purposes of this case.” Id. This Court adopted Plaintiffs’ proposal. Mem. 63

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Op. and Order, June 4, 2003 (Dkt. No. 475) at 6. As a consequence, the entire presentation of evidence by Plaintiffs’ counsel at trial was on behalf of the Non-ERISA Plaintiffs and the ERISA Plaintiffs. 221.

The ERISA Plaintiffs did not introduce any new substantive evidence on

the question of Wells Fargo’s alleged breach of fiduciary duty in their “bench-trial-only” presentation. Plaintiffs’ counsel stated during that presentation that they understood that any evidence that was common to the Non-ERISA and ERISA claims could only be presented during the jury trial portion. Tr. 6414:19-6416:2. Plaintiffs’ “bench-trial-only” presentation of evidence was limited to testimony regarding such topics as the amount of each plaintiff’s damages claim and the nature of their reliance on the same representations that had been described during the jury trial. See, e.g., Tr. 6243-6323 (Julien). 222.

In addition, the parties agree that the essential legal elements of a breach of

fiduciary duty claim under ERISA are identical to the essential elements that a common law plaintiff must prove. Bench Trial Opp. at 21. The first element of the issue preclusion test, identicality of factual and legal issues, is thus satisfied here. 2. 223.

The Jury’s Verdict Has Sufficient Finality to Support Issue Preclusion

The second prerequisite of issue preclusion under Minnesota law is a

showing that the prior ruling is “final.” Northwestern, 572 N.W.2d at 54. Although the traditional test for issue preclusion refers to a “final judgment,” id., the courts have made

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clear that jury verdicts and preliminary rulings, even though not yet incorporated into a Final Judgment for purposes of appeal, are sufficiently final to support issue preclusion. 224.

Judge Tunheim addressed this issue in Erickson v. Horing, No. 99-1468,

2001 WL 1640142, at *9 (D. Minn. Sept. 21, 2001), where he held that a state court’s entry of partial summary judgment was sufficiently firm to be accorded preclusive effect under Minnesota law even though the ruling was not yet appealable and did not dispose of the entire case. The court relied in part upon Section 13 of the Restatement (Second) of Judgments, which provides that “for purposes of issue preclusion, ‘final judgment’ includes any prior adjudication of an issue in another action that is determined to be sufficiently firm to be accorded conclusive effect.” Id. at *9.14 225.

The Eighth Circuit’s decision in John Morrell v. Local Union 304A of

United Food and Commercial Workers, AFL-CIO, 913 F.2d 544 (8th Cir. 1990), although based on federal law, is also instructive. There, a manufacturer sued several unions in federal district court for violating a “no-strike” clause in their collective bargaining agreements. After a jury determined that the strikes in question violated the agreements, but before final judgment was entered, an arbitrator in a separate grievance

14

As an example of this principle, the Restatement points approvingly to the preclusive effect of a liability finding in a bifurcated trial, where no final judgment has been rendered because remedies have not yet been addressed. Rest. (Second) of Judgments § 13, comment g, illustration 3. The Minnesota courts regularly rely on the Restatement of Judgments in resolving issue preclusion disputes. See, e.g., Margo-Kraft Distributors, Inc. v. Minneapolis Gas Co., 200 N.W.2d 45, 47-49 (Minn. 1972) (hereinafter “MargoKraft”); State ex rel. Friends of the Riverfront v. City of Minneapolis, 751 N.W.2d 586, 589-90 (Minn. App. 2008) (hereinafter “Friends of the Riverfront”). 65

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action ruled that the strikes did not violate the “no-strike” clause. Id. at 548-49. The federal district court then granted the manufacturer’s motion to vacate the arbitration award, in part on the ground that the jury verdict had preclusive effect even though the court had not yet entered a final judgment in the pending matter. Id. at 549-50. 226.

On appeal, the unions contended that issue preclusion was inappropriate

“because the arbitration award was issued before the district court entered a final judgment in the case.” Id. at 562. The Eighth Circuit rejected that argument: [w]e reject the Unions’ argument that the verdict cannot have preclusive effect because the jury’s liability verdict was not immediately appealable since the damages phase of the trial had not concluded. See 28 U.S.C. § 1291 (1988). While this circuit has not squarely confronted this issue, we believe that finality for purpose of appeal under section 1291 is not necessarily the finality that is required for issue preclusion purposes. The availability of judicial review is merely one factor to consider in determining whether issue preclusion applies. See Restatement (Second) of Judgments § 13 comment g (1982). As Judge Friendly has explained, ‘“[f]inality” in the context [of issue preclusion] may mean little more than that the litigation of a particular issue has reached such a stage that a court sees no really good reason for permitting it to be litigated again.’ Lummus Co. v. Commonwealth Oil Refining Co., 297 F.2d 80, 89 (2d Cir. 1961). .

.

.

Authoritative commentaries also provide support for our conclusion. See Restatement (Second) of Judgments § 13 comment g & illustration 3 (providing an illustration where a liability finding in a bifurcated trial would have a preclusive effect before the damages phase of the trial was completed); 18 C. Wright, A. Miller & E. Cooper, supra § 4434, at 321 (stating that ‘[r]ecent decisions have relaxed traditional views of the finality requirement by applying issue preclusion to 66

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matters resolved by preliminary rulings or to determinations of liability that have not yet been completed by an award of damages or other relief’). In sum, we are satisfied that the jury’s verdict that the nostrike clause prohibited sympathy strikes was sufficiently final to bind the arbitrator here. Both parties presented abundant evidence on the issue at trial, and both had strong incentives to litigate the issue fully. Furthermore, the jury’s verdict addressed the exact issue which the arbitrator chose to reconsider. Accordingly, we see ‘no really good reason for permitting it to be litigated again.’ Lummus, 297 F.2d at 89. Id. at 563-64 (footnotes and some citations omitted). 227.

These circumstances are found here. The parties here “presented abundant

evidence on the [breach of fiduciary duty] issue at trial, and both had strong incentives to litigate the issue fully.” Id. at 564. And, as in John Morrell, “the jury’s verdict addressed the exact issue,” Wells Fargo’s alleged breach of fiduciary duty, that the ERISA plaintiffs now present to this Court. Id. 228.

As noted above, the courts in this District have applied the Eighth Circuit’s

reasoning in John Morrell in resolving issue preclusion issues arising under Minnesota law. See Erickson, 2001 WL 1640142, at *9; Ossman v. Diana Corp., 825 F. Supp. 870, 875 (D. Minn. 1993). This Court does the same and holds that the jury’s verdict on the breach of fiduciary duty claim is sufficiently final to bind the ERISA Plaintiffs on the question of breach of fiduciary duty. 3. 229.

The Privity Requirement is Clearly Established Here

The third prerequisite under Minnesota law for the application of issue

preclusion is a showing that the party to be estopped “was a party or in privity with a

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party to the prior adjudication.” Northwestern, 572 N.W.2d at 54. The record in this case shows that the ERISA Plaintiffs are in privity with the Non-ERISA Plaintiffs for purposes of issue preclusion. 230.

The Minnesota courts have long applied a concept of “practical privity” to

the question of issue preclusion. In Margo-Kraft, 200 N.W.2d at 47, for example, the Minnesota Supreme Court addressed the question of whether a third-party defendant in a prior negligence action that did not file a counterclaim against the other defendants should nevertheless be estopped by a judgment against the plaintiff. In the first action, a building owner had sued several contractors who were working on the building’s heating system when the building burned down. The contractors then asserted a third-party indemnity claim against the building tenant on the ground that the tenant had caused the fire. Id. at 46. The jury returned a verdict that absolved the contractors of liability, but did not address the role of the tenant. Id. The tenant then brought a separate negligence action against the contractors on the same theory of liability that had been (unsuccessfully) advanced by the building owner. Id. 231.

