Judge Dumps Action Over Bad Wells Fargo Loans

SAN FRANCISCO (CN) - A federal judge completely dismissed a second attempt by shareholders to hold Wells Fargo's top brass responsible for lying about insuring high-risk home mortgages.

Lead plaintiff Richard Gulbrandsen accused Wells Fargo CEO John Stumpf and other top officers of unjust enrichment, waste of corporate assets and breach of duties in the 10 years leading up to the financial meltdown.

According to Gulbrandsen - who filed his derivative action on behalf of the bank and other shareholders - Wells Fargo "engaged in a regular practice of reckless origination and underwriting of its retail Federal Housing Administration loans and falsely certified to the Department of Housing and Urban Development that tens of thousands or those loans were eligible for FHA insurance."

He claimed that in an effort to increase loan volume, Wells Fargo executives and members of the board of directors recklessly disregarded that a high percentage of the company's loans had not been properly underwritten, contained unacceptable risk, and were not eligible for FHA insurance.

Wells Fargo failed to report more than 6,000 materially deficient loans, which resulted in the FHA paying nearly $190 million in insurance benefits on defaulted mortgage loans, according to Gulbrandsen. They also claimed bank's officials ignored "multiple red flags" of this wrongdoing and never took any corrective action.

U.S. District Judge Jacqueline Corley dismissed the original complaint in May, finding that the shareholders failed to show that any of Wells Fargo's officials "knew or should have known about the alleged scheme." And she determined for a second time last week that the shareholders' second attempt again fell short of proving that the bank's board of directors was connected to or responsible for the company's alleged wrongdoing.

Specifically, Gulbrandsen failed to show that at least seven of the 14 Wells Fargo directors had knowledge of the alleged scheme to falsify loans, according to Corley.

"While plaintiff's allegations certainly suggest that Wells Fargo's FHA-insured loan business was error-ridden, and perhaps even intentionally so, plaintiff fails to adequately allege facts that support an inference that at least seven directors were aware of the misleading practice and consciously decided to allow it to continue," Corley wrote.

Gulbrandsen also failed to persuade Corley that the board's knowledge could be presumed based on the fact that Wells Fargo had an internal risk analysis and review staff that reviewed loan quality and reported the results to executive management and the board.

"What was the level of review?" Corley wrote. "What were the results of the staff's examination? What information was actually reported? The question is not whether plaintiff has sufficiently alleged wrongdoing by Wells Fargo. He has. The critical issue is whether plaintiff has alleged particular facts sufficient to give the rise to personal liability of the outside directors. The allegation as to loan quality reports, without particularized allegations as to the reports' contents, does not give rise to such an inference."

Similarly, Gulbrandsen failed in his argument that the board must have known about a 2005 report issued by the HUD Office of Inspector General finding that Wells Fargo did not comply with HUD underwriting requirements in processing 10 FHA mortgages over a two-year period.

"Given the indisputably large volume of loans Wells Fargo processes each year, it is not reasonable to infer that a report concerning the inadequacies of a mere 10 loans would necessarily reach the board," Corley wrote. "In addition, plaintiff does not allege that the report recommended administrative action against the company, further indicating the relative insignificance of the report"

The judge declined to give Gulbrandsen another chance to amend his complaint, citing the age of the case and the fact that he could not say he was currently aware of any additional facts to support his claims.

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