Earlier this week, Wells Fargo Securities, a unit of Wells Fargo and Company (WFC) was sued by Loreley Financing, a group of special-purpose entities, Bloomberg reported. The complaint lodged claims that Wells Fargo Securities misrepresented documents in the sale of over $163.3 million of collateralized debt obligations (CDOs).
Jersey-based Loreley is a group of special-purpose entities, the largest of the Channel Islands, a dependency of the U.K. with its own governmental legislative body and known as a tax haven. These entities are created for investing in long-term CDOs, groups of assets such as mortgage bonds with new securities.
Loreley alleged that Wells Fargo Securities issued misleading statements and omissions related to the CDOs and has concealed risks associated with the same. The company claims the documents used in offering the securities contained untrue statements or omissions, and has no information regarding the extent of the risks. These misrepresentations of the risks provoked investments by Loreley.
Loreley has filed lawsuit in the New York State Supreme Court in Manhattan. The company demands compensation for damages, which includes lost market value of the CDOs and other unspecified penalties.
The SEC has stepped up its investigation on Wall Street companies over the sale of CDOs that were responsible for significant losses incurred by the investors.
The continuously increasing number of lawsuits will dent Wells Fargo’s reputation and its financials, though investors, who have lost their hard-earned money in such investments, should feel relieved.
However, strategic acquisitions have been part of Wells Fargo’s endeavor to strengthen its business model, expand its capabilities and diversify its footprint. Its growth plans have historically included several acquisitions, Wachovia being the largest addition in December 2008.
The company has demonstrated its ability to assimilate local franchises, offering a wider range of products compared with the acquired company, thus increasing the number of options for its customers. This has been the driving force behind its growth in the recent years.
With cross-selling as its key strength, WFC has a diverse geographic and business mix that enables it to sustain consistent earnings growth. Opportunistic acquisition and the demise of some smaller players helped the company to garner a larger share in the market. Yet, top-line headwinds, regulatory issues and allegations remain a cause of concern.
Shares of Wells Fargo currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.Moreover, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock. Moreover, Wells Fargo’s closest competitor, Bank of America Corporation (BAC), also retains a Zacks #3 Rank.
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