Wells Fargo must face class action over securities lending

March 27 (Bloomberg) -- Wells Fargo & Co. must face a class-action, or group lawsuit, by institutional investors who claim the bank marketed a risky securities-lending program it said was safe.

U.S. District Judge Donovan W. Frank certified the suit as a class action today, finding that common issues predominated, including whether Wells Fargo “knew or should have known that the investments it selected did not comport with investment mandates.” These issues “will likely turn on substantially the same evidence for the class as a whole,” Frank said in a 21- page decision.

The lawsuit, filed in 2010 by the City of Farmington Hills Employees Retirement System, a Michigan pension fund, on behalf of more than 100 other institutional investors, claimed breach of fiduciary duty and fraud. The investors sought to be allowed to pursue the case against Wells Fargo as a group.

The suit claimed that Wells Fargo “touted” its securities-lending program “as a highly-secure way for its institutional clients to maximize portfolio returns,” according to the complaint. Instead, the pension fund said, “Wells Fargo invested a substantial portion of the collateral in extremely risky securities.”

The investors also claimed that Wells Fargo concealed investment performance from class members to prevent them from exiting the securities-lending program.

Securities lending is a practice whereby investors lend stock or other investments to banks or brokers. In return, the bank places cash collateral on behalf of the investor into short-term investments until the shares are eventually returned. It had been traditionally viewed by pension funds and foundations as a low-risk investment.

The case is City of Farmington Hills Employees Retirement System v. Wells Fargo Bank N.A., 10-cv-04372, U.S. District Court, District of Minnesota.

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