Professional Documents
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Wells Fargo Board File Rule 14(a) Proxy Material Urging Shareholders to Vote
Against Proposals that Would Require the Board to Conduct an Internal
Investigation.......................................................................................................................73
After Rejecting Shareholder Demands for an Interim Review the Board Awards
Executives $53 Million in Incentive Awards.....................................................................75
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Government Investigations Fall Well Short of Examining the Full Extent of Well
Fargos Fraudulent Conduct of Robo-Signing Wells Fargo Accused of
Stonewalling Government Inquiries ..................................................................................81
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Wells Fargo Pays $85 Million Penalty and Enters into Consent Order to Resolve
Allegations to Predatory Lending and Steering Prime Qualified Loan Applicants
Into Subprime Loans Altering Loan Documents ...............................................................88
12
DAMAGE TO WELLS FARGO...................................................................................................92
13
CONSPIRACY, AIDING AND ABETTING, AND CONCERTED ACTION ...........................93
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DERIVATIVE AND DEMAND FUTILITY ALLEGATIONS ...................................................93
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COUNT I .......................................................................................................................................99
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COUNT II ....................................................................................................................................100
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COUNT III...................................................................................................................................100
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COUNT IV...................................................................................................................................101
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PRAYER FOR RELIEF ..............................................................................................................101
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1
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Its not just individual people who signed affidavits that are flawed, it is a business model
based on fraud that was designed to cut corners in the foreclosure process, because these
firms continue to think they play [by] a different set of rules than every other party in every
other court case in this country, and they dont and theyre going to find that out.
3
Ohio Attorney General, Richard Cordray, October 28, 2010
4
SUMMARY AND OVERVIEW
5
1.
This is a shareholder derivative action on behalf of nominal defendant Wells Fargo &
6
Company (Wells Fargo or the Company), against its entire Board of Directors (the Board) and
7
certain top officers for breach of fiduciary duty, abuse of control, gross mismanagement and
8
corporate waste. Defendants include John G. Stumpf (Stumpf), Howard I. Atkins (Atkins), John
9
D. Baker II (Baker), John S. Chen (Chen), Lloyd H. Dean (Dean), Susan E. Engel (Engel),
10
Enrique Hernandez, Jr. (Hernandez), Donald M. James (James), Richard D. McCormick
11
(McCormick), Mackey J. McDonald (McDonald), Cynthia H. Milligan (Milligan), Nicholas
12
G. Moore (Moore), Philip J. Quigley (Quigley), Judith M. Runstad (Runstad), Stephen W.
13
Sanger (Sanger) and Susan G. Swenson (Swenson).
14
2.
15
engage in the mass processing of loan ownership and servicing documents to facilitate home
16
foreclosure actions against homeowners who had become delinquent on their home mortgage
17
payments. Defendants mass processing included the creation and execution of thousands of court18
filed affidavits purportedly attesting to the truth and accuracy of loan documentation (including
19
whether Wells Fargo was indeed the legal owner of the loan on which it sought to foreclose)
20
referenced or submitted in conjunction with the affidavits. In truth, however, Wells Fargo and third
21
party servicing agents rarely even read the affidavits or examined the underlying documentation
22
purporting to evidence the facts they were attesting to, including loan ownership effectively
23
committing a fraud upon the court.
24
3.
Notwithstanding these facts, when information was disclosed that Wells Fargo may
25
have been falsifying court-filed affidavits, defendants caused the Company to repeatedly,
26
aggressively and defiantly deny that there were any problems with the accuracy of the Companys
27
foreclosure affidavits. In fact, the Chief Financing Officer (CFO), Atkins told shareholders that
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1 the issues concerning Wells Fargo and false affidavits were overstated and misrepresented in the
2 marketplace.
3
4.
Ultimately, the Company would be forced to admit deficiencies in more than 50,000
4 of its court-filed foreclosure affidavits. As a result of improper, and many times false affidavits, the
5 Company is and has been subject to multiple lawsuits and government investigations and likely
6 hundreds of millions of dollars in civil fines and penalties.
7
5.
In 2008, the United States embarked upon one of the largest economic crises in U.S.
8 history. At the core of the U.S. financial crisis was the collapse of the housing bubble fueled by the
9 low interest rates, easy and available credit, scant regulation and toxic mortgages. See Financial
10 Crisis Inquiry Report at xvi (2011). As home values plummeted and unemployment skyrocketed in
11 the United States and the world, the financial markets nearly came to a halt. In its wake and
12 aftermath, hundreds of U.S. banks failed, including Lehman Brothers and American International
13 Group (AIG), a renowned insurance giant.
14
6.
At the same time, lending institutions that held mortgages on homes on which
15 mortgage payments became delinquent began foreclosing on homeowners that fell significantly
16 behind on their mortgage payments. In 2009 and 2010, foreclosure actions in states where
17 foreclosures were controlled by the court system accelerated and began to dominate banks loan
18 servicing units.
19
7.
In the summer of 2010, allegations were levied that some U.S. lending institutions,
20 including nominal defendant Wells Fargo, Ally Financial Inc. (aka GMAC Mortgage Co.), Bank of
21 America, JPMorgan Chase, Citigroup and others were mass processing foreclosure documents,
22 including court-filed declarations in support of foreclosure proceedings on behalf of banks.
23
8.
The mass processing included robotically signing affidavits purporting to verify that
24 the banks actually owned the mortgages and that the homeowners were in fact delinquent on the
25 loans being foreclosed upon. In truth however, lenders, including Wells Fargo and their agents
26 executed and in many instances falsified court documents without even attempting to verify the truth
27 or accuracy of the facts asserted therein.
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9.
2 servicing agents routinely submitted false sworn documents to courts and in many instances
3 succeeded in removing people from their homes without legitimate documentation evidencing that
4 the respective lending institutions had standing (legal ownership rights) to foreclose on the loans.
5
10.
In September 2010, as the public outcry regarding the process began to surge, certain
6 of the large lending institutions, including Bank of America and Citigroup, issued moratoriums on
7 foreclosures in order to investigate the propriety and veracity of allegations that said banks were
8 engaging in robo-signing and submission of false legal documentation.
9
11.
On September 22, 2010, a Wall Street Journal article, entitled GMAC Spotlight on
10 Robo-Signer, discussed some of the evidence supporting claims that robo-signing had become a
11 routine part of the lending institutions foreclosure processes. The article detailed specific events
12 and deposition testimony provided by Jeffrey Stephan and Beth Cottrell, employees of GMAC
13 Mortgage Co. and Chase Home Mortgage, respectively, wherein they each admitted to signing
14 thousands of affidavits purportedly in support of foreclosure proceedings without even verifying the
15 truth or accuracy of the facts stated in the affidavits.
16
12.
While this testimony had been elicited regarding GMAC Mortgage Co., it was
17 remarkably similar to testimony that had been elicited over a period of several months in 2010 in
18 several cases brought by Wells Fargo wherein the deponents admitted to such practices as more fully
19 explained herein below.
20
13.
Wells Fargo, however, notwithstanding growing evidence that it too was engaged in
21 robo-signing on October 12, 2010, denied that any such practices were being carried out by any of its
22 agents and boldly affirmed that its foreclosure practices were sound and its affidavits in support of
23 foreclosures were accurate:
24
25
Wells Fargos policies, procedures and practices satisfy us that the affidavits we
sign are accurate. We audit, monitor and review our affidavits under controlled
standards on a daily basis. We will stand by our affidavits and if we find an error we
will take the appropriate action.
26
14.
On October 13, 2010, the National Association of Attorneys General and the
27
Mortgage Foreclosure Multistate Group, consisting of the Attorneys General of 49 states, led by
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1 Tom Miller, Attorney General of the State of Iowa, issued a joint statement describing its
2 investigation into robo-signing of foreclosure documents, including affidavits purporting to support
3 foreclosures on mortgage loans. The joint statement articulated that the groups belief was that the
4 process of signing affidavits without confirming the accuracy of their contents may in fact constitute
5 a deceptive act and violate state law.
6
15.
On October 14, 2010, the Financial Times published an article entitled Spotlight
7 falls on Wells Fargo foreclosure procedures. The article disclosed that notwithstanding Wells
8 Fargos denials about its foreclosure processes regarding the verification of mortgage foreclosure
9 documents, one of its loan officers had sworn in a deposition that she signed as many as 500
10 foreclosure-related documents each day without verifying the contents of the documents other than
11 her name and her title. The documents/affidavits were then used to support lawsuits brought by
12 Wells Fargo to initiate and complete home foreclosures:
13
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19
Unlike Bank of America, JPMorgan Chase and GMAC, Wells Fargo has not
halted foreclosures and has maintained that it has no problems with its procedures.
Yet, a sworn deposition by one of its loan documentation officers suggests
otherwise. Xee Moua said she signed as many as 500 foreclosure-related papers a
day on behalf of the bank. Ms Moua said the only information she had verified was
whether her name and title appeared correctly.
20
21
Asked whether she checked the accuracy of the principal and interest that
Wells Fargo claimed the borrower owed an important step in banks legal actions
to foreclose Ms Moua replied: I do not.
22
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16.
On October 20, 2010, the Company held a conference call for analysts and investors
27
in connection with the Companys quarterly financial results. The call was hosted by Chief
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1 Executive Officer (CEO) and Chairman of the Board Stumpf and CFO Atkins. During the call
2 Stumpf and Atkins continued to assure investors and shareholders that Wells Fargos mortgage
3 servicing processes, specifically on foreclosures, were sound and that the questions in the industry
4 regarding robo-signing, at least with respect to Wells Fargo, were overblown and that the
5 Companys internal control processes already in place ensured reliability and accuracy:
6
[Stumpf:] Now, I know we have all been hearing in recent months about
business practices within our industry.
7
*
8
9
[W]e are confident that our practices, procedures, and documentation for both
foreclosures and mortgage securitizations are sound and accurate. Third, we did
not and do not plan to initiate a foreclosure moratorium.
10
*
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*
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20
With that, let me shift to give you an overview of the foreclosure and
mortgage securitization issues. These are issues obviously that are very important
to consumers, mortgage investors, and shareholders. But we believe that these
issues have been somewhat overstated and, to a certain extent, misrepresented in
the marketplace. I would like to be clear here on how they impact Wells Fargo
specifically.
*
21
22
23
24
Our process specifies that affidavit signers and reviewers are the same team
member, not different people, and affidavits are properly notarized. . . .
We ensure loans in foreclosure are assigned to the appropriate party as
necessary to comply with local laws and investor requirements, and legal
documents related to securitizations are sound, and appropriate transfers of
ownership were made.
25
*
26
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[Stumpf:] I dont know how other companies do it, but in our Company our
process has the affidavit signer and reviewer are the same team member. And we
believe these issues they are properly notarized.
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17.
Shortly after Wells Fargos conference call, on October 27, 2010, the Company was
2 forced to admit that contrary to prior denials, including specific denials to the Ohio Attorney
3 General, who has begun his own investigation into the Companys foreclosure process, Wells
4 Fargos control processes were deficient, and in particular, its foreclosures processes had included
5 the same robo-signing alleged to have afflicted other large lending institutions. Wells Fargo
6 disclosed further that more than 50,000 foreclosure affidavits submitted on its behalf would require
7 resubmission due to apparent robo-signing:
8
9
*
10
11
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14
18.
On November 9, 2010, John C. Liu (Liu), New York City Comptroller, as trustee of
15
Fire New York City Employee Pension Funds, submitted a shareholder proposal to the Company for
16
inclusion within its Definitive Proxy Statement related to the Companys annual meeting of
17
stockholders to be held during 2011. The proposal to the Board of Directors suggested by Liu and
18
the Systems boards of trustees outlined the reported deficiencies and the scope of investigations that
19
warranted immediate action by the Board of Directors and particularly the Audit Committee. The
20
proposal would require that the Board, through the Audit Committee, conduct an independent review
21
of the Companys internal controls related to loan modifications, foreclosures and securitizations,
22
and report to shareholders, at reasonable cost and omitting proprietary information, its findings and
23
recommendations by September 30, 2011.
24
19.
On November 10, 2010, the American Federation of Labor and Congress of Industrial
25
Organizations (AFL-CIO) wrote to Wells Fargo requesting submitting a proposal for the inclusion in
26
the 2011 proxy materials. The request was similar to that of the New York City Systems seeking a
27
resolution that the Company prepare a report on its internal controls over mortgage servicing
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1 operations, including among other things, procedures to prevent legal defects in the processing of
2 affidavits related to foreclosure.
3
20.
Throughout December 2010 and January 2011, lawsuits began to mount and
4 institutional shareholders continued to demand that the Board of Directors conduct an independent
5 investigation concerning the Companys mortgage servicing process. For example, on January 9,
6 2011, the New York City Office of the Comptroller issued a press release titled $432 Billion
7 Pension Fund Coalition Demands Bank Directors Immediately Examine Foreclosure Practices. The
8 coalition included the five New York City Pension Funds and the Connecticut Retirement Plan and
9 Trust Funds, of Illinois State Universities Retirement Systems, the New York State Common
10 Retirement Fund, the North Carolina Retirement Systems and the Oregon Public Employees
11 Retirement Fund. The press release quoted North Carolina State Treasurer, Janet Cowell, who had
12 placed responsibility squarely on the Audit Committee:
15
The responsibility for making sure that internal controls and compliance
process are in place for mortgage and foreclosure practices rests squarely with these
Audit Committees, . . . . The recent testimonies and studies strongly suggest the
need for these Audit Committees to act swiftly and objectively in conducting an
independent and comprehensive review of these practices.
16
21.
13
14
On February 25, 2011, the Company filed its Form 10-K. The Form 10-K included a
17 disclosure confirming that in addition to a multitude of lawsuits relating to its foreclosure processes,
18 it was in fact likely that the government would initiate some form of enforcement action against the
19 Company related to the foreclosure document investigation. As a result, the Company could be
20 subject to significant civil penalties. The Company further acknowledged that it had established a
21 $1.2 billion loss reserve to cover potential losses regarding its foreclosure practices. The Form 10-K
22 provided in part:
23
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22.
On March 21, 2011, the Company filed its 14(a) Proxy Statement with the Securities
2 and Exchange Commission (SEC). The members of the Board caused the Company to include
3 City Comptroller Lius stockholder proposal in its Proxy Statement filed with the SEC on March 21,
4 2011. After describing the requested resolution, however, the Board of Directors urged shareholders
5 to vote against the resolution explaining that such an investigation would amount to a distraction for
6 the Company.
7
23.
On March 31, 2011, Wells Fargo entered into a Consent Order issued by the Office of
8 the Comptroller of the Currency (OCC). The OCC made specific findings of fact that the
9 Company had engaged in unsound or unsafe banking practices related to its residential loan
10 servicing and its mortgage foreclosure processing. On April 13, 2011, Wells Fargo entered into a
11 Consent Order with the Board of Governors of the Federal Reserve. Both governmental agencies
12 reserved the right to seek civil penalties against the Company.
13
24.
On May 5, 2011, the Company filed its Form 10-Q for the first quarter of 2011
14 (1Q11), announcing it had increased its litigation loss reserve to $1.7 billion. The Form 10-Q
15 further confirmed the investigations by the State Attorneys General and the U.S. Department of
16 Justice were still ongoing and could result in significant fines and civil penalties.
17
18
This Court has jurisdiction pursuant to 28 U.S.C. 1332(a)(1), because plaintiff and
19 defendants are citizens of different states and the amount in controversy exceeds $75,000, exclusive
20 of interest and costs.
21
26.
In addition, certain of the claims asserted herein arise under 10(b), 14(a) and 20(a)
22 of the Exchange Act, 15 U.S.C. 78j(b), 78n(a) and 78t(a), and Rule 10b-5, 17 C.F.R. 240.10b-5,
23 promulgated thereunder, and under California and Delaware law for violations of breach of fiduciary
24 duty, abuse of control, constructive fraud, corporate waste, unjust enrichment, insider trading and
25 gross mismanagement. In connection with the acts, conduct and other wrongs complained of herein,
26 defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, the
27 United States mail and the facilities of a national securities market. Thus, this Court has subject
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1 matter jurisdiction pursuant to 27 of the Exchange Act, 15 U.S.C. 78aa, as well as 28 U.S.C.
2 1331 and 1337.
3
27.
This action is not a collusive action designed to confer jurisdiction on a court of the
28.
This Court has jurisdiction over each defendant named herein because each defendant
6 is either a corporation that conducts business in and maintains operations in this District, or is an
7 individual who has sufficient minimum contacts with this District so as to render the exercise of
8 jurisdiction by the courts of this District permissible under traditional notions of fair play and
9 substantial justice.
29.
10
Venue is proper in this Court because Wells Fargo has a substantial presence in
11 California and is headquartered in San Francisco, California. Moreover, each defendant has had
12 extensive contacts with California as a director and/or officer of Wells Fargo or otherwise, which
13 makes the exercise of personal jurisdiction over them proper, and certain of the defendants reside in
14 this District.
15
PARTIES
16
30.
Plaintiff Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust (Pirelli)
17 is a shareholder of Wells Fargo and will adequately represent the interests of Wells Fargo in this
18 action.1 Pirelli is a citizen of the State of Tennessee. Pirelli has continuously held shares of the
19 Companys common stock since January 26, 2009.
20
31.
Plaintiff City of Westland Police and Fire Retirement System (City of Westland) is
21 a shareholder of Wells Fargo and will adequately represent the interests of Wells Fargo in this
22 action. City of Westland is a citizen of the State of Michigan. City of Westland has continuously
23 held shares of the Companys common stock since May 2009.
24
32.
Nominal party Wells Fargo is a diversified financial services company that provides
25 retail, commercial and corporate banking services principally in the United States. Nominal
26
27
At January 31, 2011, there were 201,714 holders of record of the Companys common stock.
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1 defendant Wells Fargo is a Delaware corporation with its headquarters located in San Francisco,
2 California.
3
33.
Defendant John G. Stumpf has served as Chairman of Wells Fargo since January
4 2010, as CEO since 2007, as a director since 2006 and as President since 2005. As a director,
5 defendant Stumpf has agreed to abide by the terms of the Wells Fargo & Company Director Code of
6 Ethics. After the 1998 merger of Wells Fargo and Northwest Corporation, a predecessor of Wells
7 Fargo that had employed Stumpf since 1982, defendant Stumpf became the head of the Companys
8 Southwest Banking Group, and in 2000 headed the Companys new Western Banking Group.
9 Defendant Stumpf led the integration of the Companys acquisition of First Security Corporation in
10 2000, and in 2008 led one of the largest mergers in history with the Companys purchase of
11 Wachovia. Defendant Stumpf reportedly enjoyed compensation of approximately $18,756,172 in
12 2009 and $17,100,000 in 2010.
13
34.
Defendant Howard I. Atkins served as CFO and Executive Vice President of Wells
14 Fargo from 2001 to February 8, 2011. As CFO, defendant Atkins was responsible for leading the
15 Companys financial management functions, including the Companys controllers, financial
16 reporting, tax management, asset-liability management, treasury, corporate development, investor
17 relations and mergers and acquisitions. During the Relevant Period, moreover, defendant Atkins
18 issued statements in Company press releases and participated in the Companys conference calls
19 with analysts and investors, representing himself as a primary person with knowledge about the
20 Companys business, outlook, financial reports and business practices. Defendant Atkins reportedly
21 enjoyed compensation of approximately $11,500,000 in 2009 and $8,900,000 in 2010. Defendant
22 Atkins abruptly resigned from the position as CFO from the Company on February 8, 2011 and was
23 scheduled to retire on August 6, 2011, with approximately $22 million in deferred compensation and
24 benefits. Defendant Atkins is a citizen of the State of California.
25
35.
