Wells Fargo to Defend Pension Care at Trial

(CN) - Both a bench trial and jury trial are needed to determine whether Wells Fargo mismanaged numerous pension funds, a federal judge ruled.

U.S. District Court Judge Donovan Frank decided that a bench trial will sort out the investors' claims against Wells Fargo under the Employee Retirement Income Security Act. The non-ERISA fiduciary duty claims will meanwhile go to a jury.

Blue Cross and Blue Shield of Minnesota, as administrator of its pension plan, leads several similar entities that allegedly sustained substantial losses as investors in Wells Fargo's Securities Lending Program (SLP).

In a 2011 complaint, they say Wells Fargo kept the bulk of the SLP investments in real estate - including mortgage-backed securities through Cheyne Financial, Stanfield Victoria and Lehmann Brothers - and allegedly refused to offload the securities during the 2007 credit crisis.

Citing internal memoranda, the investors allegedly believe Wells Fargo anticipated the collapse of Lehmann Brothers, concealed the information from them, and chose to favor certain clients to their detriment.

"Furthermore, as late as October 2007, Wells Fargo was letting preferred clients exit the SLP 'at the same price they got in,' regardless of the fair market value of the assets, ultimately increasing the losses plaintiffs incurred," according to Frank's summary of the claims.

The investors filed for summary judgment, hoping to toss out Wells Fargo's defense that its liability is limited by the terms of a "declaration of trust."

Judge Frank denied the motion Tuesday, writing that "questions of fact exist as to whether Wells Fargo's investment of collateral in risky securities 'could fall under the exclusion of a liability for an act performed by a covered person in a manner reasonably believed to be within the scope of authority conferred by the declaration.' Considering the relevant documents together, including the declaration of trust, the SLAs, subscription agreements, and confidential memoranda, the relevant standard of care is ambiguous and should be resolved by a fact-finder at trial."

"While the court acknowledges that Wells Fargo faces a high hurdle to establish that its conduct falls within any exclusion of liability provision contained within the declaration of trust, it will be for the jury to decide Wells Fargo's liability, or lack thereof, based on the evidence presented at trial," Frank added.

Wells Fargo had also sought summary judgment, but Frank denied such relief after noting that "plaintiffs have submitted evidence that could lead a reasonable fact-finder to conclude that Wells Fargo failed to prudently and conservatively invest the SLP collateral, that Wells Fargo abused its discretion as trustee, and that Wells Fargo failed to comply with its own investment guidelines."

In a separate opinion, Judge Frank granted Wells Fargo's motion to proceed with a bench trial on the ERISA claims but denied its request for a bench trial on the non-ERISA claims.

The possible ERISA violations are "equitable in nature and that plaintiffs are thus not entitled to a jury trial," according to the ruling.

As to the non-ERISA claims, however, Frank wrote that "the damages sought by plaintiffs in this case are, at their core, compensatory in nature; and compensatory damages are 'the classic form of legal relief.' Where a case involves a legal (as opposed to an equitable) cause of action, 'the jury rights it creates control.'" (Emphasis in original.)

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