Wells Fargo & Co.'s securities lending program was not risky and Wells Fargo did not block four Minnesota nonprofits from getting out of the investments as their value eroded, a lawyer for the banking company said at trial Tuesday.
The Minnesota Workers' Compensation Reinsurance Association and three charitable foundations sued in St. Paul in 2008, claiming Wells failed to disclose the deteriorating condition of the investments until it was too late. The nonprofits are seeking more than $400 million in damages.
Wells lawyer Robert Weinstine said in closing arguments in the trial Tuesday that the company in no way misrepresented the lending program, and the losses sustained by the plaintiffs were caused by the financial crisis. The plaintiffs were not prevented from leaving the investments, he said.
"All of this occurred during the greatest recession since the Great Depression," Weinstine said. "Plaintiffs made money every single year up until this crisis."
The suit is one of multiple complaints alleging U.S. banks purchased illiquid securities for clients. The Securities and Exchange Commission said in September that it was looking into whether banks that engage in securities lending make adequate disclosures to pension-fund clients.
In securities lending, investors lend stock or other investments to banks or brokers. In return, the bank places cash collateral on behalf of the investor into short-term investments until the shares are eventually returned. Securities lending had been traditionally viewed by investors such as pension funds and foundations as "a way to put otherwise dormant assets to earn a few extra basis points of return, on a relatively risk-free basis," SEC Chairman Mary Schapiro said in September. The crisis revealed that "risk was very much present," she said.
The Minnesota nonprofits participated in an investment program in which Wells Fargo would hold its clients' securities in custodial accounts and make temporary loans of these securities to brokers. The brokers would borrow the securities to support their trading activities, such as short sales and option contracts, and would post collateral worth at least 102% of the value of the loaned securities, the plaintiffs said in court papers.
Wells invested the collateral for its clients, promising to focus on safe, liquid instruments, primarily money markets, the nonprofits claimed. "Instead Wells Fargo invested heavily in risky securities," including structured investment vehicles and mortgage- and asset-backed securities, the plaintiffs said in court papers.
"Wells Fargo intentionally transformed a securities lending program, which it represented as safe, conservative and liquid, into a risky, illiquid program in which, in Wells Fargo's own words, it held the participants, including the plaintiffs, hostage," attorney Michael Ciresi said April 22 in his opening. About 30% of the collateral investment pool was in SIVs, Ciresi said.
Wells did not invest in risky securities, Weinstine said. "Every security purchased fit the guidelines at the time." Though three of the 170 securities ultimately failed, "all except the three have matured at full value," he said.
In 2007, as the value of the collateral investments destabilized, Wells increased the amount of plaintiffs' securities out on loan, the nonprofits claim. After two of the SIVs went into receivership, the plaintiffs asked Wells to return the securities or redeem their interests. It refused to return the securities until the collateral investments were sold and plaintiffs made up a shortfall in value, according to the lawsuit.