Defendant John D. Baker II has served as a director of Wells Fargo since 2009. As a
26 director, defendant Baker has agreed to abide by the terms of the Wells Fargo & Company Director
27 Code of Ethics. Previously, defendant Baker had served as a director of Wachovia Corporation since
28 2001, until it was acquired by Wells Fargo on December 31, 2008. Defendant Baker serves on the
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1 Boards Audit and Examination Committee, Corporate Responsibility Committee and Credit
2 Committee, and has agreed to abide by the terms of the respective charters of each committee on
3 which he serves. In addition to the demand futility allegations set forth specifically below, defendant
4 Bakers role on the aforementioned Board committees during the Relevant Period implicates his
5 decisions on those committees. Defendant Baker reportedly enjoyed total compensation as a Wells
6 Fargo director of $295,667 in 2010. Defendant Baker is a citizen of the State of Florida.
7
36.
Defendant John S. Chen has served as a director of Wells Fargo since 2006. As a
8 director, defendant Chen has agreed to abide by the terms of the Wells Fargo & Company Director
9 Code of Ethics. Defendant Chen reportedly enjoyed total compensation as a Wells Fargo director of
10 $275,667 in 2008, $289,789 in 2009 and $297,667 in 2010. Defendant Chen is a citizen of the State
11 of California.
12
37.
Defendant Lloyd H. Dean has served as a director of Wells Fargo since 2005. As a
13 director, defendant Dean has agreed to abide by the terms of the Wells Fargo & Company Director
14 Code of Ethics. Defendant Dean serves on the Boards Audit and Examination Committee,
15 Corporate Responsibility Committee (Chair), Credit Committee, and Risk Committee, and has
16 agreed to abide by the terms of the respective charters of each committee on which he serves. In
17 addition to the demand futility allegations set forth specifically below, defendant Deans role on the
18 aforementioned Board committees during the Relevant Period implicates his decisions on those
19 committees. Defendant Dean reportedly enjoyed total compensation as a Wells Fargo director of
20 $250,431 in 2008, $333,789 in 2009 and $297,667 in 2010. Defendant Dean is a citizen of the State
21 of California.
22
38.
Defendant Susan E. Engel has served as a director of Wells Fargo since 1998. As a
23 director, defendant Engel has agreed to abide by the terms of the Wells Fargo & Company Director
24 Code of Ethics. Defendant Engel serves on the Boards Credit Committee and Finance Committee,
25 and has agreed to abide by the terms of the respective charters of each committee on which she
26 serves. In addition to the demand futility allegations set forth specifically below, defendant Engels
27 role on the aforementioned Board committees during the Relevant Period implicates her decisions on
28 those committees. Defendant Engel reportedly enjoyed total compensation as a Wells Fargo director
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1 of $248, 431 in 2008, $307,789 in 2009 and $293,667 in 2010. Defendant Engel is a citizen of the
2 State of New York.
3
39.
Defendant Enrique Hernandez, Jr. has served as a director of Wells Fargo since 2003.
4 As a director, defendant Hernandez has agreed to abide by the terms of the Wells Fargo & Company
5 Director Code of Ethics. Defendant Hernandez serves on the Boards Audit and Examination
6 Committee, Corporate Responsibility Committee, Finance Committee (Chair), and Risk Committee,
7 and has agreed to abide by the terms of the respective charters of each committee on which he
8 serves. In addition to the demand futility allegations set forth specifically below, defendant
9 Hernandezs role on the aforementioned Board committees during the Relevant Period implicates his
10 decisions on those committees. Defendant Hernandez reportedly enjoyed total compensation as a
11 Wells Fargo director of $269,681 in 2008, $326,789 in 2009 and $304,667 in 2010. Defendant
12 Hernandez is a citizen of the State of California.
13
40.
Defendant Donald M. James has served as a director of Wells Fargo since 2009. As a
14 director, defendant James has agreed to abide by the terms of the Wells Fargo & Company Director
15 Code of Ethics. Previously, James had served as a director of Wachovia Corporation since 2004,
16 until it was acquired by Wells Fargo on December 31, 2008. Defendant James serves on the Wells
17 Fargo Boards Finance Committee, and has agreed to abide by the terms of its charter. In addition to
18 the demand futility allegations set forth specifically below, defendant Jamess role on the
19 aforementioned Board committee during the Relevant Period implicates his decisions on that
20 committee. Defendant James reportedly enjoyed total compensation as a Wells Fargo director of
21 $285,667 in 2010. Defendant James is a citizen of the State of Alabama.
22
41.
23 through May 3, 2011. As a director, defendant McCormick agreed to abide by the terms of the
24 Wells Fargo & Company Director Code of Ethics. Defendant McCormick served on the Boards
25 Finance Committee, and agreed to abide by the terms of its charter. Defendant McCormick
26 reportedly enjoyed total compensation as a Wells Fargo director of $246,181 in 2008, $297,789 in
27 2009 and $283,667 in 2010.
28
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42.
Defendant Mackey J. McDonald has served as a director of Wells Fargo since 2009.
2 As a director, defendant McDonald agreed to abide by the terms of the Wells Fargo & Company
3 Director Code of Ethics. Previously, defendant McDonald had served as a director of Wachovia
4 Corporation since 1997, until it was acquired by Wells Fargo on December 31, 2008. Defendant
5 McDonald serves on the Boards Governance and Nominating Committee, and has agreed to abide
6 by the terms of its charter. In addition to the demand futility allegations set forth specifically below,
7 defendant McDonalds role on the aforementioned Board committee during the Relevant Period
8 implicates his decisions on that committee.
43.
Defendant Cynthia H. Milligan has served as a director of Wells Fargo since 1992.
12 As a director, defendant Milligan agreed to abide by the terms of the Wells Fargo & Company
13 Director Code of Ethics. Defendant Milligan serves on the Boards Audit and Examination
14 Committee, Corporate Responsibility Committee, Credit Committee (Chair), Governance and
15 Nominating Committee, and Risk Committee (Chair), and has agreed to abide by the terms of the
16 respective charters of each committee on which she serves. In addition to the demand futility
17 allegations set forth specifically below, defendant Milligans role on the aforementioned Board
18 committees during the Relevant Period implicates her decisions on those committees. Defendant
19 Milligan reportedly enjoyed total compensation as a Wells Fargo director of $252,431 in 2008,
20 $320,244 in 2009 and $327,101 in 2010. Defendant Milligan is a citizen of the State of Nebraska.
21
44.
Defendant Nicholas G. Moore has served as a director of Wells Fargo since 2006. As
22 a director, defendant Moore agreed to abide by the terms of the Wells Fargo & Company Director
23 Code of Ethics. Defendant Moore serves on the Boards Audit and Examination Committee (Chair),
24 Credit Committee, and Risk Committee, and has agreed to abide by the terms of the respective
25 charters of each committee on which he serves. In addition to the demand futility allegations set
26 forth specifically below, defendant Moores role on the aforementioned Board committees during the
27 Relevant Period implicates his decisions on those committees and renders him hostile to the instant
28 action. Defendant Moore reportedly enjoyed total compensation as a Wells Fargo director of
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1 $245,431 in 2008, $359,789 in 2009 and $327,667 in 2010. Defendant Moore is a citizen of the
2 State of California.
3
45.
Defendant Philip J. Quigley has served as a director of Wells Fargo since 1994, and
4 currently serves as the Boards Lead Director. As a director, defendant Quigley agreed to abide by
5 the terms of the Wells Fargo & Company Director Code of Ethics. Defendant Quigley serves on the
6 Boards Audit and Examination Committee, Governance and Nominating Committee (Chair), and
7 Risk Committee, and has agreed to abide by the terms of the respective charters of each committee
8 on which he serves. In addition to the demand futility allegations set forth specifically below,
9 defendant Quigleys role on the aforementioned Board committees during the Relevant Period hereto
10 implicates his decisions on those committees.
11 compensation as a Wells Fargo director of $282,431 in 2008, $343,789 in 2009 and $348,839 in
12 2010. Defendant Quigley is a citizen of the State of California.
13
46.
Defendant Judith M. Runstad has served as a director of Wells Fargo since 1998. As
14 a director, defendant Runstad agreed to abide by the terms of the Wells Fargo & Company Director
15 Code of Ethics. Defendant Runstad serves on the Boards Corporate Responsibility Committee,
16 Credit Committee, and Finance Committee, and has agreed to abide by the terms of the respective
17 charters of each committee on which she serves. In addition to the demand futility allegations set
18 forth specifically below, defendant Runstads role on the aforementioned Board committees during
19 the Relevant Period implicates her decisions on those committees. Defendant Runstad reportedly
20 enjoyed total compensation as a Wells Fargo director of $238,431 in 2008, $293,789 in 2009 and
21 $293,919 in 2010. Defendant Runstad is a citizen of the State of Washington.
22
47.
Defendant Stephen W. Sanger has served as a director of Wells Fargo since 2003. As
23 a director, defendant Sanger agreed to abide by the terms of the Wells Fargo & Company Director
24 Code of Ethics. Defendant Sanger serves on the Boards Finance Committee (2010 only),
25 Governance and Nominating Committee (2011 only) and Risk Committee, and has agreed to abide
26 by the terms of the respective charters of each committee on which he serves. In addition to the
27 demand futility allegations set forth specifically below, defendant Sangers role on the
28 aforementioned Board committees during the Relevant Period implicates his decisions on those
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1 committees. Defendant Sanger reportedly enjoyed total compensation as a Wells Fargo director of
2 $264,431 in 2008, $317,789 in 2009 and $305,667 in 2010. Defendant Sanger is a citizen of the
3 State of Minnesota.
4
48.
Defendant Susan G. Swenson has served as a director of Wells Fargo since 1994. As
5 a director, defendant Swenson agreed to abide by the terms of the Wells Fargo & Company Director
6 Code of Ethics. Defendant Swenson serves on the Boards Audit and Examination Committee and
7 Governance and Nominating Committee, and has agreed to abide by the terms of the respective
8 charters of each committee on which she serves. In addition to the demand futility allegations set
9 forth specifically below, defendant Swensons role on the aforementioned Board committees during
10 the Relevant Period implicates her decisions on those committees and renders her hostile to the
11 instant action. Defendant Swenson reportedly enjoyed total compensation as a Wells Fargo director
12 of $252,431 in 2008, $305,789 in 2009 and $377,217 in 2010. Defendant Swenson is a citizen of the
13 State of California.
14
49.
15 McCormick, McDonald, Milligan, Moore, Quigley, Runstad, Sanger and Swenson, because of their
16 positions with the Company, possessed the power and authority to control the contents of Wells
17 Fargos quarterly reports, press releases and presentations to shareholders and analysts. They were
18 provided with copies of the Companys false and misleading reports and press releases before or
19 shortly after their issuance and had the ability and opportunity to prevent their issuance or cause
20 them to be corrected. Because of their positions with the Company, and their access to material non21 public information available to them but not to the public, defendants knew that the adverse facts
22 specified herein had not been disclosed to and were being concealed from the public and that the
23 positive representations being made were then materially false and misleading. Defendants are
24 liable for the false and misleading statements and omissions pleaded herein.
25
50.
Defendants, and each of them, acted in bad faith and breached their fiduciary duties
26 of candor, loyalty and good faith owed to Wells Fargo by causing or permitting Wells Fargo to enter
27 into transactions to the detriment of Wells Fargo. Defendants also acted in bad faith and breached
28 their fiduciary duties of candor, loyalty and good faith owed to Wells Fargo by causing Wells Fargo
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1 to issue false and misleading statements concerning its business prospects and revenue and income
2 projections.
3 Non-Party MERS and MERSCORP
4
51.
5 owned subsidiary of MERSCORP, Inc. was created in 1994 by the mortgage finance industry,
6 including Wells Fargo, Bank of America, HSBC, the Mortgage Bank Association and others. The
7 purpose of MERS was to maintain a database to simplify the tracking and servicing of individual
8 mortgages and speed up the recording and transfer of mortgages as opposed to physically recording
9 transfers and assignment documentation in state and county clerks offices. Mortgage lenders or
10 originators designated MERS as its assignee or nominee with the power to assign and transfer the
11 mortgage. According to MERS, the MERS system is the only central database of mortgage loan
12 information. Further, according to MERS, the data on MERS system is provided and maintained by
13 MERS members, including Wells Fargo. MERS is supported by membership and transaction fees
14 paid by MERS members. According to MERS, it has received no income from foreclosures.
15
52.
In a stipulated consent order entered into by the OCC and MERS on April 13, 2011,
53.
As of the date of this filing, the MERS Board of Directors consist of the following
28 individuals, including Joe Jackson, Senior Vice President, Wells Fargo N.A.:
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1
2
Name
Kurt Pfotenhauer,
Chairman
Bill Beckmann
Title
CEO
Albert Celini
3
4
5
Diane Citron
Joe Jackson
Brian McCrackin
Director of Finance
Gwen Muse-Evans
9
10
11
12
13
14
Robert Reynolds
Eric Schuppenhauer
David H. Stevens
Lawrence P.
Washington
Company
American Land
Title Association
MERSCORP,
Inc.
Freddie Mac
Location
Washington, DC
Ally Financial,
Inc.
Wells Fargo
Bank, N.A.
CitiMortgage,
Inc.
Fannie Mae
Reston, VA
McLean, VA
St. Louis, MO
Washington, DC
SunTrust Banks,
Inc.
JPMorgan Chase
Richmond, VA
Mortgage
Bankers
Association
Bank of
America, N.A.
Washington, DC
Columbus, OH
Jacksonville, FL
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Case3:11-cv-02369-SI Document59
(b)
(c)
New York City Teachers Retirement System and New York City Police
(d)
(e)
(f)
(g)
(h)
(i)
3 Pension Fund;
55.
10
Together, each of the above institutions reportedly held, collectively, tens of millions
11 of shares in Wells Fargo valued at more than $1 billion to $1.6 billion. The Board, while including
12 the shareholder proposal in the 2011 proxy material, recommended that shareholders vote against the
13 proposal.
14
15
56.
Each director and officer of Wells Fargo owed Wells Fargo and its shareholders the
16
duty to exercise the highest degree of candor, good faith and loyalty in the management and
17
administration of the Companys affairs, as well as in the use and preservation of Wells Fargos
18
property and assets. Delaware law holds: Loyalty. Good faith. Independence. Candor. These are
19
words pregnant with obligation. The Supreme Court did not adorn them with half-hearted
20
adjectives. Directors should not take a seat at the board table prepared to offer only conditional
21
loyalty, tolerable good faith, reasonable disinterest or formalistic candor. In re Tyson Foods, Inc.
22
Consol. Sholder Litig., No. 1106-CC, 2007 Del. Ch. LEXIS 120, at *10-*11 (Del. Ch. Aug. 15,
23
2007).
24
57.
The conduct of Wells Fargos directors and officers complained of herein involves a
25
knowing and culpable violation of their fiduciary obligations, the absence of good faith on their part,
26
and a reckless disregard for their duties to the Company which the directors and officers were aware
27
or should have been aware posed a risk of serious injury to the Company. The conduct of Wells
28
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1 Fargos directors and officers who engaged in illegal conduct has been ratified by Wells Fargos
2 Board, which has failed to take any action against them, despite knowledge of such actions and
3 rejected the taking of action proposed by shareholders, specifically, that the Company do an internal
4 audit of its foreclosure practices among other things and report findings to Company shareholder.
5
58.
To discharge their fiduciary duties of candor, good faith and loyalty, Wells Fargos
(a)
in good faith, manage, conduct, supervise and direct the business and affairs
8 of Wells Fargo and its subsidiaries in accordance with applicable state and federal laws;
9
(b)
10 Wells Fargo to violate applicable federal and state laws, rules and regulations or any rule or
11 regulation of Wells Fargo;
(c)
12
remain informed as to the status of Wells Fargos operations, and upon receipt
(d)
ensure that Wells Fargo was operated in a diligent, honest and prudent manner
16 in compliance with all applicable federal and state laws, rules and regulations.
17
59.
By reason of their corporate positions and their ability to control the business and
18 corporate affairs of Wells Fargo, defendants were required to use their ability to control Wells Fargo
19 in a fair, just and equitable manner, as well as to act in furtherance of the best interests of Wells
20 Fargo and not in furtherance of their own personal interests or ideology. In violation of their
21 fiduciary duties of candor, loyalty and good faith, defendants caused Wells Fargo to conduct its
22 business in an unsafe, imprudent, dangerous and illegal manner.
23
60.
24 improperly benefit themselves, instead of acting in the best interests of the Company, and to remain
25 as directors and officers of a public corporation and to continue and prolong the illusion of Wells
26 Fargos success and to conceal the adverse facts concerning Wells Fargos actual financial condition
27 so that they could protect and perpetuate their directorial and/or executive positions and increase the
28 substantial compensation, perks and prestige they obtained thereby. Such participation involved,
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1 among other things, planning and creating (or causing to be planned and created), proposing (or
2 causing the proposal of) and authorizing, approving and acquiescing in the illegal conduct
3 complained of herein.
4
61.
During the Relevant Period, each of the defendants occupied a position with Wells
5 Fargo or was associated with the Company in such a manner as to make them privy to confidential
6 and proprietary information concerning Wells Fargo and its operations, finances and financial
7 condition. Because of these positions and such access, each of the defendants knew that the true
8 facts specified herein regarding Wells Fargos business and finances had not been disclosed to and
9 were being concealed from its shareholders and the public. Defendants, as corporate fiduciaries
10 entrusted with non-public information, were obligated to disclose material adverse information
11 regarding Wells Fargo and to take any and all actions necessary to ensure that the officers and
12 directors of Wells Fargo did not act upon such privileged non-public information in a manner which
13 caused the Company to violate the law.
14
62.
Defendants breached their duties of candor, loyalty and good faith by allowing or by
15 themselves causing the Company to misrepresent its financial results and prospects, as detailed
16 herein, and by failing to prevent defendants from taking such illegal actions. Each of the defendants
17 participated in the issuance and/or review of false and misleading statements, including the
18 preparation of false and misleading press releases, SEC filings and reports to Wells Fargo
19 shareholders. In addition, as a result of defendants illegal actions and course of conduct, the
20 Company is the target of an investigation by the SEC.
21
63.
Pursuant to Wells Fargos Director Code of Ethics, Wells Fargo expects its directors
22 to act in a manner that will serve the best interests of Wells Fargo; that is fair, honest and
23 trustworthy; that is in compliance with applicable laws, rules and regulations; that will preserve
24 confidential information; that will avoid conflicts of interest or the appearance of conflicts of
25 interest; and that will protect and promote the proper use of Wells Fargos assets.
26
64.
27
28
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1
2
The Board has adopted and promotes the Wells Fargo Code of Ethics and Business
Conduct applicable to all team members, and has adopted a Director Code of Ethics
applicable to members of the Board. Directors shall be familiar with, and are
expected to conduct their activities in accordance with, the Director Code of Ethics.
3
65.
The Companys Team Member Code of Ethics and Business Conduct states:
4
5
6
To preserve and foster the publics trust and confidence, complete honesty
and fairness is required in conducting internal and external business. Its
important that every Wells Fargo team member understands that the honesty, trust,
and integrity essential for meeting the highest standards of corporate governance are
not just the responsibility of senior management or boards of directors.
7
COMMITTEES OF THE WELLS FARGO BOARD OF DIRECTORS
8
66.
During the Relevant Period, the Companys Board maintained five separate
9
committees on which certain director defendants sat. The Board Committees were the Audit and
10
Examination Committee, the Credit Committee, the Financial Committee and the Governance and
11
Nominating Committee.
12
67.
Audit and Examination Committee: Under Wells Fargos Audit and Examination
13
Committee Charter, the members of the committee are required, among other things, to:
14
(a)
review and discuss with management the Companys annual and quarterly
15
financial statements;
16
(b)
(c)
17
issuance;
18
19
Wells Fargos shareholders, securities analysts and members of the financial press;
20
(d)
21
deficiencies in, the design or operation of disclosure controls and procedures or internal controls, and
22
any fraud, whether or not material, that involves management or other employees who have a
23
significant role in Wells Fargos internal controls; and
24
(e)
25
Conduct by Wells Fargos directors, officers and employees.