The trial court dismissed the tenant’s action on issue preclusion grounds,

and the Supreme Court affirmed. The court noted that the tenant was not collaterally estopped as a party to the first action, because its “rights and liabilities were not expressly put in issue in the first action. . . .” Id. at 47. But the court went on to hold that the tenant “was in such practical privity with the [building owner] in the first action as to be collaterally estopped by the jury’s adverse determination on the issue of [the contractors’] alleged negligence.” Id. The court based its conclusion on the “mutuality of interest” 68

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between the building owner and the tenant in the first action, finding that the tenant’s “active participation, if not a shared control” in the prosecution of the action meant that the tenant was “no stranger to the first action” and should be collaterally estopped by the jury’s verdict. Id. at 48. The court also noted that because of the identity of the evidence and legal issues involved in the two actions, the tenant would likely have been able to take advantage of a verdict against the contractors, and the court found it appropriate to bind the tenant in that circumstance. Id. at 49. The court reasoned: [the tenant] anticipated that a result favorable to the owners would inure to the benefit of its own claims against the same defendants. It had, in all these circumstances . . . the real incentive and full opportunity to have defendants’ negligence determined, and the sole basis for its own claim – that the explosion and fire resulted from the negligence of these defendants in the installation and service of gas to a particular unit heater – was determined. As the trial court observed, it gambled and lost. We are persuaded that one who individually or in cooperation with others so controls an action in advancing his own interests has had his day in court and, in justice, should be bound by the adjudication. Id. (footnote and citations omitted). 232.

The Supreme Court’s reasoning in Margo-Kraft is fully applicable here.

The ERISA Plaintiffs joined with the Non-ERISA Plaintiffs to retain counsel, and they presented their evidence of Wells Fargo’s breach of fiduciary duty in the same way with the expectation that a favorable result would further the interests of all of them. In these circumstances, the ERISA Plaintiffs are bound by the jury’s verdict on the Non-ERISA Plaintiffs’ claims because the ERISA Plaintiffs had “the real incentive and full

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opportunity,” “in cooperation with others,” to accomplish their “common objective” of proving that Wells Fargo had breached its fiduciary duty. Id. 233.

The Court of Appeals’ decision in Reil v. Benjamin, 584 N.W.2d 442, 445

(Minn. App. 1998), is equally instructive. In that case, Reil sued Benjamin for negligence in causing an automobile accident in which he had been injured. At the time the complaint was filed, there existed a pending subrogation and indemnification claim against Benjamin brought by the insurer for Reil’s employer. Id. Although all three parties stipulated that the two cases involved “virtually identical” claims and evidence and should be consolidated, Reil ultimately chose to pursue a separate action against Benjamin. Id. 234.

The jury in the first action, brought by the insurer against Benjamin, found

that Benjamin was not negligent in the operation of her vehicle. Id. Benjamin then moved for summary judgment in Reil’s case on collateral estoppel grounds. 235.

The trial court granted the motion, and the Court of Appeals affirmed. The

court first observed that under Minnesota law: [p]rivity does not follow one specific definition, but rather expresses the idea that a judgment should also determine the interests of certain non-parties closely connected with the litigation. In general, privity requires that the estopped party’s interests have been sufficiently represented in the first action so that the application of collateral estoppel is not inequitable. Id. at 445 (citation omitted). 236.

The court then held that this requirement had been established. The

principal factors that the court relied upon in finding privity are also present here. For 70

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example, the ERISA Plaintiffs were “aware of the prior trial and . . . recognized and stipulated to the fact that the legal issues, witnesses, and evidence in both cases were virtually identical.” Id. Moreover, the ERISA Plaintiffs and the Non-ERISA Plaintiffs “were operating under the same legal theory,” breach of fiduciary duty, “on which issue the jury made a determination.” Id. In sum, because the ERISA Plaintiffs’ “objectives regarding [Wells Fargo’s] liability were identical to” the objectives of the Non-ERISA Plaintiffs, and because they “make no claim that [they were] not adequately represented at the trial,” they should be barred from pursuing this action. Id. at 446. 237.

In a similar case, Friends of the Riverfront, 751 N.W.2d at 589-92, the

court held that the plaintiffs were estopped by a prior city council proceeding from challenging the city council’s approval of a new high school athletic field. Several of the plaintiffs had not intervened in the city council proceeding, and they contended that the privity requirement therefore had not been established. Id. The Court of Appeals rejected that argument for two reasons: (1) although the plaintiffs in question had not been a party to the city council proceeding, they had participated in a subsequent certiorari proceeding in the Court of Appeals; and (2) all of the parties “had an indistinguishable – not merely similar – interest in the city-council proceeding.” Id. at 592. 238.

Both of these factors are present here. The ERISA Plaintiffs actively

participated in the overlapping bench-and-jury-trial phase by calling Wells Fargo witnesses, presenting expert testimony, and cross-examining the witnesses that Wells Fargo called. Likewise, the interests of the ERISA Plaintiffs and Non-ERISA Plaintiffs 71

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in proving that Wells Fargo had breached a fiduciary duty are “indistinguishable – not merely similar.” Id. In these circumstances, as in Friends of the Riverfront, the “participation and interest” of the ERISA Plaintiffs means that they “can be equitably barred from bringing a subsequent . . . claim and relitigating the issues raised in the [jury] proceeding.” Id. 239.

The Minnesota Supreme Court has recently confirmed that the practical

approach to privity adopted in Margo-Kraft, Reil and Friends of the Riverfront is still the law. In Rucker v. Schmidt, 794 N.W.2d 114, 118 (Minn. 2011), the court quoted at length from Margo-Kraft and held that the fundamental question on the privity issue is whether the interests of the party to be estopped are “so identified” with the interests represented by a party in the first action “that they represent the same legal right.” Id. While the Rucker court was careful to point out that “something more” than a common objective is required, it held that the requisite “something more” would include a showing of “a mutuality of legal interest in the outcome of the [first] action.” Id. at 119. See also Margo-Kraft, 200 N.W.2d at 48 (finding privity because of the “mutuality of interest” between the original plaintiff and the third-party defendant in the first action). 240.

The requisite “mutuality of interest” is present here. The ERISA Plaintiffs

and the Non-ERISA Plaintiffs together sought and obtained an order from this Court that “the liability case for ERISA and Non-ERISA Plaintiffs can be heard by the court and the jury at the same time and on the same evidence.” Bench Trial Opp. at 21. The ERISA Plaintiffs thus aligned their presentation of evidence regarding Wells Fargo’s purported breach of fiduciary duty, with that of the Non-ERISA Plaintiffs. As a result, the Court 72

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holds that the ERISA Plaintiffs are in privity with the Non-ERISA Plaintiffs and are bound by the jury’s verdict that the evidence did not show that Wells Fargo had breached its fiduciary duty. 4. 241.

The ERISA Plaintiffs Had a Full and Fair Opportunity to Litigate the Breach of Fiduciary Duty Issue

The fourth and final factor in the collateral estoppel analysis is whether the

ERISA Plaintiffs, in cooperation with the Non-ERISA Plaintiffs, had a “full and fair opportunity to be heard on the adjudicated issue.” Northwestern, 572 N.W.2d at 54. In resolving this question, “Minnesota courts focus on two factors. First, we ask whether the [proceeding] provided sufficient procedural safeguards. Second, we ask whether the tribunal or administrative agency was impermissibly biased.” Friends of the Riverfront, 751 N.W.2d at 590 (citations omitted). 242.

