Wells Fargo & Co. (WFC) has hit the headlines again and this time for a wrong reason. The company intends to pay $75 million to settle claims with stockholders in a class-action lawsuit alleging Wachovia for misleading investors, according to a Reuters report. For similar allegations, the company had reached a $590 million settlement with bond investors back in August.
The class-action case that included plaintiffs such as the New York City pension funds accused Wachovia for misleading investors about the quality of its mortgages from 2006 to 2008.
According to them, the underwriting practices in its $120 billion "Pick-A-Payment" loan portfolio were misrepresented by the executives at Wachovia to support the bank’s stock price artificially.
Borrowers were allowed to make a minimum payment in these adjustable-rate mortgages. However, the minimum payment amount did not include all the interest and principal payable and that eventually raised borrowers’ balance.
These loans were inherited by Wachovia when it purchased California-based Golden West Financial Corp in 2006. Following the acquisition, Wachovia continued to make them and carried on doing so even when the housing market began to deteriorate.
Wachovia in turn, started reporting losses that took a toll on its financial condition and was finally acquired by Wells Fargo in 2008. However, Wells Fargo itself does not make Pick-a-Payment loans.
According to Wells Fargo, the company had provisions for such a settlement in the prior quarters and therefore its financials won’t be affected much. The $75 million settlement with stockholders is subject to the Court’s approval.
Post financial crisis, investors have sued a number of institutions of wrongdoings and misrepresentation of facts while selling their investment products. Beside Wells Fargo, others that have also reached settlements or have been penalized in the past include Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS).
We believe that while such settlements dent the company’s financials to some extent, they also reduce the litigation overhang.
Wells Fargo currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We also have a Neutral recommendation on the stock.
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