26
27
28
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Here, the members of the Audit and Examination Committee (defendants Baker, Dean,
2 Hernandez, Milligan, Moore, Quigley and Swenson) failed to discharge their fiduciary duties and
3 obligations under the Audit and Examination Committee Charter.
4
68.
5 Committee Charter, the members of the committee are required, among other things, to:
6
(a)
7 responsibility matters, including those relating to the Companys fair and responsible mortgage
8 lending and the Companys government relations; and
9
(b)
Here, the members of the Corporate Responsibility Committee (defendants Baker, Dean,
12 Hernandez, Milligan and Runstad) failed to discharge their fiduciary duties and obligations under the
13 Corporate Responsibility Committee Charter.
14
69.
Credit Committee: Under Wells Fargos Credit Committee Charter, the members of
(a)
review the quality of the Companys credit portfolio and the trends affecting
18
(b)
19
(c)
20
(d)
17 that portfolio;
21
Here, the members of the Credit Committee (defendants Baker, Dean, Engel, Milligan,
22 Moore and Runstad) failed to discharge their fiduciary duties and obligations under the Credit
23 Committee Charter.
24
70.
Finance Committee: Under the Wells Fargos Finance Committee Charter, the
(a)
oversee the Companys major financial risks, including liquidity and funding
27 risk, market risk and financial risks (including credit risk) related to the Companys investment
28 security portfolio;
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(b)
(c)
(d)
(e)
(f)
report to the Board the conclusions of the Committee regarding these matters.
Here, the members of the Finance Committee (defendants Engel, Hernandez, James and
8 Runstad) failed to discharge their fiduciary duties and obligations under the Finance Committee
9 Charter.
71.
10
11 Nominating Committee Charter, the members of the committee are required, among other things, to:
12
(a)
14
(b)
15
(c)
review from time to time director compensation and recommend any changes
13 Company;
(d)
(e)
20 committees Charter.
21
72.
During the Relevant Period, the members of the Governance and Nominating
22 Committee (defendants McDonald, Milligan, Quigley, Sanger and Swenson) failed to discharge their
23 fiduciary duties and obligations under the Governance and Nominating Committee Charter.2
24
25
Risk Committee: Under Wells Fargos Risk Committee Charter, which was created in 2011,
the members of the committee are required, among other things, to:
26
27
(a)
oversee the Companys strategies, policies, procedures and systems,
established by management to identify, assess, measure and manage major risks
faced by Wells Fargo;
28
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73.
The chart below illustrates which respective committee each Company board member
As early as 2007, Wells Fargo, including its subsidiaries, agents and partners,
13
including MERSCORP and MERS and through the height of the financial crisis instituted home
14
foreclosure proceedings in judicial foreclosure states throughout the country. Wells Fargo also
15
instituted home foreclosure processes in non-foreclosure states like California. In both sets of
16
scenarios, as part of an intentional and strategic business practice, Wells Fargo, knowing and/or
17
recklessly implemented and employed a policy and business strategy to accelerate the home
18
foreclosure process by mass processing declarations or affidavits to be submitted in court
19
proceedings and filed with state agencies purporting to evidence accurate transfer and recording of
20
title on properties it sought to foreclose upon.
21
75.
The Wells Fargo business practice and strategy was knowingly or recklessly designed
22
to avoid the work and cost associated with obtaining facts or documents representing ownership,
23
standing and the right to foreclose on properties. The Company, through certain of its employees,
24
25
26
27
(b)
review and discuss policies with respect to risk assessment and risk
management, including the Companys major financial, operational, compliance or
reputational risk exposures; and
(c)
monitor the steps management has taken to control such risk exposures.
28
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1 has admitted the process was designed to and permitted Wells Fargo employees and agents to submit
2 affidavits purportedly with personal knowledge without determining the accuracy and truthfulness of
3 the affidavits it was executing and filing in courts around the country. The Companys practice and
4 procedures of mass processing foreclosure documents was also designed to and/or had the effect of
5 concealing the possibility that title and standing could not be perfected in which case the Company
6 would be at risk of writing down millions if not billions of dollars in mortgages. Therefore, in
7 addition to the accelerated foreclosure processes facilitated by MERS, even internally, volume and
8 speed were paramount such that certain Wells Fargo departments or units and units working on
9 behalf of Wells Fargo functioned as foreclosure mills, along with other large banks, often employing
10 the same individuals posing as company vice presidents, purportedly as Wells Fargo senior
11 executives or vice presidents in order for the affidavits to appear legitimate.
12
76.
According to a number of Wells Fargo employees, Wells Fargo executes all of the
13 documents necessary for foreclosures nationwide from an office in Fort Mill, South Carolina. Based
14 almost exclusively on information generated by a Wells Fargo proprietary Matrix computer system,
15 Company employees in the document execution department sign all foreclosure documents and
16 affidavits that are presented to them without personally verifying any substantive information. See
17 84-85, 87. By design, the sole responsibility of employees in the document execution department
18 is, as the name suggests, to execute documents and affidavits, trusting that some other division of
19 Wells Fargo has confirmed that the information is correct.
20
77.
Defendant Atkins, during the Company's 3Q10 financial results conference call
21 conceded that Wells Fargos process for executing affidavits was indeed designed by the Company
22 and the Company was in fact aware of how it was designed to work. See 16 (To help ensure
23 accuracy over the years, Wells Fargo has built control processes that link customer information with
24 foreclosure procedures and documentation requirements.). But in the same conference call,
25 defendant Atkins falsely represented that [o]ur process specifies that affidavit signers and reviewers
26 are the same team member, not different people, and affidavits are properly notarized. Id. Despite
27 these misrepresentations, defendant Atkins and the other defendants knew that Wells Fargos
28 foreclosure affidavit process including the Companys reliance on its Matrix computer system as
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1 described by certain Wells Fargo Home Mortgage employees was designed, implemented and
2 executed in a fashion that would not only permit, but require Company employees to cause Wells
3 Fargo to file false affidavits with the courts and state agencies.
4
78.
Among those Wells Fargo employees, during the Relevant Period and as early as
5 2007, was Linda Green (Green), who executed loan documentation as Vice President of Wells
6 Fargo. Green, whose name appeared as a vice president on countless mortgage assignments used by
7 Wells Fargo, was fraudulently used by Docx employees including Chris Pendley who signed for
8 Linda Green approximately 4,000 documents a day. Lynn Szymoniak, who was fighting
9 foreclosure, and was an attorney and fraud investigator specializing in forged documents, researched
10 over 10,000 mortgages and noticed the many different ways in which Greens name was signed. As
11 explained in a 60 Minute special by Scott Pelley some of the details of Docx and robo-signer Green
12 were reported:
13
14
One of the strangest signatures belonged to the bank vice president who had
signed Szymoniaks newly discovered mortgage documents. The name is Linda
Green. But, on thousands of other mortgages, the style of Greens signature changed
a lot.
15
16
17
18
19
And, even more remarkable, Szymoniak found Green was vice president of
20 banks - all at the same time.
Where did all those documents come from? We went searching for the
Linda Green and found her in rural Georgia. She told us she has never been a bank
vice president.
In 2003, she was a shipping clerk for auto parts when her grandson told her
about a job at a company called Docx. . . .
20
21
22
23
24
They were sitting in a room signing their name as fast as they possibly could to
any kind of nonsense document that was put in front of them, Szymoniak said.
Docx, and companies like it, were recreating missing mortgage assignments
for the banks and providing the legally required signatures of bank vice presidents
and notaries. Linda Green says she was named a bank vice president by Docx
because her name was short and easy to spell. As demand exploded, Docx needed
more Linda Greens.
25
26
27
Pendley worked at Docx at the same time and signed as Linda Green.
28
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When you came in to Docx on your first day, what did they tell you your job
was gonna be? Pelley asked.
2
3
They told me that I was gonna be signing documents for using someone
elses name, Pendley remembered.
How many banks were you vice president of in a given day? Pelley asked.
79.
The 60 Minutes expos went further with Pendley in which he said that he alone
12
80.
The CBS interview and expos continued and disclosed that 60 Minutes had been told
13
by Green that some of the bank vice presidents signing foreclosure documents were high school kids
14
and their signatures were entered into evidence in untold thousands of foreclosure suits that sent
15
families packing.
16
17
18
Szymoniak says that the banks whose paperwork was handled by the Docx
forgery mill include Wells Fargo, HSBC, Deutsche Bank, Citibank, U.S. Bank and
Bank of America. We contacted all of them. Each said it farmed out its mortgage
servicing work to other companies and it was those mortgage servicing firms that
hired Docx.
19
81.
20
Vice President. More notably, MERS, of which Wells Fargo is a member and also sits on MERS
21
Board of Directors, identifies its address as 2701 Wells Fargo Way, Minneapolis, MN, sharing an
22
address with Wells Fargo. For example, set forth below in a March 2007 affidavit signed by Green
23
as Vice President of MERS sharing an address with Wells Fargo:
24
25
26
27
28
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
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82.
In addition, well before it became more widely disclosed, Wells Fargo and the
2 defendants knew or recklessly disregarded that the Company the business practice designed to speed
3 foreclosures and conceal the likelihood of millions of imperfect title transfer and assignments, had
4 already been challenged in foreclosure around the country. Wells Fargo employees had testified in
5 legal proceedings that they had executed hundreds of thousands of false affidavits purporting to
6 evidence ownership and standing to foreclosure on mortgages wherein they had no personal
7 knowledge of the facts to which they were affirming. For example, as part of several lawsuits that
8 had been instituted by Wells Fargo, deposition testimony of Wells Fargo employees detailed the
9 Wells Fargo policy and practice of executing hundreds of foreclosure-related documents to
10 accelerate and facilitate the foreclosure process. The testimony of multiple employees confirmed
11 that Wells Fargo mass-processed foreclosure affidavits filed in agencies and courts around the
12 country, were falsified in order to accelerate foreclosure proceedings. A number of these depositions
13 were taken months before Wells Fargos public denials of such practices. These facts were known
14 or deliberately disregarded by defendants, who designed and/or turned a blind eye to Wells Fargos
15 execution and submission of false documents to courts and permitted this conduct while rewarding
16 Company executives, including defendant Stumpf, with huge compensation packages.
17
83.
Xee Moua: On March 9, 2010, Xee Moua (Moua), another Wells Fargo employee,
18 testified that she had signed as many as 500 foreclosure-related documents each day without
19 verifying the contents of the documents other than her name and her title effectively committing a
20 fraud upon the court on behalf of Wells Fargo. See Wells Fargo Bank N.A. v. John P. Stipek, et al.,
21 No. 50 2009 CA 01243 (Circuit Court of the 15th Jud. Cir. Palm Beach County). The same Wells
22 Fargo documents/affidavits were then used by Wells Fargo to support lawsuits brought by Wells
23 Fargo, including the Stipek case, to initiate and complete home foreclosures. Moua testified, in
24 substance, that it was Wells Fargos practice, process and procedure not to have those executing
25 foreclosure documents personally review the underlying materials. Instead, others, including
26 attorneys apparently retained by Wells Fargo or liaisons who process the loans purportedly
27 reviewed said documents, however, Moua could not affirm the truth of the fact.
28
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84.
During Mouas March 9, 2010 testimony, Moua testified that in addition to being told
2 by her supervisor that she had authority to execute affidavits on behalf of Wells Fargo, she had
3 received a document she referred to as a Corporate Vote from the Wells Fargo Legal Department,
4 approved by management, which provided authorization to sign loan foreclosure documents on
5 behalf of Wells Fargo.
6
Q.
A.
Job responsibilities are pretty much the same: I help out my team with
any execution of documents; I oversee that these documents are executed
and returned in a timely manner to our attorneys . . . .
8
9
10
Q.
How does your job as a Work Director differ from the job as a processor?
11
A.
12
*
13
Q.
Was there some form of certificate or something that gave you that
authorization?
A.
14
15
16
17
18
A.
19
*
20
Q.
A.
Yes, sir.
Q.
A.
21
22
23
24
*
25
Q.
A.
26
27
*
28
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Q.
And when you say hundreds when youre referencing documents, you
mean the previous documents that you listed; whether it be an affidavit,
an affidavit for judgment, substitution of trustee, those documents?
A.
Yes, sir.
2
3
4
Q.
When you sign these documents, what do you do, what do you look at on
the documents?
A.
Q.
A.
My name, my title.
Q.
Anything else?
A.
That is it.
6
7
8
9
10
11
85.
12
Moua testified that she had no personal knowledge whatsoever of the underlying facts attested to:
13
Q.
Well, Ill move on from that. I believe its the third sentence in Paragraph
2, it says that: Wells Fargo Bank Successor By Merger to Wells Fargo
Home Mortgage, Inc. is responsible for the collection of this loan
transaction and pursuit to any delinquency in payments; on what do you
base that knowledge?
A.
Q.
A.
14
15
16
17
18
19
20
86.
John Kennerty: On May 14, 2009, Herman John Kennerty (Kennerty) executed an
21
affidavit again purportedly as Vice President of Wells Fargo Bank, N.A., attorney in fact for
22
Deutsche Bank National Trust Company, purporting to represent a legal ownership and assignment
23
of a property in Massachusetts. On October 12, 2009, Kennerty, on behalf of Wells Fargo, N.A., as
24
its Vice President of Loan Documentation, executed a Power of Attorney purporting to provide the
25
Harmon Law Offices in Newton, MA, permission to enter a property for purposes of foreclosing on
26
the mortgage on that property.
27
28
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
87.
Kennerty has since testified in deposition in the case of Geline v. Northwest Trustee
25
Services, et al., No. 09-2-46576-2 SEA, Superior Court for King County, Washington, that he was
26
an employee of Wells Fargo Home Mortgage, a subsidiary of Wells Fargo Bank. He testified that he
27
was a loan administration manager, and a Vice President in the Companys document default group.
28
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1 The document default group, according to Kennerty, was responsible for ordering and obtaining
2 collateral documents for loans, the execution of assignments and the execution of foreclosure related
3 documents. Kennertys testimony included the following:
4
Q.
A.
Wells Fargo.
Q.
A.
Q.
A.
Right.
*
10
11
Q.
12
13
A.
Q.
Why dont you tell me what your job duties are of that.
A.
Theres three main areas within the default doc. group. The first one is
the ordering and obtaining of collateral documents for loans. The
assignment team, the execution of assignments, as well as the executable
team which is the executing of other foreclosure-related documents.
14
15
16
17
18
19
Q.
20
A.
Of loan documentation.
21
22
Q.
Can you tell me about how many documents you sign a day?
23
A.
24
25
28
650452_1
Q.
A.
Correct.
26
27
- 36 -
Case3:11-cv-02369-SI Document59
Q.
Somebody comes and brings you those documents and you sit down to
sign them. And youre looking at the documents to make sure that the
date is correct and consistent with the date youre signing the document;
correct?
A.
Yes.
2
3
4
5
Q.
A.
Correct.
6
7
8
88.
Stanley Silva: On January 4, 2010, in Jones, et al. v. Wells Fargo Bank, et al.,
9 No. CV10-01660, another person, Stanley Silva (Silva), not employed by Wells Fargo, but
10 nevertheless signed documents on its behalf, also admitted to the practice of robo-signing notices of
11 foreclosures. Silva testified that he did not even work in the foreclosures department and did not
12 review any documents prior to signing the notices of foreclosures and had no idea if the information
13 in the notice of default was correct. Nevertheless, Silva routinely executed the notices of defaults
14 with verifying the accuracy of the information contained therein. Silva testified he signed about 200
15 default notices over a four-year period. Silvas testimony included the following:
16
A.
17
Q.
18
A.
No.
19
Q.
20
A.
21
Q.
22
A.
23
Q.
But that is not working in foreclosures is your testimony under oath here
today on this video?
A.
Correct.
Q.
A.
24
25
26
27
*
28
650452_1
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Q.
A.
Q.
A.
Nothing.
4
5
89.
6
committing frauds upon courts pervaded the Courts can be found in case of Wells Fargo Bank, N.A.
7
et al. v. John C. Kosar and Linda S. Kosar, No. MG-10-000400, Civil Division, Court of Common
8
Pleas for Allegheny County, Pennsylvania. There, homeowners who were sued for foreclosure by
9
Wells Fargo, filed a Motion to Stay and Petition for Rule to Show Cause Why Action Should not Be
10
Dismissed, With Prejudice, for Widespread, Systematic and Deliberate Violations of the Rules of
11
Court and for Attorneys Fees, after discovery the use of robo-signing in their case and 89 other cases
12
filed in the first few months of 2010 in that county alone.
13
90.
The original verification to the foreclosure pleading was filed by Wells Fargos
14
counsel on the basis the plaintiff (Wells Fargo) was either outside the jurisdiction and/or the
15
verification could not be filed within the time allowed for filing the pleading. A substitution
16
verification was subsequently filed by well-known robo-signer Moua.
17
91.
18
docket in that county of foreclosure cases filed by Wells Fargo, the homeowner defendants presented
19
the court in the motion and/or petition a list of 89 cases in that county alone filed in the first few
20
months of 2010 where Wells Fargo had engaged the same exact conduct of filing attorney
21
verifications followed up by false robo-signed verifications. It was noted that 58 of the robo-signed
22
verifications were by Moua and the rest by other now well-known Wells Fargo robo-signers
23
including China Brown, Kennerty and Anne Neeley. As demonstrated herein, the Company has
24
employed this same fraudulent business model across virtually every county in every state
25
(employing judicial foreclosures) across the country.
26
92.
As of the date this action was filed, May 13, 2011, the Board has been hostile to this
27
action, rendering a pre-suit demand futile because they actively participated in this concerted action
28
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1 to obtain the financial and social benefits of such positions for themselves and to enrich and further
2 the personal and business interests of all defendants identified herein. As a result of defendants
3 wrongful acts, the Company has suffered and continues to be exposed to severe damage to its
4 reputation, goodwill and its ability to conduct future operations, and has been exposed to millions (or
5 billions) of dollars in potential liability for violating federal and state laws and regulations.
6
93.
A majority of the Board or all of its members has demonstrated, as alleged herein,
7 that a pre-suit demand would have been futile. In fact, the Board has already, in substance, rejected
8 a demand and shareholder proposal by shareholders to conduct comprehensive independent internal
9 review of the Companys mortgage servicing procedures, among the requested relief sought by this
10 action. See 149. For this reason alone, among others alleged herein, the entire Board has
11 particularly articulated that it could not consider a pre-suit demand in a disinterested fashion and will
12 not take action to comprehensively investigate the conduct alleged herein or remedy material
13 weaknesses in the Companys internal controls unless forced to through litigation:
(a)
14
15 likelihood of liability for the claims alleged herein, including knowing of reckless misrepresentations
16 on October 12, 2010, October 20, 2010 and November 5, 2010 concerning the Companys mortgage
17 servicing processing and procedures. 107, 110-113, 117-118.
18
(b)
19 foreclosures even after the Company admitted that its foreclosure affidavits, in judicial foreclosure
20 states, failed to meet legal requirements and would have to be re-submitted. 16, 107, 110-111,
21 114, 117.
22
(c)
The Board and the relevant Committees of the Board responsible for the
23 overall risk management of the Company permitted the Company and in particular, defendants
24 Stumpf and Atkins, to file materially false Sarbanes-Oxley certifications falsely stating that they
25 each had evaluated the Companys disclosure controls and determined that they were effective when
26 in truth each of the individual defendants, including a majority of the Board, knew or deliberately
27 disregarded that the Company had in fact designed flawed processes and procedures, including the
28 Companys Foreclosure Matrix system. Prior to the issuance of the statements and filings with the
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1 SEC, the Company employees testified under oath in substance that a Foreclosure Matrix system
2 and the Companys policies and procedures encouraged and in fact required Wells Fargo employees
3 to falsely attest in affidavits filed with the court to facts to which they did not have personal
4 knowledge. 84-85, 87.