These factors are not in dispute here. No substantial evidentiary or other

roadblocks prevented the Plaintiffs from fully presenting their claims to the jury. The trial lasted almost two months, the trial transcript exceeded 6,000 pages, and more than 1000 exhibits were admitted. Moreover, the jurors who resolved the case were attentive, respectful and “a wonderful jury for a whole host of reasons.” Tr. at 6054 (Plaintiffs’ closing argument). In short, this fourth and final prerequisite of issue preclusion is fully satisfied. 5. 243.

Conclusion

Some courts have suggested that even if all four requirements for the

application of issue preclusion are shown, a trial court may nevertheless decline to apply

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that doctrine if it would work “an injustice.” See, e.g., Ossman, 825 F. Supp. at 879 (considering and rejecting the argument). The parties have cited no Minnesota decision where a court refused to apply collateral estoppel for that reason despite finding that all four prerequisites had been satisfied, and the Supreme Court in its recent decision in Rucker declined to rule on whether such an “escape hatch” exists under Minnesota law. Rucker, 794 N.W.2d at 121. Even assuming that Minnesota law would support such an approach, the Court declines to utilize it here. As in John Morrell, the parties “presented abundant evidence on the issue at trial, and both had strong incentives to litigate the issue fully.” John Morrell, 913 F.2d at 564. And, as in Margo-Kraft, the ERISA Plaintiffs “anticipated that a result favorable to the [Non-ERISA plaintiffs] would inure to the benefit of [their] own claims against the same defendants.” Margo-Kraft, 200 N.W.2d at 49. To accomplish that goal, they closely aligned their evidentiary presentation with that of the Non-ERISA Plaintiffs and presented that evidence at the same time and in the same manner. Bench Trial Opp. at 21. As a result, it works no injustice to hold that the ERISA Plaintiffs are bound by the jury’s verdict. See Margo-Kraft, 200 N.W.2d at 49. B.

Plaintiffs Failed to Prove a Breach of Fiduciary Duty

244.

Even if the ERISA Plaintiffs were not bound by the jury’s verdict, the

Court would still conclude that they did not meet their burden of proving a breach of fiduciary duty. 245.

To establish a breach of fiduciary duty under ERISA, it was Plaintiffs’

burden to prove that (1) Wells Fargo was a fiduciary of an ERISA plan (i.e., that it was acting in a fiduciary capacity to such a plan); (2) Wells Fargo breached a fiduciary duty 74

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while acting in a fiduciary capacity; and (3) Wells Fargo’s breach caused losses to the plan. See Braden v. Wal-Mart Stores, 588 F.3d 585, 594-95 (8th Cir. 2009); In re Xcel Energy, Inc. Sec. Deriv. & ERISA Litig., 312 F. Supp. 2d 1165, 1174 (D. Minn. 2004). 246.

Here, there is no dispute that Plaintiffs are ERISA plans. The Court

concludes that Wells Fargo was acting in a fiduciary capacity under ERISA in its role as custodian of Plaintiffs’ securities and with respect to its investment of Plaintiffs’ cash collateral and related advice. See, e.g., Xcel, 312 F. Supp. 2d at 1175. 247.

As explained below, Plaintiffs failed to prove the remaining elements of

their ERISA claims. 1. 248.

Plaintiffs Failed to Prove a Breach of the Duty of Prudence

Under ERISA, Wells Fargo had a duty to use 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 like character and with like aims.” 29 U.S.C. §1104(a)(1)(B). This is “an objective standard that focuses on the fiduciary’s conduct preceding the challenged decision.” Roth v. Sawyer-Cleator Lumber Co., 16 F.3d 915, 917-18 (8th Cir. 1994) (internal citations omitted). “In evaluating whether a fiduciary has acted prudently, we therefore focus on the process by which it makes its decisions rather than the results of those decisions.” Braden, 588 F.3d at 594-95. 249.

Here, the “process by which” Wells Fargo made its investment decisions

was reasonable. The evidence at trial established:

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

Every investment at issue complied with the investment guidelines at the time of purchase. See FOF ¶¶ 30-38, 105-111, 165-169.



Securities Lending’s investments on behalf of the Business Trust portfolios were more conservative than required by the investment guidelines. See FOF ¶¶ 61, 79.



WCM’s credit group performed substantial due diligence on the issuers they placed on the Approved List and did not rely exclusively on rating agency ratings. See FOF ¶¶57-63, 67-70, 115, 142.



In making investment decisions, Wells Fargo gave “appropriate consideration to whether an investment [was] reasonably designed, as part of the portfolio . . . to further the purpose of the [portfolio], taking into consideration the risk of loss and opportunity for gain (or other return) associated with the investment.” Pension Benefit Guarantee Corp. v. Morgan Stanley Investment, 712 F.3d 705, 716 (2d Cir. 2013) (quoting 29 C.F.R. § 2550.40a-1(b)(2)(i)). See FOF ¶ 72.



After purchasing a security for the Business Trust portfolio, Wells Fargo continued to monitor the security. See FOF ¶¶ 116, 143, 153-155.



Securities Lending took steps to reduce risk in the Business Trust portfolios throughout 2007. See FOF ¶¶ 75-82.

250.

Although the Business Trust portfolios did incur losses in the 2007-2008

financial crisis, this fact alone cannot support a finding that Wells Fargo breached its duty of prudence. See, e.g., DeBruyne v. Equitable Life Assur. Soc. of U.S., 920 F.2d 457, 465 (7th Cir. 1990) (“We cannot say that Equitable was imprudent merely because the Balanced Fund lost money; such a pronouncement would convert the Balanced Fund into an account with a guaranteed return and would immunize plaintiffs from assuming any of the risk of loss associated with their investment.”). 251.

Plaintiffs argued that Wells Fargo should have constructed the portfolios to

withstand the financial crisis without losses. But the severity and timing of the 20072008 financial crisis was not reasonably foreseeable to Wells Fargo. For example, one of 76

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Geczy’s colleagues at the University of Pennsylvania’s Wharton School, observed that few experts in the field anticipated that the housing downturn in early 2007 would lead to a global financial crisis: Although some prescient analyst forecast that the housing bubble in the United States, which triggered the crisis, eventually would burst, we suspect that few foresaw the crisis bringing the United States and other global economies nearly to their knees. Certainly, no mainstream forecaster or highprofile policy maker predicted this outcome. Tr. 849:17-850:3 (emphasis added). 252.

There is also no doubt that the financial crisis was the most severe since the

Great Depression. Professor Geczy testified that during the financial crisis, the Dow Jones Industrial Average dropped by approximately 58 percent and the S&P Index by 50 percent. Tr. 707:4-14 (Geczy). Wells Fargo’s expert, Professor John Peavy, testified that liquidity in the financial market began declining precipitously in August of 2007. Id. at 5402:23-15 (Peavy). After Lehman’s bankruptcy, liquidity plunged further and, by some measures, fell to its lowest levels ever recorded. Id.; see TX29572 (demonstrative). 253.

Against this backdrop, the Business Trust’s losses were comparatively

modest. Although there was some dispute over the exact percentage of Plaintiffs’ losses, Professor Geczy testified that, on average, the Business Trust portfolios had investment losses of approximately three percent. Tr. 708:2-19 (Geczy). 254.

