OAKLAND, Calif. (CN) - A class action claims that a brokerage firm's Ponzi scheme, aided and abetted by Wells Fargo Capital Finance and the Greenberg Traurig law firm, cost investors "hundreds of millions" of dollars.
Lead plaintiff David Nolan sued Wells Fargo Capital Finance, Wells Fargo Foothill and Greenberg Traurig, of New York, in Alameda County Court.
Nolan alleges seven causes of action, including fraud by concealment, fraud by misrepresentation, aiding and abetting fraud and breach of fiduciary duty, and secondary liability for securities fraud.
From 2002 to 2007, Nolan says, he and other investors saw great returns on their investments in the now-bankrupt RE Loans, a brokerage firm that secured developer loans by holding liens on real estate throughout California. The developer loans were funded by Nolan and other investors who purchased membership interests in RE Loans' fund.
In early 2007 the fund had 1,400 investors and was worth more than $700 million, but it had to stop accepting new money because it had violated state and federal securities laws, according to the complaint.
Rather than notify its investors of this, and of its impending illiquidity, RE Loans turned to Greenberg Traurig and Wells Fargo to help hide the problems, Nolan says.
"To that end, the [RE Loans] managers, actively aided by Greenberg, procured unauthorized third party financing from Wells Fargo," the complaint states. "This third party financing was secured to enable the fund to make certain preferential payments while creating the illusion of fund liquidity sufficient to continue to pay a return to its investors. Greenberg arranged for its other client - Wells Fargo - to issue a $50 million line of credit.
"Moreover, Wells Fargo demanded that the [RE Loans] managers collateralize the $50 million line of credit with all of RE Loan's assets - an amount in excess of $700 million - and demanded that its security interest take priority over any security interests held by members. Wells Fargo also required that RE Loans endorse and deliver over $250 million of notes receivable to Wells Fargo. The line of credit from Wells Fargo was funded in or about July 17, 2007.
"Defendants Greenberg and Wells Fargo - which was [sic] clearly conflicted - knew and deliberately and recklessly disregarded the fact that the Wells Fargo line of credit itself contravened the expressed provisions of published offering circulars that had previously been issued to and used to solicit funds from the RE Loans investors. These offering circulars limited the fund's sources of operating capital to cash subscriptions from new investors, existing mortgage loans of the developer borrowers and mergers with existing partnerships or LLCs - prohibiting RE Loans from raising capital through third party borrowing."
Nolan says Wells Fargo's line of credit was "substantially exhausted" almost immediately after it was established in July 2007, exacerbating the fund's liquidity crisis.
Nolan claims that Greenberg Traurig wrote "formal Exchange Offering documents" for an "Exchange Transaction," which was sent to investors on and after Oct. 8, 2007.
"Among other documents, the Exchange Offering materials included a so-called 'Confidential Memorandum' issued to the fund's investors with copies of a proposed 'Exchange Agreement' and an 'Operating Agreement.'
'The Confidential Memorandum intentionally concealed the deteriorating financial condition of RE Loans and the insolvent shell that would remain after the Exchange Transaction," according to the complaint.