5
(d)
6 shareholder proposal that, in light of alleged and admitted robo-signing, the Audit Committee
7 conduct a comprehensive and independent review of the Companys mortgage servicing practices.
8 54, 119-122. Instead, the Board recommended generally that shareholders vote against a
9 shareholder proposal that would have required such a review. 149. The Boards basis for rejection
10 and recommendation to vote against the proposal was that such an investigation would distract it
11 from coordinating with regulatory investigators. The Board knew and acknowledged, however, that
12 the regulatory investigation were limited to only a sample of Company loan files. Id.
13
(e)
The Company, through its Board and executives, from 2007 to the present
14 (referred to as the Relevant Period), has permitted the Company to take positions in investigations
15 concerning its servicing mortgage procedures, in particular, the Office of the United States Trustee,
16 which according to its Executive Director, Clifford White III, is responsible for investigating
17 possible foreclosure improprieties, which amount to stonewalling and refusing to cooperate with
18 inquiries and requests for documents, which were designed to determine the cause and impact of
19 robo-signing at Wells Fargo and other lenders. 165-166.
20
(f)
The Board or a majority of its members has demonstrated during the Relevant
21 Period that they will permit the Company to take litigation positions of denial of wrongdoing,
22 including permitting the Company to design processes solely for the purpose of concealing unlawful
23 predatory conduct, the purpose of which was to take advantage of the economically vulnerable. This
24 is evidenced by findings of fact and conclusions of law after trial in Gutierrez, 730 F. Supp. 2d at
25 1124, which exposed the Company to $200 million judgment. 187-189.
26
(g)
The Board with knowledge that Stumpf and Atkins had caused the Company
27 to misrepresent to the public and shareholders that Wells Fargo's servicing processes and procedures
28 were sound, and issue false denials of robo-signing, nevertheless approved millions of dollars in
650452_1
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1 incentive awards to Stumpf and Atkins crediting, among other things their risk management and
2 credibility with the investment community. 150-152.
3
(h)
4 Company to design, implement and execute practices that would have the effect of encouraging its
5 employees to steer qualified loan applicants into subprime loans resulting in consent order and a fine
6 of $85 million. 174-175.
7
8
SUBSTANTIVE ALLEGATIONS
94.
On April 21, 2010 the Company issued a press lease entitled WELLS FARGO
Wells Fargo & Company reported diluted earnings per common share of $0.45 and
net income of $2.5 billion for first quarter 2010.
11
13
14
95.
12
On May 7, 2010 the Company filed its Form 10-Q for the period ending March 31,
15 2010. The Form 10-Q repeated the 1Q10 financial results reported in the Companys April 21, 2010
16 press release. Under Financial Review, the 1Q10 stated in relevant part:
17
18
Our vision is to satisfy all our customers financial needs, help them
succeed financially, be recognized as the premier financial services company in
our markets and be one of Americas great companies. . . . All of our business
segments contributed to the strong earnings results in first quarter 2010.
19
21
Our company earned $2.5 billion in first quarter 2010, or $0.45 diluted
earnings per common share. This earnings performance is an example of how our
business model is capable of producing solid results in different stages of the
economic cycle.
22
96.
20
The May 7, 2010 Form 10-Q also included a section describing the Companys
23 internal controls and assured Wells Fargo shareholders that defendants Stumpf and Atkins had
24 evaluated the Companys disclosure controls and had declared them effective:
25
26
27
28
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97.
The 1Q10 also included the certification of defendant Stumpf regarding the adequacy
1.
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2010, of Wells Fargo & Company;
5
*
6
7
8
4.
The registrants other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
9
(a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
[and]
10
11
12
13
(c)
Evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation . . . .
14
15
16
17
18
19
5.
The registrants other certifying officer(s) and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process, summarize
and report financial information; and
20
21
22
(b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
control over financial reporting.
23
24
98.
Additionally, the 1Q10, Note 10, included a report on Guarantees and Legal
25
Actions.
However, under Legal Actions, the Company did not report any litigation or
26
investigations concerning its fraudulent foreclosure practices, nor did the Company disclose the
27
known fact that certain of its employees had already testified under oath that Wells Fargos
28
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1 foreclosure practices and policies permitted and in fact encouraged the robo-signing of foreclosure
2 documents. The testimony of several of its vice president would later lead to more in-depth
3 investigation and exposure to additional liability, including the wide-spread use of robo-signing.
4
99.
On July 21, 2010 the Company issued a press release entitled WELLS FARGO
5 REPORTS NET INCOME OF $3.06 BILLION; UP 20% FROM PRIOR QUARTER. In addition
6 to reporting strong financial results for the quarter, defendants caused or recklessly permitted the
7 Company to falsely claim that it had in fact supported a regulatory environment that separated
8 consumer protections and prudent risk management:
9
10
11
Wells Fargo & Company reported diluted earnings per common share of $0.55 for
second quarter 2010 compared with $0.45 for first quarter 2010 and $0.57 for second
quarter 2009. Net income was $3.06 billion for second quarter 2010 compared with
$2.55 billion in first quarter 2010 and $3.17 billion in second quarter 2009. For the
six months ended June 30, 2010, the Companys net income was $5.6 billion, or
$1.00 per share, compared with $6.2 billion, or $1.13 per share, a year ago.
12
*
13
16
17
100.
14
15
On August 9, 2010, the Company filed its Form 10-Q for the period ending June 30,
18 2010 with the SEC. The Form 10-Q repeated the 2Q10 financial results reported in the Companys
19 July 21, 2010 press release and again failed to disclose ongoing actions. Though not individually
20 material to the Companys bottom-line, each section revealed material deficiencies within the
21 Companys internal controls, which ultimately hurt shareholders and homeowners. Instead, under
22 Controls and Procedures the 2Q10 falsely stated that defendants Stumpf and Atkins had evaluated
23 the Companys controls and that they were in fact effective:
24
25
26
27
28
650452_1
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101.
The Companys August 9, 2010 Form 10-Q also included the Sarbanes-Oxley
- 44 -
Case3:11-cv-02369-SI Document59
1
2
Ally Financial Inc., GMACs parent company, said Mr. Stephan is still
working there and admitted there had been irregularities.
3
4
5
6
7
103.
8
Wells Fargo spokesman Jason Menke wrote as follows: Wells Fargos policies, procedures and
9
practices satisfy us that the affidavits we sign are accurate. We audit, monitor and review our
10
affidavits under controlled standards on a daily basis. We will stand by our affidavits and if we find
11
an error we will take the appropriate action.
12
104.
13
Signing: Documents Show Citi and Wells Also Committed Foreclosure Fraud that described the
14
fraudulent process noting that the alleged conduct of submitting false affidavits to a court was
15
fraud and that Wells Fargo was continuing in its denial of the practice. The article disclosed
16
publicly the details of the Kennerty deposition discussed above at 87, infra.:
17
18
19
20
23
GMAC, JPMorgan Chase (JPM), Bank of America (BAC) and One West Bank
employees routinely sign hundreds of documents without verifying what theyre
signing. Those documents are then submitted to courts as if the documents were
true, to enable the banks to foreclose on delinquent properties. Wells Fargo (WFC)
and Citigroups (C) CitiMortgage told The New York Times their employees do not
engage in similar practices. Yet, new evidence Ive found shows they have. At
deadline, I was still awaiting a response from CitiMortgage.
24
25
For example, in one case I reviewed, Herman John Kennerty of Wells Fargo gave a
deposition describing the department he oversees for Wells Fargo. Its a department
dedicated to simply signing documents. Kennerty testified that he signs 50 to 150
documents a day, verifying only the date on each. Although the foreclosure in that
case was upheld, Wells Fargo did not dispute Kennertys signing practices.
21
22
26
27
28
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105.
On October 5, 2010, the Attorney General of the State of North Carolina wrote to
2 Wells Fargos General Counsel James Strother communicating his concern about reports of robo3 signing in the mortgage servicing industry and growing evidence that the practice was not isolated to
4 GMAC Mortgage Co., JPMorgan Chase, and Bank of America. The Attorney General of North
5 Carolina implored Wells Fargo to review its practices in North Carolina and submit a report
6 identifying its practice for the execution of affidavits in North Carolina:
7
8
James M. Strother
General Counsel
Wells Fargo & Company
10
11
12
13
14
15
16
We are very concerned about these practices. The use of unverified affidavits
to obtain legal relief strikes at the heart of the integrity of the legal process and could
constitute a fraud upon the court. Moreover, submitting defective affidavits could
possibly result in homeowners losing their homes to foreclosure without a valid
underlying basis.
17
18
106.
The letter also requested Wells Fargo to promptly do an internal review and provide
19 North Carolina evidence of its good faith effort to verify documentation before instituting
20 foreclosure actions in North Carolina. Wells Fargo, reportedly in a December 2, 2010 letter from
21 Wells Fargos Deputy, David Moskowitz, communicated Wells Fargos rejection of the request
22 citing its apparent cooperation with the authority.
23
107.
On October 12, 2010, defendants caused the Company to issue a press release again
24 falsely reaffirming that its foreclosure affidavits were indeed accurate and that Wells Fargo not be
25 instituting a moratorium to investigate its processes as some of the other banks had done:
26
27
28
650452_1
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4
5
6
7
8
108.
On October 13, 2010, the Star Tribune published an article entitled Rapid-fire
9
foreclosures alleged at Wells Fargo that also summarized the vast amount of evidence
10
demonstrating that Wells Fargo engaged in the fraudulent business practice of robo-signing,
11
notwithstanding the Companys repeated denials:
12
13
14
15
16
Wells Fargo & Co. mortgage loan processors have acknowledged signing
hundreds of foreclosure documents a day without verifying the informations
accuracy, calling into question the banks assertion that it did not make errors in
documents used to evict people from their homes.
A Wells Fargo vice president in South Carolina said she signed anywhere
between 300 to 500 foreclosure documents over a two-hour period each day,
without verifying much of the information. A second Wells Fargo employee said
he signed 50 to 150 foreclosure documents a day, verifying only the dates.
17
*
18
19
Banks face accusations that they were in such a rush to process foreclosures
that they were robo signing hundreds or thousands of foreclosure affidavits a day
without verifying their accuracy.
20
21
22
23
24
*
25
26
27
28
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109.
On October 14, 2010, the Financial Times published an article entitled Spotlight
2 falls on Wells Fargo foreclosure procedures. The article disclosed that notwithstanding Wells
3 Fargos denials about its foreclosure processes regarding the verification of mortgage foreclosure
4 documents, a Company Vice President of Loan Documentation, Moua, had sworn in a deposition
5 (taken months before the robo-signing phenomenon began to receive public notoriety) that she
6 signed as many as 500 foreclosure-related documents each day without verifying the contents of the
7 documents other than her name and title. The October 14, 2010 Financial Times article which made
8 this information more generally known is set forth below:
9
10
11
12
13
14
15
Unlike Bank of America, JPMorgan Chase and GMAC, Wells Fargo has not
halted foreclosures and has maintained that it has no problems with its procedures.
Yet, a sworn deposition by one of its loan documentation officers suggests
otherwise. Xee Moua said she signed as many as 500 foreclosure-related papers a
day on behalf of the bank. Ms Moua said the only information she had verified
was whether her name and title appeared correctly.
16
17
Asked whether she checked the accuracy of the principal and interest that
Wells Fargo claimed the borrower owed an important step in banks legal actions
to foreclose Ms Moua replied: I do not.
18
19
20
21
22
Wells Fargo Reports 3Q10 Results and Again Falsely Denies that Wells Fargo Robo-Signed
23 Foreclosure Documents
24
110.
On October 20, 2010, defendants caused the Company to issue its 3Q10 financial
25 results in a press release. Wells Fargo emphasized that its record earnings were a direct result of its
26 core business, helping customers succeed financially. In addition to reporting its financial results,
27 the Company specifically denied that its servicing or foreclosure practices were unsound and stated
28 that it was confident in its foreclosure policies and practices:
650452_1
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1
2
3
Wells Fargo & Company reported diluted earnings per common share of $0.60 for
third quarter 2010 compared with $0.55 for second quarter 2010 and $0.56 for third
quarter 2009. Net income was $3.34 billion in third quarter 2010 compared with
$3.06 billion in second quarter 2010 and $3.24 billion in third quarter 2009. For the
nine months ended September 30, 2010, net income was $8.95 billion, or $1.60 per
common share, compared with $9.45 billion, or $1.69 per common share, a year ago.
4
5
6
7
Record earnings in the third quarter reflect the success of the Wachovia
merger and the benefits of Wells Fargos steady commitment to our core business
of helping customers succeed financially, said Chairman and CEO John
Stumpf . . . .
10
11
111.
8
9
On the same day, October 20, 2010, the Company held a conference call for analysts
12 and investors. The call was hosted by defendant Stumpf. During the call he and other Wells Fargo
13 officers, including defendant Atkins, again assured investors and shareholders that Wells Fargos
14 mortgage servicing processes, specifically on foreclosures, were sound and that the questions in the
15 industry regarding robo-signing, at least with respect to Wells Fargo, were overstated and
16 misrepresented in the marketplace and that the Companys internal control processes already in
17 place ensured reliability and accuracy:
18
19
20
21
22
23
24
25
26
[Stumpf:] Now, I know we have all been hearing in recent months about
business practices within our industry. I am proud of Wells Fargos adherence to a
culture of doing what is right for customers, which not incidentally benefits [our]
team members, our communities, and our shareholders in the long run. For us,
this means doing the hard work early and building processes that adhere to our
standards as a Company. This is as true in our approach to merger integration as it
is to our day-to-day business operations.
Let me quickly give you my views on the latest topic, related to mortgage
foreclosures and repurchases. Howard will address this topic in more detail later
on the call, but there are a couple of important points I want to make up front.
First, foreclosure is always a last resort . . . .
Second, we are confident that our practices, procedures, and
documentation for both foreclosures and mortgage securitizations are sound and
accurate. Third, we did not and do not plan to initiate a foreclosure moratorium.
27
28
650452_1
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Case3:11-cv-02369-SI Document59
112.
2 assertion that the Companys loan servicing policies were sound, falsely stating that the document
3 reviewers and affidavit signer was the same team member:
4
5
6
7
8
9
With that, let me shift to give you an overview of the foreclosure and
mortgage securitization issues. These are issues obviously that are very important to
consumers, mortgage investors, and shareholders. But we believe that these issues
have been somewhat overstated and, to a certain extent, misrepresented in the
marketplace. I would like to be clear here on how they impact Wells Fargo
specifically.
10
*
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
[Nancy Bush NAB Research Analyst:] John, I have just got one question
for you. . . . [T]here have been a couple of instances detailed in the press of Wells
Fargo robo-signing etc. And there is a great deal of speculation that at some point
you guys are going to cave and we are going to find out all this bad stuff about
your foreclosure procedures.
*
[Stumpf:] I dont know how other companies do it, but in our Company our process
has the affidavit signer and reviewer are the same team member. And we believe
these issues they are properly notarized.
And if we find an error we will fix it. I mean that is just humans do make
errors, but that is what our process is. One reviewer, one signer, same person.
27
28
650452_1
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Case3:11-cv-02369-SI Document59
113.
On October 20, 2010, the Company filed its 3Q10 Quarterly Supplement in a filing
2 with the SEC. The 3Q10 Quarterly Supplement also reiterated false statements concerning the
3 soundness of the Companys foreclosure practices:
4
3Q10 Overview
8
9
10
Overview of foreclosure and mortgage securitization
11
I.
12
*
13
14
15
16
17
II.
18
Our process specifies that affidavit signers and reviewers are required to be
the same team members, and affidavits are properly notarized. If we find
errors we fix them
19
20
21
22
23
24
Wells Fargo Finally Admits to Robo-Signing and Identifies 55,000 Affidavits Which Would be
25 Re-Filed
26
114.
On October 27, 2010, the defendants caused the Company to issue a press release
27 admitting that the Companys foreclosure processes had in fact failed to adhere to its reported
28 procedures and that it had permitted certain of its foreclosure documents to be submitted to the
650452_1
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Case3:11-cv-02369-SI Document59
1 courts without the appropriate or authentic signatures on the foreclosure documents effectively
2 committing a fraud upon the court. The Company admitted that it would have to re-do more than
3 55,000 foreclosure affidavits:
4
5
6
7
8
Wells Fargo & Company is continuing its ongoing efforts to monitor and
assess its foreclosure affidavit procedures. We understand the concern over
foreclosure procedures on the part of homeowners in these difficult economic times,
and want to do everything we can to assure that the procedures we have in place
provide Wells Fargo borrowers and others with confidence that foreclosure
proceedings we initiate are done appropriately, said Mike Heid, co-president of
Wells Fargo Home Mortgage.
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
25
26
115.
24
On October 21, 2010, Oppenheimer Equity Research issued a report entitled, Wells
27 Fargo Core Earnings Power Stronger Than What's Visible on the Surface. The report credited the
28
650452_1
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Case3:11-cv-02369-SI Document59
1 Company and defendant Stumpf for convincing shareholders that its foreclosure servicing
2 processes and procedures did not include robo-signing, but instead were sound:
3
Wells Fargo
Wells posted a solid quarter with stable core operating trends in most of the
key operating line items. The reported $0.60 contained about $0.08 of benefit from
reserve releases, and thus the core was just a bit shy of our $0.56 estimate. The
reason for the shortfall was from the pre-provision earnings (PPE) as the net chargeoffs improved more than expected. We are shaving back our revenue and earnings
assumptions a bit. However, we continue to think that the company has earnings
power of over $4 per share in 2012 as the current results are dragged down not just
by credit costs, but also merger costs and operating costs related to dealing with
credit costs. We continue to recommend the stock.
6
7
8
9
10
11
We feel that WFC did a very convincing job on the call arguing that their
foreclosure procedure and documentation processes are sound and that the
mortgage put-back issues are contained and manageable for them.
12 Wells Fargo Criticized by Government Officials for Lying About Foreclosure Processes and
False Assurances that Robo-Signing Did Not Occur at Wells Fargo
13
116. A day after the Companys October 27, 2010 press release, Ohio Attorney General
14
Richard Cordray (Cordray) characterized Wells Fargos plan to submit supplemental affidavits for
15
approximately 55,000 foreclosures as more of a band-aid than a cure. Cordray stated that Wells
16
Fargo and several other banks clearly dont recognize the seriousness of submitting fraudulent
17
testimony to a court of law, and cannot seriously hope to rectify this problem by filing supplemental
18
affidavits purportedly out of an abundance of caution. Cordray also remarked to Bloomberg News
19
that Wells Fargo had specifically represented to him and potentially other State Attorney Generals,
20
that it did not have robo-signing issues. He added that he believed, as others had opined, that the
21
submission of false affidavits constituted a fraud on the Court. Excerpts of Cordrays comments are
22
set forth below:
23
We spoke with Wells Fargo when we started our investigation before the 50 state
24
attorneys general got together. They assured us that they were different from the
other financial firms. They did not have these robo-signing problems, now were
25
finding theyre acknowledging they have those problems in at least 55,000 cases.
So theyre going to become a focus of our investigation and were going to have to
26
take steps as needed to clean this up.
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1
2
3
4
I think that these firms need to understand the financial exposure theyve
created for themselves. They have defrauded our courts. They now think they can
just say oops, give us that evidence back and will give you better evidence. The
courts are not going to take kindly to thatThe courts are going to impose [sanctions
and penalties on] the firms and they need to look to a global solution to this problem,
where they put it behind them by reaching agreements with lenders and investors to
clean up this problem immediately.