Having weighed this evidence and considered Wells Fargo’s actions in light

of the information that was available to Wells Fargo at the time, the Court concludes that Wells Fargo satisfied its duty of care.

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255.

Plaintiffs’ arguments to the contrary are ultimately unpersuasive.

256.

First, Plaintiffs contend that Wells Fargo breached its duty of care by

investing and holding securities issued by SIVs. Pltfs. Mem. of Law in Supp. of Opp. to Wells Fargo Mot. for Partial Summary Judgment (“MSJ Opp.”) at 34. The evidence shows, however, that until the liquidity crisis of 2007, senior notes issued by SIVs were viewed as safe and liquid money-market instruments. See FOF ¶¶ 89-91. Plaintiffs did not prove that, based on the information that was available to Wells Fargo at the time, Wells Fargo should have foreseen that the SIV model, which had been successful for nearly twenty years to that point, would soon break down. Id. Because this Court must evaluate Wells Fargo’s conduct without the benefit of hindsight, it cannot find that Wells Fargo breached its fiduciary duty of care by investing in SIV securities. See Roth, 16 F.3d at 918 (“[T]he prudent person standard is not concerned with results; rather, it is a test of how the fiduciary acted viewed from the perspective of the ‘time of the [challenged] decision’ rather than from the ‘vantage point’ of hindsight.”) 257.

Second, Plaintiffs contend that Wells Fargo failed to diversify the portfolio

because, at certain points, approximately 30% of the CI Term Trust’s portfolio was invested in SIV securities. MSJ Opp. at 33. However, the investment guidelines for the CI Term Trust set forth diversification criteria for the portfolio. FOF ¶ 36. As discussed below, Wells Fargo complied with those criteria. See ¶¶ 271-74, infra. 258.

In addition, ERISA requires a fiduciary to diversify a plan’s investments

“so as to minimize the risk of large losses, unless under the circumstances it is clearly

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prudent not to do so.” 29 U.S.C. § 1104(a)(1)(C).15 Neither ERISA nor its implementing regulations specify what constitutes appropriate diversification of plan assets. See, e.g., Metzler v. Graham, 112 F.3d 207, 209 (5th Cir. 1997). According to ERISA’s legislative history, “[t]he degree of investment concentration that would violate this requirement to diversify cannot be stated as a fixed percentage, because a fiduciary must consider the facts and circumstances of each case.” Id. (citing H.R. Rep. No. 1280, 93d Cong., 2d Sess. (1974), reprinted in 1974 U.S. Code Cong. & Admin. News 5038, 5084-85 (Conference report at 304)). The legislative history lists non-exhaustive factors that may be relevant to whether a plan is diversified. Id. 259.

As the Fifth Circuit has recognized, this “open-ended ‘facts and

circumstances’ list ought to caution against judicial review of investment decisions.” Id. A court should not “evaluate diversification solely in hindsight—plan fiduciaries can make honest mistakes that do not detract from a conclusion that their decisions were prudent at the time the investment was made.” Id. Thus “to establish a violation, a plaintiff must demonstrate that the portfolio is not diversified ‘on its face.’” Id. (internal citations omitted). 260.

Plaintiffs did not make this showing. Under the investment guidelines, the

CI Term Trust could invest no more than 5% of its assets in a single issuer. TX33179 at 2. Thus, even if the CI Term Trust invested 30% of its assets in SIV securities, it never 15

While the duty to diversify is technically a separate duty from the duty of prudence, the duties are related, and the Court therefore analyzes whether Wells Fargo discharged its duty to diversify in the context of its duty-of-prudence analysis. 79

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had more than 5% exposure to a single SIV. Cf. Marshall v. Glass/Metal Ass’n & Glaziers & Glassworkers Pension Plan, 507 F. Supp. 378, 384 (D. Haw. 1980) (concluding that a plan was not diversified where 23% of the plan’s total assets were committed to a single loan). 261.

Plaintiffs did not prove that a 30% exposure to the SIV sector, where no

SIV comprised more than 5% of the portfolio, rendered the CI Term Trust’s portfolio non-diversified. As noted, SIV securities were viewed before the financial crisis as among the safest and most liquid investments available. While Wells Fargo reasonably could anticipate that some SIVs (like any issuer) could default, the evidence did not support a finding that Wells Fargo could anticipate that the entire SIV industry would be wiped out by a liquidity crisis in the fall of 2007. 262.

In assessing Wells Fargo’s duty to diversify, moreover, it is inappropriate

to focus on the SIV concentration in the CI Term Trust alone. All of the Plaintiffs who invested in the CI Term Trust also invested in the EY Fund. Whether Wells Fargo diversified these Plaintiffs’ assets therefore must be evaluated in light of the combined EY Fund and CI Term Trust portfolios’ exposure to SIVs. See, e.g., Sandoval v. Simmons, 622 F. Supp. 1174, 1211 (C.D. Ill. 1985) (“ERISA measures diversification by considering the assets of the trust as a whole, not by the assets of particular funds.”). That exposure was about 12% as of November 2007. FOF ¶ 94. Plaintiffs did not introduce evidence that the combined EY Fund and CI Term portfolios were undiversified. See, e.g., Pension Ben. Guar. Corp. ex rel. St. Vincent Catholic Med. Centers Ret. Plan v. Morgan Stanley Inv. Mgmt. Inc., 712 F.3d 705, 724 (2d Cir. 2013) 80

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(holding that complaint’s allegation that 12.6% of portfolio was concentrated in nonagency mortgage-backed securities failed to raise a plausible inference that the defendant breached its duty to diversify). 263.

Third, Plaintiffs argue that Securities Lending’s lack of prudence is

established by the fact that the Wells Fargo money market funds eliminated their exposure to Cheyne and Lehman before those issuers defaulted. MSJ Opp. at 13, 15. This evidence only shows that the money market funds made a different judgment than Securities Lending. The fact that, in hindsight, WCM’s decision produced a better result does not demonstrate that Securities Lending’s judgment was imprudent. As discussed above, the prudent person standard under ERISA focuses on the process by which a fiduciary reaches a decision, not the results of that decision. Braden, 588 F.3d at 495. 264.

Finally, Plaintiffs argue that Wells Fargo breached its duty of prudence by

retaining securities after the issuer of the security was removed from the Approved List. But removal of an issuer did not necessarily imply that an issuer was a default risk. Of the 25 issuers that WCM removed from the Approved List in September 2007, only two defaulted. Tr. 3266:14-24 (Hruska-Claeys). Nor did removal mandate that portfolio managers liquidate their existing holdings of that issuer. As Grimes stated when he removed Cheyne from the Approved List, “I don’t want the positions added to, but you are not required to sell at this time.” TX410. 265.

When an issuer was removed from the Approved List, ERISA required

Wells Fargo to make an informed judgment as to whether it was prudent to continue holdings securities from that issuer. The evidence shows that Securities Lending did just 81

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that. FOF ¶¶ 65-66. While Plaintiffs now argue that Wells Fargo should have made different decisions, “[s]o long as the prudent person standard has been met, ERISA does not require that a particular course of action—and no other—be followed.” Bd. of Trustees of Operating Engineers Pension Trust v. JPMorgan Chase Bank, Nat. Ass’n, 09CIV-9333 KBF, 2013 WL 1234818, at *7 (S.D.N.Y. Mar. 27, 2013). “What the appropriate methods are depends on the character and aims of the particular plan—as well as the circumstances prevailing at the time.” Id. Securities Lending’s procedures for determining whether to sell or hold a security that had been removed from the Approved List satisfied this standard of care. 266.

