Shareholders Want Wells Fargo Execs to Pay

SAN FRANCISCO (CN) - Wells Fargo cost taxpayers "hundreds of millions of dollars" by misrepresenting more than 6,000 home mortgage loans, shareholders say in a derivative complaint.

Lead plaintiff Richard Gulbrandsen accuses CEO John Stumpf and 23 other top officers of unjust enrichment, waste of corporate assets and breach of duties during the nearly decade-long runup to the financial meltdown.

From May 2001 through December 2010, according to the federal complaint, "Wells Fargo improperly certified to the United States Department of Housing and Urban Development (HUD) that over 100,000 of its high-risk residential mortgage loans met HUD's requirements for proper origination and underwriting, and therefore were eligible for the Federal Housing Administration's (FHA) insurance. In so doing, the individual defendants shifted responsibility for these materially deficient loans to the United States government.

"Under the FHA Direct Endorsement program, HUDA insured the loans that Wells Fargo was originating. Thus, when the loans defaulted, it was the United States government on the hook, not the company. The individual defendants knew or recklessly disregarded that a very substantial percentage of the company's loans-nearly half of the loans in certain months-had not been properly underwritten, contained unacceptable risk, and were ineligible for FHA insurance."

The shareholder adds: "The extreme poor quality of Wells Fargo's loans was a function of the individual defendants' singular focus on increasing the volume of FHA residential mortgage loans, rather than on the quality of the loans being originated."

Wells Fargo internally identified more than 6,000 seriously deficient loans it was required to report to HUD, but concealed almost all of them, according to the complaint.

The director-defendants' "singular focus on increasing the volume of FHA residential mortgage loans," included "(i) hiring temporary staff to churn out and approve an ever-increasing quantity of FHA loans; (ii) failing to provide its inexperienced staff with proper training; (iii) paying improper bonuses to its underwriters to incentivize them to approve as many FHA loans as possible; and (iv) applying pressure on loan officers and underwriters to originate and approve more and more FHA loans as quickly as possible. As a consequence of Well Fargo's misconduct, the FHA was required to pay hundreds of millions of dollars in insurance claims on defaulted loans that the company had falsely certified met HUD's requirements," according to the complaint.

Federal prosecutors are trying to recoup that money, the complaint states, and "for at least the foreseeable future, Wells Fargo will suffer from what is known as the 'liar's discount,' a term applied to the stocks of companies who have been implicated in illegal behavior and have perpetrated a fraud, such that Wells Fargo's ability to raise equity capital or debt on favorable terms in the future is now impaired," the complaint states.

Gulbrandsen seeks disgorgement of the defendants' bonuses and other compensation, better controls, including allowing shareholders to nominate at least three directors of the board, and costs. He is represented by Brian Robbins, with Robbins Umeda, of San Diego.

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