5
6
7
8
9
12
13
14
15
I think they should be halting foreclosures in every case where they know
theyve submitted fraudulent evidence. They should not simply try to put in new
evidence and think the courts are going to accept that thats not going to be good
enough. These courts are going to give sanctions, theyre upset at being defrauded
having evidence presented to them as good when it was not good and its not going
to be enough for them just to say Oh we made a mistake. Here are some different
evidence.
*
10
11
Well, theres new evidence as to Wells Fargo. There was a deposition of one
of their employees, taken in South Carolina, that demonstrates a similar problem to
the Jeff Stefan GMAC problem from his deposition in Maine. The boiler room of
these operations are pretty unappetizing affairs. These people did not know what
they were signing but they were ordered to go ahead and sign anyway. Its not just
individual people who signed affidavits that are flawed, it is a business model based
on fraud that was designed to cut corners in the foreclosure process, because these
firms continue to think they play a different set of rules than every other party in
every other court case in this country, and they dont and theyre going to find that
out.
16
117.
On November 5, 2010, the Company filed its Form 10-Q for the period ending
17
September 30, 2010. The Form 10-Q was signed by Richard Levy, Executive Vice President and
18
Controller, Principal Accounting Officer. In addition to setting forth the Companys financial
19
condition, the Company, through the Form 10-Q, again admitted what it had initially denied without
20
basis, i.e., that its foreclosure affidavits, at least 55,000 of them, would have to be re-filed because
21
they failed to meet certain requirements:
22
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118.
In addition, the Company explained the wide-ranging financial exposure that it could
2 or would materialize if in fact it was found that Wells Fargo had failed under its servicing
3 agreements with loan originators to perform its obligations, or any acts, omissions which involve
4 malfeasance, bad faith gross negligence or reckless disregard to the Companys duties. The
5 Company explained that Wells Fargo would not be indemnified for such conduct. In addition, the
6 Company explained that Wells Fargo may not be reimbursed for costs associated with the re7 execution or re-delivery of documents in connection with foreclosures or litigation costs associated
8 with borrowers who challenge the validity of foreclosures, especially if they relate to securitized
9 loans. Moreover, if certain documents required for foreclosure are missing, or defective, the
10 Company could be obligated to repurchase the loans:
11
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*
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1
2
3
4
5
6
7
8
9
Large Institutional Shareholders from New York City Pension Funds, AFL-CIO Demand that the
10 Wells Fargo Board of Directors Take Action to Investigate Loan Servicing Deficiencies to Help
Restore Credibility
11
119. On November 9, 2010, John C. Liu, New York City Comptroller, as trustee of Fire
12
New York City employee pension funds, submitted a shareholder proposal to the Company for
13
inclusion within its Definitive Proxy Statement related to the Companys annual meeting of
14
stockholders to be held during 2011.
15
Ms. Laurel A. Holschuh
16
Corporate Secretary
Wells Fargo & Company
17
*
18
19
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24
25
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650452_1
I write to you on behalf of the Comptroller of the City of New York, John C. Liu.
The Comptroller is the custodian and a trustee of the New York City Employees Retirement
System, the New York City Fire Department Pension Fund, the New York City Teachers
Retirement System, and the New York City Police Pension Fund, and custodian of the New
York City Board of Education Retirement System (the Systems). The Systems boards of
trustees have authorized the Comptroller to inform you of their intention to present the
enclosed proposal for the consideration and vote of stockholders at the companys next
annual meeting.
120.
The proposal to the Board suggested by Liu and the Systems Boards of Trustees
outlined the reported deficiencies and the scope of investigations that warranted immediate action by
the Board and particularly the Audit Committee:
Wells Fargo & Company is a leading originator, securitizer and servicer of
home mortgages.
MASTER SHAREHOLDER DERIVATIVE COMPLAINT - 3:11-cv-02369-SI
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1
2
3
*
4
5
Fitch Ratings warned the probes may highlight weaknesses in the processes,
controls and procedures of certain [mortgage] servicers and may lead to servicer
rating downgrades.
6
*
7
8
9
10
11
12
13
14
16
The report should evaluate (a) the Companys compliance with (i)
applicable laws and regulations and (ii) its own policies and procedures; (b)
whether management has allocated a sufficient number of trained staff; and (c)
policies and procedures to address potential financial incentives to foreclose when
other options may be more consistent with the Companys long-term interests.
17
121.
15
On November 10, 2010, the American Federation of Labor and Congress of Industrial
18 Organizations (AFL-CIO) wrote to Wells Fargo as a current shareholder of more than 3,000 shares
19 of the Companys stock, submitting a proposal for the inclusion in the 2011 proxy materials. The
20 request was similar to that of the New York City Systems seeking a resolution that the Company
21 prepare a report on its internal controls over mortgage servicing operations, including among other
22 things, procedures to prevent legal defects in the processing of affidavits related to foreclosure.
23
24
25
26
27
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650452_1
Laurel A. Holschuh
Corporate Secretary
Wells Fargo & Company
*
On behalf of the AFL-CIO Reserve Fund (the Fund), I write to give notice
that pursuant to the 2010 proxy statement of Wells Fargo & Company (the
Company), the Fund intends to present the attached proposal (the Proposal) at
the 2011 annual meeting of shareholders (the Annual Meeting). The Fund requests
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Case3:11-cv-02369-SI Document59
that the Company include the Proposal in the Companys proxy statement for the
Annual Meeting.
2
3
4
The fund is the beneficial owner of 3817 shares of voting common stock (the
Shares) of the Company. . . .
The Proposal is attached. I represent that the Fund or its agent intends to
appear in person or by proxy at the Annual Meeting to present the Proposal.
5
*
6
7
8
9
10
11
12
13
122.
The AFL-CIO proposal included the following supporting statement regarding the
14 reasons for its proposal specifying that an investigation and report would provide the transparency
15 necessary to improve the now-tarnished representation of the Company, especially in light of the
16 large number of homes Wells Fargo had already foreclosed upon:
17
18
19
20
21
22
23
24
25
26
. . . We believe that our Company should provide greater disclosure of its efforts
to prevent foreclosures by its participation in government mortgage modification
programs such as the Home Affordable Modification program as well as our
Companys proprietary mortgage modifications.
*
In our view, our Companys shareholders will benefit from a report that
provides greater transparency regarding our Companys mortgage servicing
operations. We believe that such a report will also help improve our Companys
corporate reputation by disclosing its responses to the foreclosure crisis, including
its efforts to modify mortgage to prevent foreclosures, to properly service investorowned mortgages, and to comply with state foreclosure laws.
27
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123.
On November 20, 2010, The Charlotte Observer published an article entitled N.C.
2 AG questions Wells Fargo foreclosure practices reporting that the North Carolina Attorney
3 Generals Office sent a letter to Wells Fargo & Co. expressing concerns about its foreclosure
4 practices after the San Francisco bank said its resubmitting affidavits in 23 other states not including
5 North Carolina, a quasi-judicial state. The article noted, in particular, that submission of false
6 affidavits could be considered a fraud on the court, which in turn could expose the Company to
7 significant liability. The article stated, in part:
8
9
10
11
12
13
14
15
16
17
The use of unverified affidavits could be considered a fraud upon the court,
he wrote. In particular, he said, Wells could be asserting that it attempted to
modify loans for struggling borrowers without having a valid basis for those
assertions.
Bank of America and other lenders have halted foreclosure sales as they
review their procedures. Wells has not.
18
This further heightens the concerns of the state of North Carolina, Hartzell
19
wrote.
20 The United States Senate Launches Investigations and Holds Hearings on Banks Signing and
Filing of False Affidavits Several U.S. Government Officials Weigh In
21
124. On November 18, 2010 the Senate held a hearing on the robo-signing scandal.
22
During the hearing, Sen. Sherrod Brown (D-Ohio) drew a correlation between robo-signing and the
23
predatory lending practices which many of the large banks had participated in and which led to the
24
subprime crisis stating, The predatory practices of the mortgage servicing industry are remarkably
25
similar to the predatory practices that led to the subprime crisis. The biggest mortgage servicers
26
have poorly maintained, lost, or forged documentation. They ignored the interests of homeowners in
27
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1 exchange for outsized profits. . . . Indifference, foreclosed homes, and broken neighborhoods
2 shouldnt be a formula for record profits.
3
125.
4 Comptroller of the Currency noted that completed foreclosures had increased an astonishing 53.6%
5 over the last year as well as other forfeiture actions including new short sales, which increased an
6 amazing 126.5% and new deed-in-lieu-of-foreclosures actions rose 55% over the last year. Walsh
7 identified certain of the issues relating to the operational breakdowns at certain banks and stated that
8 his investigation was only limited to a sample of individual loan files only where foreclosures
9 have either been initiated or completed:
15
To date, four large national bank servicers [including Wells Fargo] have
publicly acknowledged procedural deficiencies in their foreclosure processes. The
lapses that have been reported represent a serious operational breakdown in
foreclosure governance and controls that we expect national banks to maintain. . . .
At the same time, we initiated plans for intensive, on-site examinations of the eight
largest national bank mortgage servicers. Through these examinations we are
independently testing the adequacy of governance over their foreclosure processes to
ensure foreclosures are completed in accordance with applicable legal requirements
and that affidavits and claims are accurate. As part of our examinations we also are
reviewing samples of individual loan files where foreclosures have either been
initiated or completed to test the validity of bank self- assessments. . . .
16
126.
10
11
12
13
14
Walsh added that the scope of the investigation which had initially centered upon
17 improper attestations of accuracy, had broadened to include the accuracy of all of the underlying
18 information regarding the foreclosure process:
19
20
21
22
23
24
25
(Emphasis added in original.)
26
127.
27
System (FRB) submitted written testimony on the significance of the information in the
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1 foreclosure documentation and the affidavits that must be executed, including whether the bank
2 agent that is advocating foreclosure action is legally entitled to bring the action:
3
4
5
6
7
8
9
10
11 the Treasury wrote that the mortgage servicers should be held accountable:
12
13
14
129.
15 Commissioner, U.S. Department of Housing and Urban Development wrote that the conduct denied
16 then admitted by Wells Fargo was a continuation of a decade of bad behavior and abuse was indeed
17 shameful:
18
19
Of course, as I mentioned, the job is far from over. Recent reports of faulty
documentation and fraudulent affidavits in the foreclosure process remind us that
we continue to pay a very steep price for nearly a decade of abuses and bad
behavior.
20
21
As Secretary Donovan has said, the notion that many of the very same
institutions that helped cause this housing crisis may well be making it worse is not
only frustrating its shameful.
22
*
23
24
25
Servicers that are not meeting FHAs standards will face the full strength of our
enforcement authority, including the levying of fines, sanctions, and if necessary,
stripping institutions of their FHA approval. Prior to the start of FHAs current
servicer review process, which began in May 2010, an evaluation of the practices of
one servicer yielded over $700,000 in administrative fees.
26
130.
27
Law Center, explained that the key issue is the falsification of court documents that could, as
28
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1 discussed by other commentators, be found to be a fraud on the court. In the case of Wells Fargo
2 and certain other banks, which filed false affidavits in multiple courts around the country, actions by
3 governing bodies could result in substantial liability for:
4
5
6
7
8
Perhaps the most disturbing problem that has appeared in foreclosure cases is
evidence of counterfeit or altered documents and false notarizations. To give some
examples, there are cases in which multiple copies of the true original note are
filed in the same case, with variations in the true original note; signatures on note
alleges that have clearly been affixed to documents via Photoshop; blue ink
notarizations that appear in blank ink; counterfeit notary seals; backdated
notarizations of documents issued before the notary had his or her commission; and
assignments that include the words bogus assignee for intervening asmts, whose
address is XXXXXXXXXXXXXXXX.
9 Class Actions and Individual Borrower Actions Continue to Accumulate Exposing Wells Fargo
to Increasing Potential Liability Courts Issue Stern Orders Regarding Affidavits Against Wells
10 Fargo
11
131.
In Reginald Jones v. USA, N.A., No. 09-2904 RWT (D. Md.), Wells Fargo Bank,
12 N.A. is named as defendant in a class action seeking damages of not less than $100,000,000. The
13 action asserts class members had their due process rights violated by the submission of fraudulent
14 (and robo-signed) affidavits by Wells Fargo and other defendants in connection with certain
15 foreclosure proceedings in violation of Maryland procedural rules and/or fundamental fairness.
16
132.
Additionally, in November and December of 2010, a New York court state judge,
17 pursuant to a previous Administrative Order issued by the Chief Judge, denied 127 foreclosure cases
18 including numerous ones initiated by Wells Fargo because there have been numerous instances
19 alleged as to robo signing of documents and a failure to attest to the accuracy of documents in
20 mortgage foreclosure proceedings. Specifically, the order in Wells Fargo Bank, N.A. v. Joseph
21 Gennarelli, et al., Index No. 31089/09 (Supreme Court State of New York, I.A.S. Term, Part
22 XXIV Suffolk County, Dec. 1, 2010), which was issued by Judge Cohalan in all 127 cases
23 including numerous ones involving Wells Fargo, stated in full part:
24
25
26
27
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2
3
4
133.
5
6
7
In December 2010, another Wells Fargo employee, Alden Berner (Berner), testified
10 in an action captioned that his role as a legal process specialist was limited to verifying facts on
11 foreclosure documents and only to verify facts on the documents. However, in his deposition
12 Berner testified that he used a computer only to verify the name of the lender or loan servicer against
13 the name of the investment entity that owns the loan. Berner testified that he does not know who
14 places the information in the system he relies on, and does not review any attachments in the
15 complaints and that he did not review the actual loan document itself, nor did he review the note or
16 the mortgage. Further, Berner did not look at any documents that actually transfer or assign
17 ownership of any note or mortgage. Thus, the verifications he was submitting to courts was not
18 really verifying anything. Berner and others who submit verifications without actually verifying
19 anything have become known as robo verifiers.
134.
20
21 steps
which
On December 20, 2010, the New Jersey court system, sua sponte, took a number of
according
to
press
release
issued
that
day
(available
at
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Case3:11-cv-02369-SI Document59
1 General Equity Part, Mercer County. Wells Fargo was among the six lenders given such notice. In a
2 second order,3 a judge issued an administrative order that details the scope of the problem and
3 orders certain procedures to safeguard the mortgage foreclosure documentation preparation and
4 filing process. The press release notes that this second order requires 24 lenders and service
5 providers who have filed more than 200 residential foreclosure actions in 2010 to demonstrate
6 affirmatively that there are no irregularities in their handling of foreclosure proceedings, via
7 submissions to a special master.
8
135.
The New Jersey courts administrative order specifically called out Wells Fargo as
9 one of six institutions with robo-signing activities that the order noted were pervasive problems
10 in foreclosure and bankruptcy filings in state courts. As the order put it, [r]obo-signers are
11 mortgage lender/servicer employees who sign hundreds in some cases thousands of affidavits
12 submitted in support of foreclosure claims without any personal knowledge of the information
13 contained in the affidavits. Robo-signing may also refer to improper notarizing practices or
14 document backdating.
15
136.
16
17
18
19
20
21
22
23
24
With respect to Wells Fargo, the New Jersey Administrative Order stated:
In another foreclosure case, an employee stated that she spent about two
hours a day signing between 300 to 500 documents. She held the title of Vice
President of Loan Documentation for the purpose of signing the documents. She did
not review or have personal knowledge of the facts in the documents, relying on
outside counsel or an employee in the foreclosure department for accuracy.
Similarly, for a bankruptcy case in Texas, a Wells Fargo employee stated that she
sometimes did not personally review documents before signing, relying on the
expertise of the document preparer.
25
26
3
See In the Matter of Residential Mortgage Foreclosure Pleading and Document
27 Irregularities,
Administrative Order 01-2010 (Dec. 10, 2010).
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1 (Footnotes omitted.)
2 The New York City Comptroller on Behalf of New York City Public Pension Funds Shareholder
Again Demand Action from Wells Fargo Board of Directors Audit Committees
3
137. On January 6, 2011, New York City Comptroller Liu sent a letter to Wells Fargos
4
Board. He urged that the Board take immediate, independent action to restore confidence in the
5
Companys internal controls and compliance. The letter noted managements public comments that
6
the allegations of robo-signing were overblown were contrary to the findings of regulators, which
7
had begun their own investigations. Specifically, we call on the Audit Committee . . . to conduct an
8
independent review of the Companys internal controls related to loan modifications, foreclosures
9
and securitizations and to include a report to shareholders with findings and recommendations in the
10
Companys 2011 proxy statement. Liu stated that such a review should evaluate
11
(a)
the Companys compliance with (i) applicable laws and regulations and (ii) its own
12
policies and procedures;
13
(b)
14
(c)
138.
The January 6, 2011 letter addressed to the Chairman of the Audit Committee,
15
16
17
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27
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1
2
The requested review, the scope of which we further detail below, is already
the subject of a shareholder resolution submitted by New York City Pension Funds
for the Companys spring 2011 annual meeting. However, we believe the urgency
and seriousness of our concerns require more immediate Board action.
3
The Congressional Oversight Panels November 2010 Report
4
5
6
7
8
9
In its November 2010 oversight report, the COP characterized the view
expressed by management at the large banks that current concerns over foreclosure
irregularities are overblown, reflecting mere clerical errors that can and will be
resolved quickly as the best case scenario. In its worst case scenario, the COP said
severe capital losses could destabilize exposed banks and potentially threaten
overall financial stability.
*
11
12
13
On November 23rd, a week after the COP released its report, Assistant
Treasury Secretary Michael Barr informed members of the Financial Stability
Oversight Council that a federal foreclosure task force investigating some of the
nations largest mortgage servicers had found widespread and inexcusable
breakdowns in basic controls in the foreclosure process. . . .
10
14
15
16
17
18
19
20
21
22
23
24
25
26
27
Mr. Tarullo testified that foreclosures are costly to all parties, noting their
harmful impacts on homeowners, lenders, mortgage investors and local governments,
as well as the broader economy. It just cannot be the case, he said, that
foreclosure is preferable to modification for a significant proportion of mortgages
where the deadweight costs of foreclosure, including a distressed sale discount, are
so high.
Among the possible explanations for the prominence of foreclosures, he cited
lack of servicer capacity to execute modifications, purported financial incentives for
servicers to foreclose rather than modify, . . . and conflicts between primary and
secondary lien holders. Although servicers are required to act in the best interests
of the investors who own the mortgages, an October 2010 study provides
compelling empirical support for the view that perverse incentives and conflicts of
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2
Federal Regulators and Congress May Impose Structural Reforms
3
4
5
10
For example, a bill introduced by Reps. Brad Miller (D-NC) and Keith
Ellison (D-MN) in April 2010, before the recent round of hearings, would address
one of the conflicts cited by Mr. Tarullo. The Mortgage Servicing Conflict of Interest
Elimination Act would bar servicers of first loans they do not own from holding any
other mortgages on the same property. Enactment of the legislation would
presumably force the Company, which is one of four banks that control more than
half the mortgage servicing market and more than half the home equity loan market,
to divest its servicing businesses or its interests in home mortgages.
11
12
7
8
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It may be too late to protect the Company from the worst consequences of
any past compliance failures. It is nonetheless critical that the Audit Committee
take immediate, independent action to assess the Companys mortgage-related
internal controls and address any underlying weaknesses. This will help to prevent
future compliance failures and restore the confidence of shareholders, regulators,
legislators and mortgage market participants.
MASTER SHAREHOLDER DERIVATIVE COMPLAINT - 3:11-cv-02369-SI
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1 (Footnote omitted.)
2
139.
The letter was signed by Liu, New York City Comptroller, New York City Pension
3 Funds; Denise Nappier, Connecticut State Treasurer, Connecticut Retirement Plans and Trust Funds;
4 William R. Atwood, Executive Director, Illinois State Board of Investment; William E. Mabe,
5 Executive Director, Illinois State Universities Retirement System; Thomas D. DiNapoli, New York
6 State Comptroller, New York State Common Retirement Fund; Janet Cowell, North Carolina State
7 Treasurer, North Carolina Retirement Systems; and Ted Wheeler, Oregon State Treasurer, Oregon
8 State Treasury.
9
140.