Accordingly, Plaintiffs have failed to prove that Wells Fargo breached its

duty of prudence under ERISA. 2. 267.

Plaintiffs Failed to Prove a Violation of the Investment Guidelines

Under § 404(a)(1)(D) of ERISA, fiduciaries have a duty to comply “with

the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [ERISA].” 11 U.S.C. § 1104(a)(1)(D). While Plaintiffs did not specifically plead a violation § 404(a)(1)(D), they have alleged that Wells Fargo violated the investment guidelines, MSJ Opp. at 10-12, which arguably constitute plan documents within the meaning of that provision. Consequently, the Court will address Wells Fargo’s compliance with the investment guidelines. 268.

To the extent the parties offer competing interpretations of the investment

guidelines, Well Fargo’s interpretations are entitled to deference. Where “the trust 82

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documents give the trustee ‘power to construe disputed or doubtful terms, . . . the trustee’s interpretation will not be disturbed if reasonable.’” Conkright v. Frommert, 559 U.S. 506, 512 (2010) (quoting Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 111 (1989)). See also Tibble v. Edison Int’l, 639 F. Supp. 2d 1074, 1097-98 (C.D. Cal. 2009) (“[W]hen a plan explicitly grants a fiduciary the authority to interpret the language of the plan, the fiduciary’s interpretation is entitled to deference.”), vacated and remanded on other grounds by, 843 F.3d 1187 (9th Cir. 2016); id. at 1098 (“[I]n order to be liable for a violation under § 1104(a)(1)(D), the plan document must put a reasonable fiduciary on notice that the conduct in question is prohibited.”). Section 3.1 of the Declaration of Trust confers on the trustee (i.e., Wells Fargo) “full, exclusive and complete power and discretion . . . to definitively interpret the investment objectives, policies and limitations of the Trust . . . .” TX37, Declaration of Trust, § 3.1(s). The Court therefore will uphold Wells Fargo’s interpretation of the guidelines if those interpretations are reasonable. Green v. UPS Health & Welfare Package for Ret. Emps., 746 F. Supp. 2d 921, 927 (N.D. Ill. 2009). 269.

Plaintiffs first allege that Wells Fargo violated the “Issue Selection” criteria

by investing in SIV securities. MSJ Opp. at 33. Wells Fargo witnesses, however, testified that they considered senior notes issued by SIVs as types of “corporate notes, bonds, and debentures” and “[d]ebt obligations[,]” which are authorized by the guidelines. FOF ¶ 108. 270.

Plaintiffs do not dispute that SIV securities fall within the literal definitions

of “corporate notes” and “debt obligations.” Rather, they contend that, because SIV 83

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securities were “uniquely risky,” SIVs “should have been specifically listed” in the investment guidelines. MSJ Opp. at 11. Before the financial crisis, however, SIV securities were not perceived as “uniquely risky” but instead were considered as among the safest and most conservative investments available. It was therefore reasonable for Wells Fargo to conclude that (assuming the other criteria were satisfied) SIV securities were consistent with the investment guidelines. 271.

Second, Plaintiffs allege that Wells Fargo violated the diversification

constraint in the CI Term Trust, because the portfolio held more than 25% of its assets in SIV securities at certain points. MSJ Opp. at 33. Wells Fargo witnesses, however, testified that SIVs were part of the “financial services or banking industry,” which was not subject to the 25% diversification limit in the guidelines. FOF ¶ 111. 272.

In disputing this interpretation, Plaintiffs point to certain internal Wells

Fargo documents that they contend show that Securities Lending personnel considered SIVs to be a “sector” that was distinct from the financial services or banking industry. TX197 at 4. 273.

However, while Securities Lending personnel referred to SIVs as a “sector”

in certain internal documents, the context makes clear that they were not using “sector” as that word is used in the investment guidelines. In the same document cited above, for example, a Securities Lending employee referred to corporate notes as a “sector.” Id. Yet, all corporations obviously are not part of the same “industry”: corporate notes issued by General Motors would fall within the auto industry, for instance, while notes issued by Microsoft would fall within the software industry. 84

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274.

Further, the terms “sector” and “industry” are not mutually exclusive. As

Plaintiffs’ own expert agreed, for example, Exxon is a corporation that falls within both the oil industry and energy sector. Tr. 948:1-17 (Geczy). There is no logical reason why SIVs could not similarly be considered a sector and a part of the financial services or banking industry. 275.

Third, Plaintiffs failed to prove Wells Fargo violated the investment

guidelines’ liquidity constraint by continuing to hold securities (such as SIVs and ABS) after the market for those securities became illiquid. MSJ Opp. at 35-36. As an initial matter, the investment guidelines expressly provide that compliance will be determined at the “time of purchase.” FOF ¶ 39. There is no evidence that the Business Trust’s purchase of a security caused more than 15% of the Business Trust portfolios to be invested in illiquid instruments. 276.

At trial, Plaintiffs argued that it would violate the investment guidelines to

hold more than 15% of the portfolio in illiquid securities, even if those securities were liquid at the time of purchase and had only become illiquid due to market conditions outside Wells Fargo’s control. As support for this theory, Plaintiffs cited a December 1, 2004 email to Bob Smith stating that, with respect to certain 3(c)(7) business trusts, “each Fund may not invest or hold more than 15% of the Fund’s net assets in illiquid securities.” TX179 at 2 (emphasis in original). But as Smith explained, this email concerned a business trust at a different bank, not the securities lending program’s Business Trust. Tr. 2249:9-2250:13 (Smith); id. at 2702:4-12. Indeed, this email could not have pertained to the Business Trust portfolios: the EY Fund was a 3(c)(1) fund, not 85

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a 3(c)(7) fund, and the CI Term Trust did not even exist until 2006, two years after Smith received this email. TX31220 at 10; Tr. 2791:16-25 (Smith). 277.

In addition, Plaintiffs’ argument is not supported by the plain terms of the

investment guidelines. While the market for many of the securities in the Business Trust portfolios became illiquid during the liquidity crisis that began in the fall of 2007, FOF ¶ 92, an illiquid market is not equivalent to an illiquid instrument. 278.

Under Rule 2a-7, a security is considered illiquid if it cannot be sold within

seven days in the ordinary course of business at approximately the cost at which the fund has valued the security. See, e.g., Revisions to Rules, 61 Fed. Register at 13966. The key phrase is “ordinary course of business.” There was nothing “ordinary” about the financial markets during the liquidity crisis. Tr. 4658:18-4659:11 (Adams). 279.

Thus, even if the market for many securities in the Business Trust became

illiquid as a result of the financial crisis, that does not show that the securities were “illiquid instruments” within the meaning of the investment guidelines. 3. 280.

Plaintiffs Failed to Prove a Breach of the Duty of Loyalty

ERISA requires plan fiduciaries to “discharge [their] duties with respect to

a plan solely in the interest of the participants and beneficiaries.” 29 U.S.C. § 1104(a)(1). This requirement to “act solely in the interest of participants” imposes on fiduciaries a duty of loyalty to plans and their participants. See, e.g., Donavan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982). 281.

