Wells Fargo on Hook for $163M Dumping Claim

(CN) — Wells Fargo must face fraud claims over $163 million in securities that Wachovia, now owned by Wells Fargo, allegedly used as a "dumping ground" for assets it wanted off its books, a federal judge ruled.

A number of specialized investment entities sued Wells Fargo in New York after three collateralized debt obligations marketed by Wachovia Capital Markets defaulted following the 2008 financial crisis.

These entities, led by Loreley Financing No. 3, invested a total of $163 million in the CDOs, which they now claim were used as a "private dumping ground for rapidly deteriorating assets" that Wachovia wanted to get rid of.

Wells Fargo is the successor in interest to Wachovia, having purchased the bank in 2008 in an FDIC-brokered deal following Wachovia's heavy losses in the subprime mortgage crisis.

The Second Circuit upheld the plaintiffs' primary fraud claim last year, and Wells Fargo did not attempt to dismiss that count again on remand.

However, Wells Fargo sought to dismiss the complaint's claims for rescission, aiding and abetting fraud, and conspiracy to commit fraud.

U.S. District Judge Richard Sullivan granted the motion on the conspiracy claim, but upheld plaintiffs' other causes of action Thursday.

"Where, as here, an action for rescission under New York law is predicated on fraud, the rescission claim may be 'applicable against a defrauder not in privity of contract with the victim of the fraud' to the extent the defrauder defendant 'induced the victim to make the purchase,'" Sullivan said.

Taking the allegations of the complaint as true, the investment entities did not unreasonably delay brining suit because they did not have notice of the alleged fraud until 2010.

"While the Court is quite skeptical of plaintiffs' allegations regarding notice in light of the fact that certain CDOs experienced default as early as October 23, 2007, the Court nonetheless declines to dismiss the rescission claim on this basis at this stage," the 17-page opinion states.

The court agreed with Wells Fargo that the conspiracy claim duplicates the plaintiffs' other tort claims and must be dismissed.

This largely unfavorable ruling comes in the midst of a crisis at Wells Fargo over the bank's fraudulent practice of creating bank and credit card accounts that customers never authorized. The Consumer Financial Protection Bureau fined the company $185 million for the fraud in September.

On Thursday, members of the House Financial Services Committee grilled Wells Fargo CEO John Stumpf, comparing him to a common bank robber and threatening to level RICO charges against him.

"You screwed student loan holders, credit unions, Fannie Mae, Freddie Mac, mortgage holders, African Americans, Hispanics, healthcare workers, on and on and on," said Rep. Michael Capuano of Massachusetts.

"When prosecutors get a hold of you, you're going to have a lot of fun," the Democrat added.

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