On January 9, 2011, the New York City Office of the Comptroller issued a press
10 release titled $432 Billion Pension Fund Coalition Demands Bank Directors Immediately Examine
11 Foreclosure Practices. The coalition included the five New York City Pension Funds and the
12 Connecticut Retirement Plan and Trust Funds, of Illinois State Universities Retirement Systems, the
13 New York State Common Retirement Fund, the North Carolina Retirement Systems and the Oregon
14 Public Employees Retirement Fund:
15
16
17
18
19
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141.
The January 9, 2011 press release went further, describing that the Board could no
2 longer pretend that these false affidavits were simple paperwork failures and placed oversight
3 responsibility directly on the shareholders of the Audit Committee, again demanding that they
4 conduct comprehensive and independent reviews:
5
6
7
8
9
The banks boards cannot continue to pretend the foreclosure mess is the
result of technical glitches and paperwork errors Comptroller Liu said. There is
a fundamental problem in their procedures that endangers not just homeowners,
but shareholders, and local economies. Given the risks involved, only a swift and
unbiased audit can reassure shareholders that the pension funds of 700,000 working
and retired New Yorkers are in safe hands. The boards of directors have no time to
waste.
The coalition represents more than $430 billion in pension fund investments,
including $5.7 billion invested in the four banks.
10
11
12
13
We dont know exactly what the banks were doing, and we dont know if
they did it right, New York State Comptroller Thomas P. DiNapoli said, Millions
of families have lost their homes, and the investments of the million members of the
Common Retirement System have been put at risk. As investors, we need to
understand what happened. A full and open examination of the procedures used to
foreclose on millions of families is the only way to make sure our investments are
protected and no one is ever wrongfully evicted from their home.
14
15
16
17
18
19
20
21
22
23
24
25
26
27
The responsibility for making sure that internal controls and compliance
process are in place for mortgage and foreclosure practices rests squarely with
these Audit Committees, said North Carolina State Treasurer Janet Cowell. The
recent testimonies and studies strongly suggest the need for these Audit
Committees to act swiftly and objectively in conducting an independent and
comprehensive review of these practices.
The coalition of pension funds called for the banks to report the findings of
their independent examinations in their 2011 proxy statements this spring. As of
December 31, 2010, the coalitions combined holdings in each bank included: 97.1
million Bank of America shares valued at $1.3 billion; 226.6 million Citigroup shares
valued at $1.1 billion; 40.7 million JPMorgan Chase shares valued at $1.7 billion;
and 50.6 million Wells Fargo shares valued at $1.6 billion.
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1
2
3
4
5
The New York City Comptroller serves as the investment advisor to,
custodian and trustee of the New York City Pension Funds. The New York City
Pension Funds are comprised of the New York City Employees Retirement System,
Teachers Retirement System, New York City Police Pension Fund, New York City
Fire Department Pension Fund and the Board of Education Retirement System. The
New York City Pension Funds hold a combined 138,786,887 total shares in Bank of
America Corporation (NYSE: BAC), Citigroup Inc. (NYSE: C), JPMorgan Chase &
Co. (NYSE: JPM), and Wells Fargo & Company (NYSE: WFC) for a combined
asset value of $1,933,160,319 as of 12/31/2010.
6 Defendants Cause Wells Fargo to File Its Form 10-K for the Year Ending Falsely Contending
Effectiveness of Internal Controls Potential Liability Materializes Into $1.2 Billion in Reserves
7
142. On January 19, 2011, the Company issued a press release entitled WELLS FARGO
8
REPORTS RECORD QUARTERLY AND FULL YEAR NET INCOME; Q4 Net Income of $3.4
9
billion; Q4 Revenue of $21.5 billion which stated in relevant part:
10
Wells Fargo & Company reported record net income of $12.4 billion, or $2.21 per
diluted common share, for 2010, up from $12.3 billion, or $1.75 per share, for 2009.
11
Fourth quarter 2010 net income was a record $3.4 billion, or $0.61 per common
share, compared with $3.3 billion, or $0.60 per common share, for third quarter 2010
12
and $2.8 billion, or $0.08 per common share, for fourth quarter 2009. Earnings per
share for fourth quarter 2009 were reduced by $0.47 for the combined dividends and
13
deemed dividend upon redemption and full repayment of TARP preferred stock.
14
In 2010 Wells Fargo saw solid growth in a variety of businesses, with record
net income for the full year as well as the fourth quarter, said Chairman and CEO
15
John Stumpf. As the U.S. economy showed continued signs of improvement, our
diversified model continued to perform for our stakeholders, as demonstrated by
16
growth in loans and deposits, solid capital levels and improving credit quality.
17
143. On the same day the Company held a conference call for analysts and investors. The
18
call was hosted by defendants Stumpf and Atkins. During the call, defendant Atkins explained that
19
the Company had reduced the value of its Mortgage Servicing Rights (MSR) to reflect the higher
20
costs associated with residential foreclosures:
21
[Atkins:] Before turning to credit quality I would like to make a few points
22
about the mortgage business on slide 8. Mortgage banking non-interest income
increased $258 million in the fourth quarter. Not coincidentally we also had
23
approximately $200 million higher operating expenses in the quarter to process all
these originations an example of our ability to modify capacity and variable
24
expenses up and down as volume ebbs and flows.
25
26
27
On slide 8, for purposes of analysis, weve broken down mortgage fees into
component parts, originations and servicing. On the origination side the total gain on
origination activities was $2.5 billion in the fourth quarter, but that included $464
million provided for repurchase reserves, up $94 million from the third quarter. This
addition primarily reflected an increase in loss severity projections even though
unresolved repurchase demands are down again in the quarter. The $2.9 billion
28
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gain from origination activities was up 27% from the third quarter on a 27% increase
in originations.
2
3
4
5
6
7
8
9
10
All in servicing revenue was $240 million in the quarter. Im often asked
where in the income statement we account for higher residential foreclosure costs.
And in fact the present value of projected residential mortgage foreclosure costs is
reflected in the MSR valuation, so when foreclosure expenses are projected to rise,
the full higher expected costs reduce current period earnings through a reduction
in the MSR.
As you can see on this slide, we reduced the value of our MSR by $143
million in the fourth quarter for higher projected servicing and foreclosure costs. We
review and adjust our servicing and foreclosure cost projections within our MSR
valuation each quarter and have been adding to this cost for several quarters now to
reflect the current higher cost environment.
The ratio of MSRs as a percent of loan service for others was 86 basis points,
up slightly from 72 basis points in the third quarter simply due to the higher
mortgage rates in the quarter. But we expect we will once again be at the lower end
of the peers on this metric.
11
144.
On February 25, 2011 the Company filed its Annual Report on Form 10-K with the
12
SEC for the fiscal year ending December 31, 2010 (the 2010 Annual Report). The 2010 Annual
13
Report repeated the financial results in the Companys January 19, 2011 press release. With respect
14
to the Companys internal controls and procedures, the 2010 Annual Report falsely stated that during
15
2010, the Companys internal controls were effective:
16
19
20
145.
17
18
With respect to internal controls over financial reporting, the 2010 Annual Report
26
146.
The 2010 Annual Report was signed by defendants Baker, Chen, Dean, Engel,
27
Milligan Moore, Quigley, Runstad, Hernandez, James, McCormick, McDonald, Sanger, Stumpf and
28
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1 Swenson, and also included certifications of defendant Stumpf regarding the adequacy of the
2 Companys internal controls over financial reporting substantially similar to the one referenced in
3 97 above.
4
147.
Also buried in the Companys 2010 Annual Report on Form 10-K was a disclosure
5 confirming that in addition to a multitude of lawsuits relating to its foreclosure processes, it was in
6 fact likely the government would initiate some form of enforcement action against the Company
7 related to the foreclosure document investigation and, as a result, the Company could be subject to
8 significant civil penalties. The Company further acknowledged that it had established a $1.2 billion
9 loss reserve to cover potential losses regarding its foreclosure practices. The 2010 Annual Report
10 provided in part:
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
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1 Wells Fargo Board File Rule 14(a) Proxy Material Urging Shareholders to Vote Against
Proposals that Would Require the Board to Conduct an Internal Investigation
2
148. On March 21, 2011, the Company filed its 14(a) Proxy Statement with the SEC. The
3
members of the Board, defendants, caused the Company to include Lius stockholder proposal styled
4
ITEM 9 STOCKHOLDER PROPOSAL REGARDING A REPORT ON INTERNAL CONTROLS
5
FOR MORTGAGE SERVICING OPERATIONS in its Proxy Statement filed with the SEC on
6
March 21, 2011 in connection with the annual meeting of stockholders scheduled for May 3, 2011
7
which stated:
8
The New York City Employees Retirement System, the New York City Fire
9
Department Pension Fund, the New York City Teachers Retirement System, the
New York City Police Pension Fund, and the New York Board of Education
Retirement System as joint filers, c/o The City of New York, Officer of the
10
Comptroller, 1 Centre Street, Room 629, New York, NY 10007, which in the
aggregate held 16,622,857 shares of common stock on November 17, 2010, intend to
11
submit a resolution to stockholders for approval at the annual meeting. The
proponents resolution and supporting statement are printed below.
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
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2
3
Fitch Ratings warned the probes may highlight weaknesses in the processes,
controls and procedures of certain [mortgage] servicers and may lead to servicer
rating downgrades.
4
5
While federal regulators and state attorneys general have focused on flawed
foreclosures, reported Bloomberg (10/24/10), a bigger threat may be the cost to
buy back faulty loans that banks bundled into securities.
6
7
8
9
10
11
12
13
14
Resolved, shareholders request that the Board have its Audit Committee
conduct an independent review of the Companys internal controls related to loan
modifications, foreclosures and securitizations, and report to shareholders, at
reasonable cost and omitting proprietary information, its findings and
recommendations by September 30, 2011.
15
16
17
The report should evaluate (a) the Companys compliance with (i) applicable
laws and regulations and (ii) its own policies and procedures; (b) whether
management has allocated a sufficient number of trained staff; and (c) policies and
procedures to address potential financial incentives to foreclose when other options
may be more consistent with the Companys long-term interests.
18
149.
The Companys Board responded to the above stockholder proposal stating it had
19
already done a review, and that government agencies were also doing a review of a sample of
20
documents and an additional internal review might be a distraction.:
21
Position of the Board
22
23
24
The Company has already undertaken comprehensive internal selfassessments and reviews of our mortgage servicing processes and practices
including controls related to loan foreclosures and securitizations;
25
26
27
28
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3
4
5
6
7
8
9
10
After Rejecting Shareholder Demands for an Interim Review the Board Awards Executives
11 $53 Million in Incentive Awards
12
150.
13 proposals made by institutional investors that the Audit Committee conduct an internal investigation
14 into the Companys foreclosure practices, the Board and specifically the Human Resources
15 Committee voted to approve millions in bonuses to defendants Stumpf, Atkins and other Company
16 executives. For fiscal year 2010, the Company paid its top five executives (including defendants
17 Stumpf and Atkins) over $53,435,000 in compensation which included $9,935,000 in bonuses
18 (Annual Incentive Awards) and $28,000,000 in Long-Term Equity Incentive Award:
19
20
21
22
23
24
25
26
Named Executive
John G. Stumpf
Howard I. Atkins
David A. Hoyt
Mark C. Oman
Carrie L. Tolstedt
TOTAL
151.
Base Salary
($)
2,800,000
1,700,000
2,000,000
2,000,000
1,700,000
9,200,000
Annual
Incentive Long-Term Equity Total 2010
Award
Incentive Award
Pay
($)
($)
($)
3,300,000
11,000,000 17,100,000
1,700,000
5,500,000
8,900,000
2,000,000
6,500,000 10,500,000
1,500,000
5,000,000
8,500,000
1,235,000
5,500,000
8,435,000
9,935,000
28,000,000 53,435,000
27 Stumpf and Atkins), were awarded bonuses for 2010 based on, among other things, the strong
28
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1 financial performance of the Company for 2010 which included record net income for 2010 and by
2 exceeding target performance measures which included exceeding an EPS of at least $1.43.
3
152.
The executive compensation for these executives was recommended by the Human
4 Resources Committee of the Board (in its capacity as the compensation committee) which included
5 defendants, Sanger (Chair), Chen, Engel, James, McCormick and McDonald and approved by the
6 Board. The Board and the Human Resources Committee remarkably explained that the basis for the
7 awards were in part due to defendants Stumpf and Atkins guidance of the Company through the
8 financial crisis, risk management and credibility with the investment community. The Board,
9 through its comments and recommendations in the proxy statement, virtually endorsed the
10 misrepresentations of both defendants Stumpf and Atkins concerning the submission of phony
11 affidavits, further evidencing their inability to consider a demand in a disinterested fashion:
12
13
14
15
16
17
18
In determining 2010 annual incentive awards for the named executives, the
HRC considered information pertaining to the factors described above under
Compensation Program Governance.
*
Stumpf.
In making the 2010 annual incentive compensation award
determination for Mr. Stumpf, the HRC considered, among other factors, the
following:
the Companys record 2010 net income of $12.4 billion, EPS of $2.21 . . . ;
the Companys relative performance versus the Financial Performance Peer
Group . . .;
19
*
20
21
22
23
positioning the Company for future success following the financial crisis and
regulatory reform;
*
24
25
26
27
28
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1
2
3
Atkins.
In making the 2010 annual incentive compensation award
determination for Mr. Atkins, the HRC considered, among other factors, the
following:
4
5
6
7
8
9
10
11 Investigations by the Federal Reserve System, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, and the Office of Thrift Supervision MERS Also
12 Enters Into Consent Order
13
153.
On March 31, 2011, Wells Fargo entered into a Stipulation and consent to the
14 Issuance of a Consent Order issued by the OCC. The OCC found that the Company had engaged in
15 unsound or unsafe banking practices related to its residential loan servicing and mortgage
16 foreclosure processing.
17
154.
On April 13, 2011, the results of the OCCs review and findings were made public in
18 the fully-executed Consent Order. This Consent Order states [t]he OCC has identified certain
19 deficiencies and unsafe or unsound practices in residential mortgage servicing and in the Banks
20 initiation and handling of foreclosure proceedings.
21
155.
22
(1)
The Bank is among the largest servicers of residential mortgages in the
United States, and services a portfolio of 8,900,000 residential mortgage loans.
During the recent housing crisis, a substantially large number of residential mortgage
loans serviced by the Bank became delinquent and resulted in foreclosure actions.
The Banks foreclosure inventory grew substantially from January 2009 through
December 2010.
23
24
With respect to the Companys Wells Fargo Bank, N.A., the OCC found as follows:
25
26
27
28
650452_1
(2)
In connection with certain foreclosures of loans in its residential mortgage
servicing portfolio, the Bank:
(a)
filed or caused to be filed in state and federal courts affidavits
executed by its employees or employees of third-party service providers
making various assertions, such as ownership of the mortgage note and
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mortgage, the amount of the principal and interest due, and the fees and
expenses chargeable to the borrower, in which the affiant represented that
the assertions in the affidavit were made based on personal knowledge or
based on a review by the affiant of the relevant books and records, when, in
many cases, they were not based on such personal knowledge or review of
the relevant books and records;
2
3
4
(b)
filed or caused to be filed in state and federal courts, or in local land
records offices, numerous affidavits or other mortgage-related documents
that were not properly notarized, including those not signed or affirmed in
the presence of a notary;
5
6
7
(c)
litigated foreclosure proceedings and initiated non-judicial
foreclosure proceedings without always ensuring that either the promissory
note or the mortgage document were properly endorsed or assigned and, if
necessary, in the possession of the appropriate party at the appropriate
time;
8
9
(d)
failed to devote sufficient financial, staffing and managerial resources
to ensure proper administration of its foreclosure processes;
10
11
(e)
failed to devote to its foreclosure processes adequate oversight,
internal controls, policies, and procedures, compliance risk management,
internal audit, third party management, and training; and
12
13
(f)
failed to sufficiently oversee outside counsel and other third-party
providers handling foreclosure-related services.
14
156.
15
On behalf of Wells Fargo, the Stipulation which included a waiver by the Company
16 to contest the validity of the Consent Order and its findings was entered into by Wells Fargo
17 through its duly elected and acting Board of Directors and signed by David Hoyt, Wells Fargos
18 Senior Vice President, Wholesale Banking, Michael Loughlin, Wells Fargos Senior Vice President,
19 Chief Risk Officer; Marc C. Oman, Senior Vice President of Home and Consumer Finance; Stumpf,
20 CEO and Chairman of the Board; and Carrie Tolstedt, Senior Executive Vice President Community
21 Banking.
22
157.
Though the Consent Order required the Company to begin submitting its progress
23 report and remediation plans to the OCC within 90 days of the date of the Consent Order. It has
24 been reported that none of those deadlines have been met and haven been extended.4
25
26
On September 2, 2011, counsel for lead plaintiffs wrote to counsel for Wells Fargo and the
individual defendants requesting confirmation of reports that Wells Fargo had not yet supplied the
27 OCC with action plans required by the March 31, 2011 Consent Order. Counsel for the individual
defendants responded that she could not confirm nor deny the reports.
28
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158.
Under the terms of the Consent Order, Wells Fargo agreed to, among other things, (i)
2 to establish a Compliance Committee to monitor and coordinate the Companys compliance with the
3 Consent Order; (ii) to create a comprehensive remediation plan to achieve compliance with the
4 Consent Order; (iii) to submit an acceptable compliance plan to ensure that its mortgage servicing
5 and foreclosure operations, including loss mitigation and loan modification, comply with legal
6 requirements, OCC supervisory guidance, and the terms of the Consent Order; (iv) to submit a plan
7 to ensure appropriate controls and oversight of the Companys activities with respect to the MERS;
8 (v) to take certain other actions with respect to its mortgage servicing and foreclosure operations;
9 and (vi) to conduct a foreclosure review through an independent consultant on certain residential
10 foreclosure actions. The OCC reserved the right to seek civil penalties against the Company.
159.
11
Even though the Board and the individual defendants had long known of the
12 Companys inadequate procedures, policies, resources, and controls pertaining to its default loan
13 management functions, they did not take corrective action until forced to do so pursuant to the OCC
14 Consent Order. Further, they have failed to compensate the Company for damages caused by their
15 wrongdoing and have refused to seek remedies against anyone else who was responsible for the
16 misconduct alleged herein.
17
160.
On April 13, 2011, Wells Fargo also entered into a Consent Order with the Board of
WHEREAS, the Bank and the OCC have entered into a consent order to
address areas of weakness identified by the OCC in residential mortgage loan
servicing, Loss Mitigation,6 foreclosure activities, and related functions;
20
21
WHEREAS, in the consent order, the OCC has made findings, which the
Bank neither admitted nor denied, that there were unsafe or unsound practices with
respect to the manner in which the Bank handled various foreclosure and related
activities. The OCCs findings also raised concerns that WFC did not adequately
assess the potential risks associated with these activities; . . .
22
23
24
5
25
In the Matter of Wells Fargo & Company, No. 11-025-B-HC, 1 (Apr. 13, 2011).
6
The Federal Reserve Consent Order defines Loss Mitigation to collectively mean
26 foreclosure
proceedings and loss mitigation activities involving nonperforming residential mortgage
loans,
including
related to special forbearances, repayment plans, modifications, short
27 refinances, short activities
sales, case-for-keys, and deeds-in-lieu of foreclosure.
28
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161.