To establish a breach of the duty of loyalty, Plaintiffs must prove that Wells

Fargo’s decisions were motivated by a desire to serve its own interests or those of a third 86

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party over those of its clients. See, e.g., In re State St. Bank & Trust Co. Fixed Income Funds Inv. Litig., 842 F. Supp. 2d 614, 650 (S.D.N.Y. 2012) (dismissing duty of loyalty claim and explaining that a breach of the duty of loyalty “requires some showing that the fiduciaries’ decisions were motivated by a desire to serve the interests of [the fiduciaries] over those of the beneficiaries.”) (quoting Tibble v. Edison Int’l, 2010 WL 2757153, at *24 n.19 (C.D. Cal. July 8, 2010), vacated and remanded on other grounds by, 843 F.3d 1187 (9th Cir. 2016)). 282.

Plaintiffs did not meet this standard. As an initial matter, Wells Fargo

witnesses testified credibly and consistently that they recognized that they had a duty to act and did act in the best interest of the Business Trust participants. See, e.g., Tr. 1512:6-14 (Smith); id. at 2608:23-2609:9; id. at 2837:22-24 (Hruska-Claeys). The contemporaneous evidence corroborates this testimony. While Plaintiffs may question the judgments reached by Wells Fargo, they did not prove that Wells Fargo deliberately placed its own interests ahead of those of its clients. 283.

Plaintiffs, for example, allege that Wells Fargo “intentionally” withheld

material information in order to prevent a “run on the bank and to protect itself.” MSJ Opp. at 31. While Wells Fargo did not immediately disclose certain information based on a concern about a potential run on the Business Trust that would create unnecessary losses for its clients, the evidence shows that Wells Fargo’s decision was motivated by a concern with protecting the Business Trust participants, not itself. FOF ¶ 129. As noted above, a run on the fund would not have harmed Wells Fargo. Id. ¶ 130. But it would

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have drained liquidity from the Business Trust at the expense of those participants who remained in the Trust or who were slow to exit. Id. 284.

Plaintiffs next allege that Wells Fargo placed Lehman’s interests ahead of

participants by continuing to hold Lehman securities even though it had “ample advance knowledge of Lehman’s dire straights [sic] prior to Lehman’s bankruptcy in September 2008.” Third Am. Compl. ¶ 128. The evidence does not bear out this allegation. As discussed above, Securities Lending decided to hold Lehman notes, not to protect Lehman’s interests, but because it believed that those notes would mature at par and did not want to incur unnecessary losses for clients. FOF ¶¶ 159-161. Moreover, Securities Lending took actions that were adverse to Lehman (namely, reducing Lehman’s credit) where it concluded that those actions were in the interest of clients. Id. ¶ 156.16 285.

Finally, Plaintiffs have alleged that Wells Fargo breached its fiduciary

duties by adopting an in-kind redemption policy and subsequently disaggregating the Business Trust, which Plaintiffs alleged forced them to take “devalued and illiquid” securities. Third Am. Compl. ¶ 275(m). Again, the evidence at trial did not support this

16

Plaintiffs have also alleged that Wells Fargo “assert[ed] rights and claims on behalf of the borrowing brokers to the detriment of Plaintiffs” by demanding that Plaintiffs pay for any shortfall in their cash collateral accounts before returning Plaintiffs’ securities from borrowing brokers. Third Am. Compl.¶¶ 161-62, 275(n).) But under the SLA, Plaintiffs were responsible for repaying the cash collateral. See, e.g., TX33137 at 4 (providing that a participant assumes “all risk of loss arising out of collateral investment loss and any resulting collateral deficiencies”). A fiduciary does not violate its fiduciary duties under ERISA by enforcing its rights under a contract, even if doing so is not in the “best interests” of plan participants. See, e.g., Chicago District Council of Carpenters Welfare Fund v. Caremark, Inc., 474 F.3d 463, 473 (7th Cir. 2007). 88

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allegation. As an initial matter, the Declaration of Trust expressly authorized Wells Fargo both to make distributions in kind (as opposed to cash) and to disaggregate the Business Trust. TX37 at 16 (Declaration of Trust § 9.3). Wells Fargo, moreover, exercised rights under the Declaration of Trust in order to protect the participants of the Business Trust. FOF ¶¶ 197-200. 286.

To be sure, in-kind distributions and disaggregation had disadvantages for

participants. Id. ¶ 202. But market conditions had made difficult choices unavoidable, and Wells Fargo had to balance these disadvantages against the disadvantages of the available alternatives. Id. Wells Fargo’s balancing of these competing considerations is entitled to deference, and there is no evidence that Wells Fargo abused its discretion. See Armstrong v. LaSalle Bank Nat. Ass’n, 446 F.3d 728, 733 (7th Cir. 2006) (“[T]he general standard of review of an ESOP’s decisions for prudence is plenary, a decision that involves a balancing of competing interests under conditions of uncertainty requires an exercise of discretion, and the standard of judicial review of discretionary judgments is abuse of discretion.”); Caterino v. Barry, 8 F.3d 878, 883 (1st Cir. 1993) (“As is wellestablished, courts set aside [a] trustee management decision only if it is arbitrary and capricious in light of the trustees’ responsibility to all potential beneficiaries.”) (citation and internal quotation marks omitted). 287.

There is no evidence that Wells Fargo’s decisions were motivated by self-

interest. To the contrary, the evidence shows that disaggregation substantially increased the costs to Wells Fargo of administering the securities lending program. FOF ¶ 205. At the same time, Wells Fargo until 2010 voluntarily waived its share of returns from 89

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collateral investments (which were still profitable) and therefore was running the program at a loss for the benefit of participants. Id. ¶ 195. 4. 288.

Plaintiffs Failed to Prove a Breach of the Duty of Disclosure

The Eighth Circuit has held that the “duty of loyalty [under ERISA]

requires fiduciaries to ‘deal fairly and honestly with all plan members,’ and it is a breach of this duty affirmatively to mislead a participant or beneficiary.” Braden, 588 F.3d at 598 (quoting Shea v. Esensten, 107 F.3d 625, 628 (8th Cir. 1997)). “[I]n some circumstances fiduciaries must on their own initiative ‘disclose any material information that could adversely affect a participant’s interests.’” Id. (quoting Kalda v. Sioux Valley Physician Partners, Inc., 481 F.3d 639, 644 (8th Cir. 2007)). 289.

Plaintiffs failed to establish that Wells Fargo made any material

misrepresentations or failed to disclose any material facts. 290.

First, Plaintiffs did not prove that Wells Fargo affirmatively misrepresented

any facts concerning the securities lending program. As discussed above, the Confidential Memoranda accurately and completely disclosed the risks associated with investing in a Business Trust. FOF ¶¶ 23-25. Wells Fargo’s written marketing materials contained similar risk disclosures. Id. ¶¶ 10-11. While Wells Fargo’s marketing presentations also described (accurately) the safeguards Wells Fargo would apply to protect against investment risk, Wells Fargo never represented to Plaintiffs that an investment in the Business Trust was guaranteed. Id. 291.

Nor did Wells Fargo misstate the risks of investing in the Securities

Lending program by representing that the Business Trust would invest in low-risk, 90

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money market-type instruments. The uncontroverted evidence showed that money market funds invested in the same securities—SIVs, Lehman, and ABS—that are at issue in this case. Id. ¶ 9. 292.

Second, Plaintiffs did not prove that Wells Fargo concealed material facts.

Plaintiffs have never alleged that Wells Fargo violated any statutory disclosure obligations under ERISA, nor have they alleged that Wells Fargo failed to disclose material information about the terms of a plan or plan benefits. Instead, Plaintiffs allege that Wells Fargo failed to disclose, or to timely disclose, information about the Business Trust’s investments. 293.

