According to Reuters, the federal judge in Manhattan rescinded the bid filed by Wells Fargo & Company (WFC - Analyst Report) regarding the dismissal of a lawsuit charged against the bank, accusing it of mishandling a collateralized debt obligation (CDO). While discharging several claims, the U.S. District Judge, Richard Sullivan, has ordered the plaintiffs to pursue the proceedings over the remaining claims against Wells Fargo.
The plaintiffs claimed that the mismanagement of funds led to losses, which might reach $163 million. Notably, the aforementioned CDO was created by state-owned German bank WestLB AG in 2003. However, the German bank was closed following the financial crisis in 2008.
CDOs typically repackage bonds and other assets into new securities. These are not traded on a public exchange, allowing firms like Wells Fargo to generate fees through brokering deals between buyers and sellers. However, CDOs have performed miserably since these were invested in securities comprising sub-prime mortgages, which are known to have a larger-than-average risk of defaulting in the market. Eventually, the market downturn ruined the investment banker’s expectations, resulting in huge losses for the common investors.
The lawsuit has been filed by Cayman Islands-based House of Europe Funding I Ltd, the CDO issuer against Wells Fargo and Collineo Asset Management GmbH, a German asset manager in Jan 2013. Notably, Erste Abwicklungsanstalt (EAA), a German agency was also a plaintiff.
Sullivan has sustained certain claims in the lawsuit against Wells Fargo’s gross negligence and breach of contract. The bank has been accused as a trustee and collateral administrator for taking risky bets.
House of Europe was also permitted to partly pursue its case against Collineo, while dismissing much of EAA's case against the asset manager. Collineo was accused of concealing facts from House of Europe when it entered risky bets in other kinds of CDOs at least 6 times between Apr 2006 and Jul 2007. However, Collineo expects the remaining claims to be dismissed against it over a period of time.
Presently, Wells Fargo is not the only bank facing problems over the mismanagement of CDOs. Many financial institutions including Morgan Stanley (MS - Analyst Report), The Goldman Sachs Group, Inc. (GS - Analyst Report) and Bank of America Corporation (BAC - Analyst Report) have been embroiled in lawsuits over similar practices.
The continuously mounting lawsuits are sure to dent Wells Fargo’s reputation and its financials. In addition, the company faces numerous other lawsuits, which will keep the litigation costs at elevated levels, thereby thwarting the efforts made by the company to contain the rising expenses. However, investors, who have lost their hard-earned money in such investments, should feel relieved.
Currently, Wells Fargo carries a Zacks Rank #2 (Buy).