The Federal Reserve Consent Order requires that the Board ensure the Companys
2 compliance with the OCC Consent Order and to submit to the Federal Reserve within 60 days:
3
(a)
a written plan to strengthen the boards oversight of WFCs enterprise-wide risk
management (ERM), internal audit, and compliance programs concerning the residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities conducted through the
Bank;
4
5
(b)
an acceptable written plan to enhance its ERM program with respect to its oversight
of residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and
operations;
6
7
(c)
an acceptable written plan to enhance its enterprise-wide compliance program
(ECP) with respect to its oversight of residential mortgage loan servicing, Loss Mitigation,
and foreclosure activities and operations; and
8
9
(d)
an acceptable written plan to enhance the internal audit program with respect to
residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and
operations.
10
11
162.
On April 13, 2011, MERSCORP and MERS entered into a stipulation and consent to
12
the issuance of a Consent Order with the OCC, the Board of Governors, the FDIC, the OTS and
13
FHFA. The agency findings included that MERS and MERSCORP engaged in unsafe and unsound
14
practices that exposed them and the examined members, including Wells Fargo, to unacceptable
15
operational, compliance and legal reputational risks. The stipulation was signed by each of the
16
members of the Board of Directors of MERS, including Joe Jackson, MERS Board member, and
17
Senior Vice President of Wells Fargo. The MERS Consent Order made the following findings of
18
fact:
19
(1)
(2)
(3)
20
21
22
23
24
25
26
27
28
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these individuals, who are officers or employees of Members or certain thirdparties who have contractual relationships with Members, as officers of
MERS. By virtue of these designations, the certifying officers execute legal
documents in the name of MERS, such as mortgage assignments and lien
releases.
2
3
4
(4)
6
(a)
have failed to exercise appropriate oversight, management
supervision and corporate governance, and have failed to devote adequate
financial, staffing, training, and legal resources to ensure proper
administration and delivery of services to Examined Members; and
7
8
9
(b)
have failed to establish and maintain adequate internal controls,
policies, and procedures, compliance risk management, and internal audit and
reporting requirements with respect to the administration and delivery of
services to Examined Members.
10
11
(5)
By reason of the conduct set forth above, MERS and MERSCORP engaged
in unsafe or unsound practices that expose them and Examined Members to
unacceptable operational, compliance, legal, and reputational risks.
163.
The Consent Order required MERS and MERSCORP to implement an action plan
12
13
14
and policies to ensure compliance with the law and quality assurance programs. In addition, the
15
agencies required that MERS maintain adequate litigation reserves. It has been suggested that Wells
16
Fargo, and the members of MERS will bear the cost of compliance with the Consent Order and
17
maintaining litigation reserves.
18
164.
On May 5, 2011, the Company filed its Form 10-Q for 1Q11, announcing it had
19
increased its litigation loss reserve to $1.7 billion. The Form 10-Q further confirmed that the
20
investigations by the state attorneys general and the U.S. Department of Justice were still ongoing
21
and could result in significant fines and civil penalties.
22
Government Investigations Fall Well Short of Examining the Full Extent of Well Fargos
23 Fraudulent Conduct of Robo-Signing Wells Fargo Accused of Stonewalling Government
Inquiries
24
165. On May 17, 2011, Sense on Cents issued an article entitled, Sense on Cents Calls
25
Out Jamie Dimon, Vikram Pandit, Brian Moynihan, Michael Carpenter, and John Stumpf. The
26
article emphasized that certain of the directors at these banks, including defendant Stumpf, were in
27
fact not cooperating with certain government inquiries:
28
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For those of us who embrace the virtues of truth, transparency, and integrity,
I have little interest in allowing the assaults on our fellow citizens to pass without
greater attention and focus. On that note, lets navigate and highlight the findings of
The New York Times fabulous journalist Gretchen Morgenson (a surefire first ballot
inductee into the Sense on Cents Hall of Fame) as she recently detailed how the Wall
Street banks would care to make A Low Bid for Fixing a Big Mess:
2
3
4
5
Clifford J. White III, director of the executive office of the United
States Trustee, discussed some of the findings in an interview last week. But
before we recount the ugly details, its worth noting the immense pushback
the banks have mounted against the trustee office.
6
7
8
9
10
11
12
13
14
The banks typically make two arguments. First, they say the trustee
program has no legal standing to delve into individual cases between lenders
and borrowers because it is not a party to these disputes. Every court has
rejected this claim. Nonetheless, the tactic has allowed servicers to stall
trustees discovery requests.
15
16
17
18
19
20
21
There are continued flaws in the process, and they are not merely
technical, Mr. White continued. Those flaws undermine the integrity of the
bankruptcy system. Many homeowners have been harmed, including where
the lender has come in and said we want to lift the stay and go back into
foreclosure proceedings, even though they lacked a sufficient basis to do it.
22
23
24
166.
25
revealed that as of May 24, 2011, Wells Fargo, despite having admitted to wrongdoing with respect
26
to robo-signing had failed to produce documents requested by Congress to aid in its investigation of
27
issue:
28
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2
3
4
5
6
7
8
9
10
11
14
Four companies have begun to respond to these requests, but the remaining
six - MetLife, Inc.; SunTrust Banks, Inc.; PHH Mortgage; U.S. Bank, N.A.; Wells
Fargo and Company; and Bank of America Home Loans have failed to provide
any requested documents despite efforts to obtain their voluntary compliance. One
company, MetLife, Inc., explained in its letter that it would not provide requested
documents unless it was subject to subpoena.
15
167.
12
13
On May 26, 2011, a Los Angeles Times article, titled Scrutiny of the home seizures
16 grows; The state subpoenas a Florida firm that handles foreclosures for many major banks,
17 discussed the subpoenas and described Wells Fargos retention of Lender Processing Services in
18 California to file and record document to facilitate foreclosures:
19
20
21
22
23
*
24
25
26
27
28
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
LPS was used by many of the largest mortgage lenders and servicers in the
country, and former LPS employees have testified that documents were robo-signed
there, Harris said in a statement Wednesday. The company has several offices in
California.
All the states are facing a similar issue: whether questionable practices were
used to prepare, sign and notarize official foreclosure documents, said Frances
Grunder, senior assistant California attorney general. In California, foreclosure
information must be accurate, verified and properly notarized because these
documents are used to foreclose on peoples homes. The issue is whether those
laws were followed here.
15
168.
In June 2011, Mortgage Servicing News issued an article about a Regulatory Order
16
concerning MERS. Notably, one commentator noted that the reforms required to be done by MERS
17
would be expensive and that expense would be borne by its members, including Wells Fargo:
18
19
20
21
22
23
24
25
26
27
Regulators also did not question the validity of allowing hundreds of bank
employees to be designated as certifying officers of MERS-an issue plaintiffs
lawyers maintained amounts to its own robo-signing scandal. Such certifying
officers will have to be identified and tracked, but they can still sign legal
documents such as mortgage assignments and lien releases in MERS name,
regulators said.
28
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1
2
3
4
5
*
6
7
8
9
10
12
The staffing, reviews and audits will be costly, Marshall said. MERS will
pay for it presumably by assessing its members. (MERS revenue comes solely from
its 2,184 active members, which pay annual fees determined by their size and
transaction fees for loan registration.).
13
169.
11
On July 11, 2011, The Huffington Post published an article entitled As Government
14 Nears Accord With Banks, Questions Swirl Over Scope of Investigation strongly suggesting that
15 despite state and federal prosecutors efforts to complete a proposed settlement of approximately $30
16 billion with the nations five largest home loan companies, including Wells Fargo, over alleged
17 mortgage abuses, the underlying state and federal probes tied to the settlement have been extremely
18 limited and havent examined the full extent of the alleged wrongdoing. The article stated, in part:
19
20
21
22
23
24
25
26
27
The evidence a prosecutor would use is not in the possession of the prosecution,
said one person familiar with the ongoing settlement talks.
*
28
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2
3
- Findings from the Justice Departments U.S. Trustee Program, a unit overseeing the
integrity of bankruptcy courts, that show mortgage servicers filed inaccurate claims
in as many as 10 percent of bankruptcy cases.
4
5
6
7
8
9
10
11
12
The federal bank regulators review examined just 2,800 loan files, or 0.001
percent of homes that received a foreclosure filing last year, according to
calculations made using data from the Office of the Comptroller of the Currency and
RealtyTrac, a data provider. Only about 200 loans each were examined at banking
behemoths JPMorgan, Bank of America, Citi and Wells, Julie L. Williams, the No.
2 official at the OCC and the agencys chief counsel, told a House panel last
Thursday. Those four firms collectively service $5.7 trillion in home loans, or about
54 percent of all outstanding residential mortgages, according to Inside Mortgage
Finance.
13
170.
The Huffington Post article also noted that several state task forces that had been
14
designed to investigate Well Fargos fraudulent conduct had been eliminated due to ongoing budget
15
constraints:
16
17
18
19
20
22
But Harris announced last week that the special unit will likely lose its
investigative abilities, a consequence of a debilitating $71 million budget cut. Her
office will lose the ability to follow up on open investigations ranging from
foreclosure scams to multi-million dollar corporate fraud, she said in a
statement.
23
171.
21
On July 15, 2011, The Huffington Post published an article entitled Elizabeth
24 Warren: Government Hasnt Sufficiently Probed Foreclosure Abuses reporting that Elizabeth
25 Warren, a senior adviser to President Barack Obama and Treasury Secretary Timothy Geithner, told
26 a congressional panel that government agencies may not have sufficiently investigated claims that
27 borrowers homes were illegally seized by banks such as Wells Fargo:
28
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1
2
3
Despite Several Investigations Evidence Suggests that Wells Fargo Continues to Commit a Fraud
4 Upon the Court by Engaging in the Fraudulent Business Practice of Robo-Signing
5
172.
On July 18, 2011, Reuters published an article entitled Special report: Banks
6 continue robo-signing reporting that Wells Fargo was among a handful of banks that continued to
7 engage in the fraudulent practice of robo-signing. The article stated, in part:
8
9
10
11
12
Of these companies, Reuters has found at least five that in recent months
have filed foreclosure documents of questionable validity: OneWest, Bank of
America, HSBC Bank USA, Wells Fargo and GMAC Mortgage.
13
*
14
15
16
17
18
19
20
These are practices that the 14 banks and other loan servicers said had
occurred only on a small scale and were halted more than six months ago.
21
173.
On July 19, 2011, The Associated Press published an article entitled Lawmakers call
22 for hearings on robo-signing reporting that the practice of robo-signing is still a widespread
23 problem throughout the mortgage industry. The article stated, in part:
24
25
26
27
28
650452_1
Sen. Sherrod Brown, D-Ohio., chair of the Financial Institutions and Consumer
Protection Subcommittee, said the subcommittee will hold a hearing on the robosigning issue.
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1
2
3
4
5
6
7
(The lenders) have complete disregard for the damage they have already
caused and have no intention of changing their ways, said Waters, who also called
for more hearings on the issue.
8
9
County officials who are responsible for keeping land records, including
property deeds, say that they have received thousands of robo-signed documents filed
in their offices since October.
10
11
In Essex County, Mass., the office that handles property deeds has received
almost 1,300 documents since October with the signature of Linda Green, but in 22
different handwriting styles and with many different titles.
12
Wells Fargo Pays $85 Million Penalty and Enters into Consent Order to Resolve Allegations to
13 Predatory Lending and Steering Prime Qualified Loan Applicants Into Subprime Loans Altering
Loan Documents
14
174. On July 20, 2011, Wells Fargo & Company and Wells Fargo Financial, Inc. entered
15
into an Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon
16
Consent (the July 20 Consent Order) with the Board of Governors of the FRB which resolved an
17
investigation of Wells Fargo Financials mortgage lending activities by the FRB. In particular, the
18
Board of Governors found that Wells Fargo, through its employees, has altered and falsified loan
19
documents, which help increase sales staff income and steered prime borrowers into subprime
20
mortgages:
21
WHEREAS, in recognition of the common goals of the Board of Governors
22
of the Federal Reserve System (the Board of Governors), Wells Fargo &
Company, San Francisco, California (Wells Fargo), and its subsidiary, Wells Fargo
23
Financial, Inc., Des Moines, Iowa (Financial), each a bank holding company as
defined in the Bank Holding Company Act, 12 U.S.C. 1841 et. seq. (BHC Act),
24
to ensure compliance by the consolidated Wells Fargo organization with applicable
federal and state laws, rules and regulations related to home mortgage lending, and
25
effective management of the legal, reputational, and compliance risks of the
consolidated Wells Fargo organization associated with home mortgage lending, the
26
Board of Governors, Wells Fargo, and Financial have mutually agreed to enter into
this combined Order to Cease and Desist and Order of Assessment of a Civil Money
27
Penalty Issued Upon Consent (the Order);
28
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1
2
3
4
5
6
7
8
*
9
Income Document Alteration or Falsification
10
11
12
D.
Financials internal controls were not adequate to detect and prevent instances
when certain of its sales personnel, in order to meet sales performance standards and
receive incentive compensation, altered or falsified income documents and inflated
prospective borrowers incomes to qualify those borrowers for loans that they
would not otherwise have been qualified to receive.
13
17
E.
During the Relevant Period, particular instances of customer income
document alteration or falsification by individual Financial sales personnel came
to the attention of Financials compliance officers. The compliance officers
investigated the particular instances brought to their attention and disciplinary action
was taken against certain individual sales personnel if their involvement in income
document alteration or falsification was admitted or otherwise proven. In mid-2008,
Financial took steps to improve its internal controls that made it more difficult for
sales personnel to alter or falsify income-related documents.
18
19
F.
In or around August 2005, in response to public and regulatory criticism,
Financial initiated a process, referred to as the A-Paper Filter, to provide prime
pricing to customers for qualifying debt consolidation cash-out refinancing mortgage
loans. Initially, if a transaction passed the filter and a further underwriting process,
the customer would be offered prime pricing from Financial. Beginning in or around
February 2006, the A-Paper Filter was modified so that customers with potentially
qualifying transactions instead would be referred to Financials affiliate, Wells Fargo
Home Mortgage (Home Mortgage), which would determine the customers
eligibility for prime pricing and, if eligible, originate the prime priced home
mortgage loan. At approximately the same time, Financial revised its performance
standards and compensation programs so that it generally was less advantageous for
sales personnel to sell a prime loan to the customer than a nonprime loan.
14
15
16
20
21
22
23
24
25
26
27
28
650452_1
G.
As a result of the modifications and revisions, some customers during the
Relevant Period who may have qualified for a prime priced home mortgage loan at
Financial or through referral to Home Mortgage were sold loans by sales
personnel priced at nonprime rates, primarily through upselling prospective
borrowers so that the borrowers requested cash-backloans that were sufficiently
large that the borrowers transactions no longer qualified for prime pricing. While the
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1
2
customers received disclosures regarding the nonprime rates they were being
charged, the customers were not advised that they may have qualified for prime
priced loans or that it was generally more advantageous for the salesperson to sell
a nonprime, rather than a prime, loan.
3
4
H.
Financials internal controls, including controls relating to Financials sales
performance standards and compensation programs, were not adequate to detect and
prevent incidents of evasion of the A-Paper Filter by Financial sales personnel.
5
I.
6
a.
7
8
9
b.
Unfair or deceptive acts or practices within the meaning of section
5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. 45(a)(1);
10
c.
Violations of various state laws pertaining to fraud and false or
misleading statements in home mortgage loan-related documents, and to unfair or
deceptive acts or practices.
11
175.
The July 20 Consent Order provides, among other things, that (i) Wells Fargo shall
12 submit to the FRB within 90 days of the July 20 Consent Order a plan, acceptable to the FRB, for
13 overseeing fraud prevention and detection and for compliance with certain federal and state laws
14 applicable to unfair and deceptive practices and certain other laws applicable to mortgage lending;
15 (ii) Wells Fargo shall submit to the FRB within 90 days of the July 20 Consent Order a plan,
16 acceptable to the FRB, for overseeing the implementation and modification of incentive
17 compensation and performance management programs for sales, sales management and underwriting
18 personnel with respect to mortgage lending within the Wells Fargo organization; (iii) Wells Fargo
19 shall submit within 90 days of the July 20 Consent Order a plan, acceptable to the FRB, for the
20 remediation to borrowers who entered into loans with Wells Fargo Financial beginning January 1,
21 2004 through September 2008 where the loans were based on income documents that were altered or
22 falsified by sales personnel; (iv) Wells Fargo shall submit within 90 days of the July 20 Consent
23 Order a plan, acceptable to the FRB, for the remediation to borrowers who received mortgage loans
24 through Wells Fargo Financial at non-prime prices during the period from January 1, 2006 through
25 September 2008, but whose mortgage loans may have qualified for prime pricing. In addition to
26 these provisions to submit plans for compliance and compensation changes and for remediation
27 payments to certain Wells Fargo Financial borrowers, the July 20 Consent Order imposes a civil
28 money penalty of $85 million on Wells Fargo.
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176.
On July 21, 2011, according to reports from Reuters, and in conjunction with the
2 April 13, 2011 Consent order between MERS and the OCC, MERS adjusted its operating procedures
3 disallowing its service members from filing assignments and foreclosure documents in court in the
4 name of MERS. This adjustment will indeed increase the costs associated with conducting
5 foreclosures:
6
8
9
NEW YORK (Reuters) MERS, the electronic mortgage registry that faces
multiple investigations for its role in thousands of problematic foreclosure cases,
changed its rules to lower its profile in court-supervised foreclosures.
10
*
11
12
13
14
15
Mortgage-loan servicers perform routine duties for the investment trusts that
own pools of mortgages, including collecting mortgage payments and, when
necessary, filing foreclosures.
16
17
18
19
20
21
22
23
24
25
26
27
28
650452_1
Although these trusts are legally required to own the mortgages when they
file to foreclose, the servicers in many cases did not obtain documents known as
assignments on their behalf until weeks or months after launching a foreclosure
action in court, a recent Reuters Special Report found. (link.reuters.com/kyb72s)
Since the collapse of the housing boom, many foreclosure cases were filed in
MERSs name, even though the registry doesnt really own either the mortgage or
the promissory note, the document which states the terms of the mortgage loan.
MERSs role in foreclosure cases has made it a lightning rod in recent months
in court decisions which have held that loan servicers use of the registry violates
basic real estate and mortgage laws.
*
Under the new rules, servicers are required to stop filing foreclosures in
MERSs name, but MERSs role in foreclosures wont actually be eliminated. The
servicers will continue to obtain the needed mortgage assignments from MERS. In
past cases examined by Reuters, such assignments have included ones of
questionable legitimacy, such as mortgages owned by now-defunct lenders.
O. Max Gardner III, a North Carolina lawyer who is specialist in foreclosure
actions in bankruptcy courts, said the change will have the effect of making MERSs
role in assigning mortgages invisible in court.
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The assignments will still come from MERS, but they just wont be in the
court files any more, he said.
2
3
4
5
MERS spokeswoman Janice Smith said the new rules make mandatory a
trend that already was under way.
She noted that Fannie Mae, Freddie Mac and several large banks already had
stopped filing foreclosures in MERS name. Smith said the change would avoid
confusing homeowners facing foreclosure by eliminating MERS, a company they
had never heard of, from court documents.
6
7
She also said that MERSs original purpose was to keep track of changes in
servicers and mortgage ownership. Foreclosure really was not central to MERSs
core business, she said, adding that MERS received no income from foreclosures.
8
9
10
11
12
13
14
15
16
Mortgage-law specialists say that lenders and servicers for a long time relied
heavily on bringing foreclosures in MERSs name. This helped make possible
foreclosures that otherwise might not have taken place because the necessary original
documents were missing.
MERS says that it is the holder of record of 32 million, or 60 per cent, of U.S.
mortgages. But it has only a handful of employees. Instead, it has designated some
20,000 employees of banks and other servicers as MERS officers.
Some courts and homeowners lawyers have criticized this system because in
effect it enables servicers to assign mortgages to themselves whenever they needed
one to foreclose.