Federal courts, however, have held that ERISA does not require plan

fiduciaries to “disclose information about plan investments as opposed to plan benefits.” In re Lehman Bros. Sec. & ERISA Litig., 2011 WL 4632885 at *5 (S.D.N.Y. Oct. 5, 2011), vacated and remanded on other grounds by, Rinehart v. Akers, 134 S. Ct. 2900 (2014); see also Uselton v. Commercial Lovelace Motor Freight, Inc., 940 F.2d 564, 58182 (10th Cir. 1991); Patten v. N. Trust Co., 703 F. Supp. 2d 799, 813 (N.D. Ill. 2010). While the Eighth Circuit has not squarely addressed this issue, it has emphasized that it is “not quick to infer specific duties of disclosures under § 1104 because of the extent of the statutory and regulatory scheme.” Braden, 588 F.3d at 598. 294.

Even if Wells Fargo had a fiduciary duty to disclose information relating to

plan investments, Plaintiffs did not prove a breach of that duty. Plaintiffs’ core nondisclosure claim is that Wells Fargo breached its duty of disclosure by failing to disclose

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Cheyne’s enforcement (and related information) until the November 20, 2007 newsletter. The evidence does not support this allegation. 295.

When Wells Fargo learned of Cheyne’s enforcement event, it also

understood that: (1) Cheyne remained solvent (i.e., its assets exceeded liabilities and it continued to pay its liabilities as they came due); and (2) Cheyne comprised less than two percent of the Business Trust portfolios. FOF ¶ 126. More importantly, the evidence shows that until the second week of November 2007, Wells Fargo reasonably believed that Cheyne would pay senior notes in full, which would mean that the Business Trust would not incur any losses on its Cheyne investments. Id. ¶ 138. 296.

At the same time, Securities Lending’s understanding of Cheyne’s financial

situation and prospects was changing almost daily as it received updated information about the status of Cheyne’s restructuring negotiations. Id. ¶¶ 123-137; Tr. 3599:9-20 (Hogan). The Securities Lending team understandably was concerned about disclosing Cheyne’s enforcement event to participants before it had complete and accurate information. See, e.g., Tr. 3600:10-11 (Hogan) (“I think for the information to be useful, it has to be accurate and complete.”). 297.

This concern was reasonable. Plaintiffs have not cited, and the Court is not

aware of, any authority that precludes a fiduciary from exercising any discretion as to when it will disclose material information to beneficiaries. There are good reasons for according fiduciaries such discretion. If a fiduciary makes a disclosure before it has complete and accurate information (out of concern that it would be accused of violating its duty of disclosure), there is a greater risk that the fiduciary’s disclosures will be 92

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misleading, which will only expose the fiduciary to liability for affirmative misstatements and potentially harm beneficiaries. 298.

In addition, a fiduciary must balance its duty of disclosure against its other

duties—including its duty to act in the best interest of all participants. Here, the Business Trust, like other pooled funds that employ a stable NAV (e.g., money market funds), was vulnerable to a “run on the fund” if a large number of participants sought to exit from the Business Trust at the same time. As described above, a run on the fund would harm participants who were slow to exit or who remained in the Business Trust. FOF ¶¶ 129130. Wells Fargo had a fiduciary duty to protect participants from being harmed from a run on the fund, and it had to balance this duty against its duty of disclosure. 299.

Plaintiffs also allege that Wells Fargo breached its fiduciary duty by not

disclosing that, in November 2007, WCM found that the securities lending portfolio’s score under the WellsCap PCR model was 826% of the maximum score allowed for money market funds. But as discussed above, the evidence established that this score did not contrast the “riskiness” of the Wells Fargo securities lending portfolio against the appropriate level of risk in a AAA rated securities lending pool: the WellsCap score was developed to measure risk in money market funds, which can invest in securities with maturities up to 13 months, and not the securities lending portfolio, which could invest in securities with maturities up to five years. Id. ¶ 86. There was no showing that the WellsCap model adjusted for these differing maturity limitations. 300.

Finally, Plaintiffs allege that Wells Fargo breached its fiduciary duties by

not disclosing that a substantial percentage of securities in the Business Trust portfolios 93

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had been removed from the Approved List or were on a so-called “watch list” for removal. But Plaintiffs failed to establish that this information was material. To begin with, the investment guidelines did not require Wells Fargo to use an Approved List. See, e.g., Tr. 4617:24-4618:5 (Adams). In addition, the Approved List was an internal credit tool, and removal of an issuer from the Approved List did not imply that it was imprudent to continue holding the issuer’s securities in a portfolio. FOF ¶¶ 59-64. Accordingly, the Court concludes that Wells Fargo did not have a duty to disclose that the portfolios held issuers that had been removed from the Approved List. 5. 301.

Plaintiffs Failed to Prove a Breach of the Duty of Impartiality

A trustee has a duty of impartiality, which requires a trustee to manage the

assets of the trust “with equal consideration for the interests of all beneficiaries.” In re Trust Known as Great N. Iron Ore Properties, 263 N.W.2d 610, 621 (Minn.1978); see also Varity Corp. v. Howe, 516 U.S. 489, 514 (1996) (suggesting that ERISA fiduciaries have a duty of impartiality to plan participants). Plaintiffs alleged, but failed to prove, a breach of the duty of impartiality. 302.

First, Plaintiffs allege that Wells Fargo breached its duty of impartiality by

allowing PSA to redeem its shares in the Business Trust at $10 per share in cash when the NAV of the portfolios was below $10 per share. MSJ Opp. at 20-21. The evidence, however, shows that when PSA redeemed its shares from the Business Trust, Wells Fargo was processing all redemptions at $10 per share in cash. FOF ¶ 180. Indeed, during the same period that PSA exited, Wells Fargo processed redemptions by Plaintiff

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International Truck at $10 per share in cash. Id. Thus, PSA did not receive any preferential treatment over Plaintiffs or other participants. 303.

Second, Plaintiffs allege that Wells Fargo breached its duty of impartiality

when it transferred the responsibility over the Wells Fargo money market funds’ Securities Lending portfolios from Securities Lending to WCM. Plaintiffs thus allege that the Wells Fargo money market funds were given the benefit of WCM’s “expertise,” while Plaintiffs were left with Securities Lending. MSJ Opp. at 19-20. 304.

This allegation was not proven. Most fundamentally, it is well settled that

ERISA fiduciary duties only apply to the extent that a fiduciary is acting in a fiduciary capacity. See In re WorldCom, Inc., 263 F. Supp. 2d 745, 757 (S.D.N.Y. 2003) (“The ‘threshold question’ in an action charging breach of fiduciary duty under ERISA ‘is not whether the action of some person employed to provide services under a plan adversely affected a plan beneficiary’s interest, but whether that person was acting as a fiduciary (that is performing a fiduciary function) when taking the action subject to the complaint.”) (quoting Pegram v. Herdrich, 530 U.S. 211, 226 (2000)). 305.

As this Court has explained, “[u]nlike the common law of trusts, ERISA

permits fiduciaries to take actions adverse to beneficiaries, as long as the fiduciary is not acting in his capacity as a fiduciary when he takes adverse action.” Morrison v. MoneyGram Int’l, Inc., 607 F. Supp. 2d 1033, 1045-46 (D. Minn. 2009). “To establish that a particular action was a breach of fiduciary duty, then, it is not sufficient to prove that the person who took the action was a plan fiduciary.” Id. at 1046. Plaintiffs “must

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also prove that, at the time [Wells Fargo took the action], [it] was acting as a plan fiduciary.” Id.; see also Hickman v. Tosco Corp., 840 F.2d 564, 566 (8th Cir. 1988). 306.