The rule change also comes amid a growing movement against MERS among
county clerks around the U.S. They have been pressing state attorneys general and
local prosecutors to investigate MERS for allegedly failing to record documents with
them and pay the associated filing fees.
17
177.
On August 5, 2011, the Company filed its Form 10-Q for 2Q11, announcing that the
18
Companys liability for probable and estimable losses related to litigation was $1.6 billion as of
19
June 30, 2011. The Form 10-Q also reported that the Company incurred $428 million of operating
20
losses in 2Q11, substantially all from litigation accruals for mortgage foreclosure-related matters.
21
The Form 10-Q further confirmed that the investigations by the state attorneys general and the U.S.
22
Department of Justice were still ongoing and could result in significant fines and penalties.
23
DAMAGE TO WELLS FARGO
24
178.
During the Relevant Period, Wells Fargos directors and top officers have severely
25
injured Wells Fargo and exposed the Companys business, goodwill and reputation by breaching
26
their fiduciary duties of candor, loyalty and good faith, which has exposed Wells Fargo to massive
27
28
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1 fines, penalties and damages, while lining their own pockets with excessive salaries and other perks
2 not justified by Wells Fargos dismal financial performance while under their stewardship.
3
179.
By this action, plaintiffs seek to remedy defendants misconduct and recover damages
180.
In committing the wrongful acts alleged herein, defendants have pursued, or joined in
7 the pursuit of, a common course of conduct, and have acted in concert with and conspired with one
8 another in furtherance of their common plan or design. In addition to the wrongful conduct herein
9 alleged as giving rise to primary liability, defendants further aided and abetted and/or assisted each
10 other in breaching their respective duties.
11
181.
During all times relevant hereto, defendants, collectively and individually, initiated a
12 course of conduct that was designed to and did: (i) enhance the defendants executive and directorial
13 positions at Wells Fargo and the profits, power, and prestige that the defendants enjoyed as a result
14 of holding these positions; and (ii) deceive the public, including Wells Fargos shareholders, via
15 false and misleading statements regarding the defendants management of Wells Fargos financial
16 results and operations, and its future business prospects. In furtherance of this plan, conspiracy, and
17 course of conduct, defendants, collectively and individually, took the actions set forth herein.
18
182.
Each of the defendants aided and abetted and rendered substantial assistance in the
19 wrongs complained of herein. In taking such actions to substantially assist the commission of the
20 wrongdoing complained of herein, each defendant acted with knowledge of the primary wrongdoing,
21 substantially assisted the accomplishment of that wrongdoing, and was aware of his or her overall
22 contribution to and furtherance of the wrongdoing.
23
24
Plaintiffs bring this action for the benefit of Wells Fargo to redress injuries suffered,
25 and to be suffered, by Wells Fargo as a result of defendants violations of law, as well as the aiding
26 and abetting thereof. This action is not a collusive action designed to confer jurisdiction on a court
27 of the United States that it would not otherwise have. Wells Fargo is named as a nominal party in
28
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1 this action. Plaintiffs will adequately represent the interests of Wells Fargo in enforcing and
2 prosecuting their rights.
3
184.
The Wells Fargo Board at the time this action was initiated currently consisted of the
4 following 14 individuals: Stumpf, Baker, Chen, Dean, Engel, Hernandez, James, McDonald,
5 Milligan, Moore, Quigley, Runstad, Sanger and Swenson.
6
185.
Plaintiffs have not made a pre-suit demand on the Wells Fargo Board to bring these
7 derivative claims because such demand would be a futile and useless act and, therefore, is excused
8 for the reasons set forth above in 1-184 and below in 186(a)-(e).
9
186.
The members of the Board have presided over a business practice of policies and
10 procedures that is alleged and at times found and proven to prey upon those with the least amount of
11 leverage in order to expand profits. The Board all the while has permitted the Company and its
12 management to publicly deny facts it knew to be true and engage in public relations and litigation
13 strategizes designed to avoid responsibility and accountability for violations of both federal and state
14 laws.
(a)
15
A pre-suit demand on the Board is excused as a useless and futile act because
16 a majority of the Board is not independent. According to Wells Fargos Proxy Statement dated
17 March 21, 2011, the Company has already determined defendant Stumpf is not considered an
18 independent director, even as defined by the lenient NASDAQ rules. Moreover, many of Wells
19 Fargos directors and their business or family associates have had and still have loans or
20 commitments with the Company and its subsidiaries. In addition, the defendants have engaged in or
21 permitted the other defendants to engage in related-party transactions with Wells Fargo, including
22 the following:
23
(i)
24 Inter-Con Security Systems, Inc. (Inter-Con). Defendant Hernandez owns a 26% interest in Inter25 Con. Since 2006, Wells Fargo has paid Inter-Con over $13.3 million in exchange for guard services
26 at certain of the Companys branches:
27
(ii)
Defendant Milligans brother has worked for Wells Fargo since 2004,
28 as a private client advisor. His salary for 2010 was $210,000; and
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(iii)
Defendant Quigleys son has worked for Wells Fargo since 2006, as an
2 institutional relationship manager in the Companys Wholesale Banking Group. His salary for 2010
3 was $450,000.
4
(b)
All of the Board members at the time this action was initiated (defendants
5 Stumpf, Baker, Chen, Dean, Engel, Hernandez, James, McDonald, Milligan, Moore, Quigley,
6 Runstad, Sanger and Swenson) reviewed and caused to be filed the Companys 2010 and 2011 false
7 and misleading SEC filings detailed herein, which repeatedly failed to properly address and reveal
8 the true extent of Wells Fargos fraudulent foreclosure practices.
9
(c)
10 Milligan, Moore, Quigley and Swenson) serve[d] on the Companys Audit and Examination
11 Committee during the Relevant Period. All of these members have been determined to be audit
12 committee financial experts as defined by SEC regulations. Under the Audit & Examination
13 Committees charter, each of these defendants was responsible for assisting the Board of Directors
14 in fulfilling its responsibilities to oversee Company policies and management activities related to . . .
15 internal controls, . . . operational risk and legal and regulatory compliance[.] These seven Board
16 members failed to properly discharge such duties, as discussed herein.
17
(d)
18 Milligan and Runstad) serve on the Corporate Responsibility Committee. Under this Committees
19 charter, each of these defendants was responsible for: overseeing the Companys policies,
20 programs, and strategies regarding social responsibility matters of significance to the Company and
21 the public at large, including the Companys community development and reinvestment activities
22 and performance, fair and responsible lending, government relations, support of charitable
23 organizations, and environmental issues; and, monitoring the Companys reputation and
24 relationships with external stakeholders regarding significant social responsibility matters, and
25 advis[ing] the Board and management on strategies that affect the Companys role and reputation as
26 a socially responsible organization[.] These defendants cannot impartially consider a demand
27 because they face a substantial likelihood of liability.
28
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(e)
The Board has made a number of decisions that give rise to a reasonable doubt
2 that they are entitled to protection under the business judgment rule. Such decisions include, inter
3 alia, the Boards recommendation in the Companys March 21, 2011 Proxy Statement that the
4 Companys shareholders vote against Lius stockholder proposal and the reasons given therefore.
5 See 149. Additionally, the factual bases of these consent orders demonstrate that the Board was
6 unwilling to take any action to curtail the Companys fraudulent foreclosure practices until forced to
7 do so by the government. Further, the Board neither admitted nor denied the factual bases for such
8 orders, and declined to agree to or otherwise pursue pecuniary relief for the wrongdoing on behalf of
9 the Company, or agree that any of the persons responsible for the wrongdoing pay any financial
10 penalties to the government. The Boards unwillingness to seek compensatory redress for the
11 Company raises a reasonable doubt that its decisions to enter into the foregoing consent orders were
12 the products of valid business judgment.
13
187.
Members of the Board during the time period relevant to the Gutierrez, 730 F. Supp.
14 2d at 1124, approximately 2002-2007, and its litigation permitted and or approved the policies and
15 procedures found to have been violative of law. These directors include at least defendants Dean,
16 Engel, Hernandez, Milligan, Moore, Quigley, Runstad, Sanger and Swenson. On August 10, 2010,
17 Wells Fargo was found liable after a trial in the United States District Court for the Northern District
18 of California for fraudulent and unfair business practices under California Business and Professions
19 Code 17200, for, among other things, misleading its customers and engineering processes designed
20 to fraudulently maximize the overdraft fees collected from consumers for no purpose other than
21 profiteering. Gutierrez, 730 F. Supp. 2d at 1124. With respect to the Companys misleading
22 materials and inadequate disclosures, the Court noted Wells Fargos intent to hide its deceptive
23 practices:
24
25
26
Given the harsh impact of the banks high-to-low practices, the bank was obligated to
plainly warn depositors beforehand. Instead, the bank went to lengths to hide these
practices while promulgating a facade of phony disclosure. The banks own
marketing materials were deceptive in leading customers to expect purchases to be
debited in the order made (rather than to be resequenced in high-to-low order).
27 Id. at 1112-13.
28
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188.
The Court went further, finding that Wells Fargos undisclosed overdraft sequencing
2 process constituted a gimmick and a trap to make profits off the backs of the working poor:
3
4
5
Wells Fargo constructed a trap a trap that would escalate a single overdraft into
as many as ten through the gimmick of processing in descending order. It then
exploited that trap with a vengeance, racking up hundreds of millions off the backs
of the working poor, students, and others without the luxury of ample account
balances.
6 Id. at 1119.
7
189.
Wells Fargo was enjoined from engaging in the practices alleged and ordered to pay
190.
On July 20, 2011, Wells Fargo and Company and its subsidiary, Wells Fargo
10 Financial Inc., Des Moines, Iowa, entered a Cease and Desist Order and Order of Assessment of
11 Civil Money Penalty Issued Upon Consent with the United States Board of Governors of the Federal
12 Reserve. See 174-175. The Consent Order resolved In the Matter of Wells Fargo & Company,
13 San Francisco, California, and Wells Fargo Financial Inc., Des Moines, Iowa, Nos. 11-094-B14 HC(1), Order to Cease and Desist and Order of Assessment of Civil Money Penalty Issued Upon
15 Consent (July 20, 2011). The Consent Order resolved conduct between at least 2004 and 2008,
16 wherein Wells Fargo, San Francisco, subsidiary Wells Fargo Financial and its employees, falsified
17 and/or altered documents to inflate borrowers income on loan applications in order to qualify for
18 loans they would not have otherwise have qualified. Separately, Wells Fargo employees were
19 steering borrowers into subprime loans who would have, but for upselling by Wells Fargo
20 qualified for prime pricing. The Cease and Desist Order found that the Companys internal controls
21 were not sufficient to detect this conduct of employees.
22
23
24
25
(i)
26
(ii)
- 97 -
Case3:11-cv-02369-SI Document59
(iii)
2 misleading statements in home mortgage loan-related documents, and to unfair or deceptive acts or
3 practices.
4
(a)
The current directors who were also directors during the period in which the
5 deceptive acts were carried out were Chen, Dean, Hernandez, Sanger, Quigley, Moore, Runstad,
6 Milligan and Swenson. As demonstrated, a majority of Wells Fargos directors knowingly
7 participated in and authorized the wrongful acts and omissions, or recklessly disregarded the wrongs
8 which are complained of herein. Thus, despite knowledge of the claims asserted by plaintiffs, the
9 defendants have knowingly chosen not to exercise the fiduciary duties of loyalty and due care owed
10 to the Company and protect Wells Fargo or to rectify the illegal practices complained of herein.
11
(b)
The acts complained of constitute waste and are violations of the defendants
12 fiduciary duties owed to Wells Fargo and, therefore, are not protected by the business judgment rule
13 and/or subject to ratification by shareholders.
14
(c)
The defendants have not taken any legal action against themselves and/or any
15 other director and/or current or former officers for failing to implement adequate internal controls
16 and engaging in conduct that has exposed Wells Fargo to liability for violating state and federal
17 laws. Any suit by the Board to remedy the wrongs complained of herein would expose the
18 defendants and their friends and business allies to significant personal liability for their breaches of
19 fiduciary duties and other misconduct. The defendants have demonstrated their unwillingness and/or
20 inability to act in compliance with their fiduciary obligations and/or to sue themselves and/or their
21 fellow directors for the wrongful conduct described herein.
22
(d)
The defendants have close personal and business ties with each other and are,
23 consequently, interested parties who cannot in good faith exercise independent business judgment to
24 determine whether to bring this action against themselves or any other member of the Board. For
25 example, the Company routinely makes charitable donations to different tax-exempt organizations
26 on which one or more of the defendants serve as an officer, board or trustee chair and the Company
27 purchases software from companies where defendants Chen and Swenson serve as CEOs.
28
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(e)
Each defendant had the ability and/or opportunity to prevent the unlawful
2 practices complained of herein. As members of the Board, the defendants are responsible for
3 overseeing the Companys compliance with legal requirements and, therefore, all directors are liable
4 for not ensuring that the officers and employees of the Company did not expose Wells Fargo to
5 unnecessary risk. Because the defendants are liable for approving and directing the illegal conduct
6 described herein, demand would be futile.
7
(f)
Wells Fargos officers and directors are protected against personal liability by
8 a large directors and officers liability insurance policy. They caused the Company to purchase that
9 insurance for their protection with corporate funds, i.e., monies belonging to the shareholders of
10 Wells Fargo. However, the directors and officers liability insurance policy covering the defendants
11 contains provisions which eliminate coverage for any action brought directly by Wells Fargo against
12 these defendants, known as, inter alia, the insured-versus-insured exclusion. As a result, if these
13 directors were to sue themselves, no insurance protection would be provided for the derivative
14 claims. Thus, this is a further reason why the defendants will not bring such a suit, for to do so
15 would subject them and their colleagues and/or friends to a judgment of millions of dollars that
16 would have to be paid from their individual assets alone. On the other hand, if the claims are
17 brought derivatively, such insurance coverage will provide a basis for the Company to effectuate a
18 recovery.
19
(g)
20 reports of continued robo-signing by Wells Fargo) to put into place adequate internal controls and
21 adequate means of supervision to stop the wrongful conduct alleged herein despite the fact that the
22 Board knew and/or recklessly ignored such wrongful business practices. These acts, and the acts
23 alleged in this action, demonstrate a pattern of gross misconduct, which conduct is not taken
24 honestly and in good faith.
25
COUNT I
26
27
191.
28
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192.
Each defendant owed to the Company the duty to exercise candor, loyalty and good
2 faith in the direction and administration of Wells Fargos business and affairs.
3
193.
Defendants misconduct was not due to an honest error or misjudgment, but rather to
4 their intentional breach or reckless disregard of the fiduciary duties they owed to the Company.
5 Defendants intentionally breached or recklessly disregarded their fiduciary duties to protect the
6 rights and interests of Wells Fargo.
7
194.
8 participated in and caused Wells Fargo to waste its valuable assets and otherwise to expend
9 unnecessarily its corporate funds, and failed to properly direct Wells Fargos business, rendering
10 them personally liable to the Company for breaching their fiduciary duties.
11
195.
12 Wells Fargo has sustained and continues to sustain significant damages. As a result of the
13 misconduct alleged herein, defendants are liable to the Company.
14
COUNT II
15
16
196.
17
197.
198.
As a direct and proximate result of defendants abuse of control, Wells Fargo has
199.
As a direct and proximate result of defendants abuse of control, Wells Fargo has
22 sustained and continues to sustain significant damages. As a result of the misconduct alleged herein,
23 defendants are liable to the Company.
24
COUNT III
25
26
200.
27
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201.
Defendants have grossly mismanaged Wells Fargos business and affairs, and
2 exposed and subjected Wells Fargo to damages, fines and penalties, by causing the Company to
3 violate state and federal laws applicable to Wells Fargos business.
4
202.
By their actions, defendants breached their fiduciary duties to direct and control Wells
5 Fargo in a manner consistent with the legal duties of directors and officers of a publicly held
6 company.
7
203.
As a result of the defendants gross mismanagement, Wells Fargo has sustained and
8 will continue to sustain damages and irreparable injury, for which it has no adequate remedy at law.
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COUNT IV
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204.
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205.
As a result of the foregoing misconduct, defendants have caused Wells Fargo to waste
206.
As a direct and proximate result of defendants corporate waste, Wells Fargo has
15 sustained and continues to sustain significant damages. As a result of the misconduct alleged herein,
16 defendants are liable to the Company.
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A.
Declaring that plaintiffs may maintain this action on behalf of Wells Fargo and that
B.
Declaring that the defendants have breached and/or aided and abetted the breach of
C.
24 the violations set forth above from each of the defendants, jointly and severally, together with
25 interest thereon;
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D.
27 necessary to punish defendants and to make an example of defendants to the community according
28 to proof at trial;
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E.
F.
Awarding plaintiffs the costs and disbursements of this action, including reasonable
G.
Granting such other and further equitable relief as this Court may deem just and
5 proper.
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JURY DEMAND
Plaintiffs demand a trial by jury.
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s/ SHAWN A. WILLIAMS
SHAWN A. WILLIAMS
Post Montgomery Center
One Montgomery Street, Suite 1800
San Francisco, CA 94104
Telephone: 415/288-4545
415/288-4534 (fax)
ROBBINS GELLER RUDMAN
& DOWD LLP
TRAVIS E. DOWNS III
BENNY C. GOODMAN III
ERIC I. NIEHAUS
655 West Broadway, Suite 1900
San Diego, CA 92101-3301
Telephone: 619/231-1058
619/231-7423 (fax)
BARRETT JOHNSTON, LLC
GEORGE E. BARRETT
DOUGLAS S. JOHNSTON, JR.
TIMOTHY L. MILES
217 Second Avenue, North
Nashville, TN 37201-1601
Telephone: 615/244-2202
615/252-3798 (fax)
Co-Lead Counsel for Plaintiffs
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VERIFICATION
1.
I am a member of the law firm of Robbins Geller Rudman & Dowd LLP, one of the
2.
I make this Verification because Lead Plaintiffs are absent from the County of San
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s/ SHAWN A. WILLIAMS
SHAWN A. WILLIAMS
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1
2
CERTIFICATE OF SERVICE
I hereby certify that on September 12, 2011, I authorized the electronic filing of the foregoing
3 with the Clerk of the Court using the CM/ECF system which will send notification of such filing to
4 the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I
5 caused to be mailed the foregoing document or paper via the United States Postal Service to the non6 CM/ECF participants indicated on the attached Manual Notice List.
7
I certify under penalty of perjury under the laws of the United States of America that the
13
s/ SHAWN A. WILLIAMS
SHAWN A. WILLIAMS
ROBBINS GELLER RUDMAN
& DOWD LLP
655 West Broadway, Suite 1900
San Diego, CA 92101-3301
Telephone: 619/231-1058
619/231-7423 (fax)
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E-mail: shawnw@rgrdlaw.com
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CAND-ECFCase3:11-cv-02369-SI Document59
Page 1 of 1
Filed09/12/11 Page108 of 108
George E. Barrett
gbarrett@barrettjohnston.com
Stephen R. Basser
sbasser@barrack.com,lnapoleon@barrack.com,cfessia@barrack.com
Sarah A. Good
sgood@howardrice.com,bhastings@howardrice.com
Douglas S. Johnston
djohnston@barrettjohnston.com
Alan M. Mansfield
alan@clgca.com,sally@clgca.com
Timothy L. Miles
tmiles@barrettjohnston.com
Samuel M. Ward
sward@barrack.com,lxlamb@barrack.com
Shawn A. Williams
shawnw@rgrdlaw.com,khuang@rgrdlaw.com,erinj@rgrdlaw.com,e_file_sd@rgrdlaw.com,lmix@rgrdlaw.com,e_file_sf@rgrdlaw.com
Barbara Wright
barbara.wright@wellsfargo.com
https://ecf.cand.uscourts.gov/cgi-bin/MailList.pl?818974292070897-L_366_0-1
9/12/2011