Here, to the extent that Wells Fargo was subject to fiduciary duties under

ERISA, it was because Wells Fargo exercised discretionary authority or control over the management of a plan or disposition of a plan’s assets. 12 U.S.C. § 1002(21)(A). Wells Fargo clearly was not acting in this or any other fiduciary capacity when it transferred the money market funds’ securities lending portfolios to WCM. As explained above, the Wells Fargo money market funds participated in the securities lending program through separate accounts, not the Business Trust. FOF ¶ 202. Plaintiffs introduced no evidence that Wells Fargo’s transfer of the money market funds’ accounts involved or otherwise affected any of Plaintiffs’ ERISA plan assets. Accordingly, Wells Fargo was not acting in a fiduciary capacity when it transferred management of the money market funds’ accounts to WCM. 6. 307.

Plaintiffs Failed to Prove Causation

The Court also concludes that the evidence does not support a finding that

Wells Fargo’s alleged breaches of fiduciary duty caused Plaintiffs’ losses. At the outset, the Court must address the burden of proof on causation. In Martin v. Feilen, 965 F.2d 660, 671 (8th Cir. 1992), the Eighth Circuit held that, where “the ERISA plaintiff has proved a breach of fiduciary duty and a prima facie case of loss to the plan . . . . the burden of persuasion shifts to the fiduciary to prove that the loss was not caused by . . . .

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the breach of duty.” Id. at 671-72. Even if Martin remains good law,17 Martin’s burdenshifting framework does not relieve Plaintiffs of their burden to prove a prima facie case that Wells Fargo’s alleged breaches of fiduciary duty caused them losses. See, e.g., Silverman v. Mut. Ben. Life Ins. Co., 138 F.3d 98, 106 n.1 (2d Cir. 1998) (“[T]he issue in Martin involved the calculation of damages after the plaintiff proved a prima facie case that the plan suffered a loss resulting from the defendant’s breach of its fiduciary duty.”) (Jacobs, concurring); Barry v. West, 503 F. Supp. 2d 313, 326 (D. D.C. 2007) (noting that “the burden-shifting principle endorsed in Martin, by its terms, applies only where the plaintiff has already demonstrated ‘a prima facie case of loss to the plan’”). Hence, “only after [Plaintiffs] demonstrate[] that [Wells Fargo’]s breach of duty caused a loss to [Plaintiffs] can any ‘uncertainties in fixing damages’ be resolved in [Plaintiffs’] favor.” Barry, 503 F. Supp. 2d at 326. 308.

Here, Plaintiffs have not established a prime facie case that Wells Fargo’s

alleged breaches caused losses to Plaintiffs and, even if they had done so, Wells Fargo has met its burden of proving that its actions did not cause Plaintiffs’ losses. 309.

First, it is well-settled in this Circuit that “there is no causal link between an

alleged breach of fiduciary duty and an investment loss if a hypothetically prudent fiduciary would have made the same investment.” Harley v. Minn. Mining & Mfg. Co.,

17

Although the Court is bound in this case to follow the burden-shifting framework set out in Martin, the Supreme Court’s rejection of burden-shifting on causation in Title VII cases in University of Texas Southwestern Med. Center v. Nassar, 133 S.Ct. 2517 (2013), suggests that Martin was wrongly decided. 97

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42 F. Supp. 2d 898, 915 (D. Minn. 1999) aff’d sub nom. Harley v. Minn. Min. & Mfg. Co., 284 F.3d 901 (8th Cir. 2002) (citing Roth, 16 F.3d at 919). Wells Fargo has established that a hypothetically prudent fiduciary would have made the same decisions that it did. With respect to SIVs, for instance, the evidence showed that: (a) SIV securities were viewed as extremely safe investments before the financial crisis; (b) Cheyne and Victoria’s senior notes had the highest possible credit ratings, which indicated an extremely low risk of default; and (c) money market funds, which are among the most conservative investment funds, invested in SIV securities. FOF ¶ 92. This evidence negates any causal link between Wells Fargo’s alleged breaches of fiduciary duty and Plaintiffs’ losses. See, e.g., Roth, 16 F.3d at 919 (“Even if a trustee failed to conduct an investigation before making a decision, he is insulated from liability if a hypothetical prudent fiduciary would have made the same decision anyway.”). 310.

Second, Wells Fargo has shown that its alleged non-disclosures did not

cause Plaintiffs’ losses. As noted above, none of the Plaintiffs exited from the securities lending program in response to the November 20, 2007 newsletter’s disclosures. See FOF ¶¶ 2-7, 191. Thus, even if Wells Fargo had disclosed information about Cheyne and the NAV earlier than November 2007, Wells Fargo has met its burden of proving that Plaintiffs would not have acted differently. See, e.g., Meehan v. Atl. Mut. Ins. Co., No. 06-CV-3265, 2008 WL 268805, at *12 (E.D.N.Y. Jan. 30, 2008) (finding that “even if Defendants had failed to comply with” ERISA’s disclosure requirements, “any such failure did not result in prejudice to Plaintiffs” because they failed to offer how receiving notice “would have altered their decisions”). 98

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311.

To be sure, Plaintiffs contend that the November 20, 2007 newsletter did

not disclose all material information about the Business Trust portfolios, such as the fact that the portfolios were holding securities that had been removed from the Approved List. MSJ Opp. at 19. But Plaintiffs’ assertion that they would have exited the program earlier if they had known of this allegedly omitted information is not persuasive. In particular, the November 2007 newsletter disclosed that Cheyne had defaulted and was valued below par, that the NAV for the CI Term had fallen below $9.95 per share, and that Securities Lending would process future transactions in the Business Trust at a floating NAV. FOF ¶ 190. 312.

Plaintiffs chose to remain after receiving these disclosures. The assertion

that they would have made a different decision if Wells Fargo had also disclosed in November 2007 that issuers had been removed from the Approved List is too speculative to support a finding of causation. See, e.g., Barry, 503 F. Supp. at 326-332 (entering judgment for defendant after bench trial where the evidence that defendant’s nondisclosure caused ERISA plan losses was speculative). 313.

Finally, Wells Fargo established that its alleged breaches of the duty of

impartiality did not cause Plaintiffs any losses. In particular, Wells Fargo’s Hogan testified that PSA’s exit from the Business Trust at $10 per share at most diluted the NAV for the Business Trusts by .07 cents. Tr. 3669:2-12 (Hogan). Plaintiffs did not introduce any contrary evidence that they were harmed by this dilution. 314.

For the reasons stated above, Wells Fargo has satisfied its burden of

proving that any breaches of fiduciary duty did not cause Plaintiffs’ losses. 99

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V.

CONCLUSION 315.

For the foregoing reasons, the Court concludes that Plaintiffs failed to

prove that Wells Fargo breached its fiduciary duties under ERISA. Dated: July 21, 2017

ZELLE LLP s/Dan Millea Dan Millea (MN State Bar #245963) Rory D. Zamansky (MN State Bar #0330620) Lindsey A. Davis (MN State Bar #0332148) 500 Washington Avenue South, Suite 4000 Minneapolis, MN 55415 [email protected] [email protected] [email protected] Phone: (612) 339-2020 -andPROSKAUER ROSE LLP Bart H. Williams (admitted pro hac vice) Manuel F. Cachán (admitted pro hac vice) 2049 Century Park East Los Angeles, CA 90067-3206 [email protected] MCachan@ proskauer.com Phone: (310) 557-2900 ATTORNEYS FOR WELLS FARGO BANK, N.A.

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