Wells Fargo Loses Bid

Issues related to overdraft fees are far from over for Wells Fargo & Co. (WFC - Analyst Report). Last week, a bid to compel arbitration of customer disagreements related to overdraft fees was lost by the company, according to a Bloomberg report.

According to the Atlanta based U.S. Appeals Court ruling, the settlement cannot be compelled by the bank following the relinquishment of its right to do so twice earlier. The ruling came amidst the rejection of the bank’s proposition to discharge a class-action lawsuit.

On investigation, it was found by the court that prior to affirming its right to compel the customers to negotiate their disputes, the customers of Wells Fargo had to undergo a long litigation process which continued for years and resulted in around 900,000 documents. However, as expected, the ruling came as a disappointment for Wells Fargo and the company contemplates to preserve its stand on this litigation.

The Allegation

As a matter of fact, customers have sued Wells Fargo for charging improper overdraft fees. The company was charged of having manipulated transaction entries to generate greater overdraft fees. Transactions were re-sequenced by the bank so that the largest withdrawals were deducted first instead of being cleared in the order in which they were received.

As a result, customers’ balances dwindled faster, resulting in a larger number of ‘overdrawn’ transactions, each of which then became chargeable. Moreover, as a result of such practices, funds were overdrawn several times a day in small amounts.

In addition to Wells Fargo, over 30 banks have been sued on similar grounds. Notably, Bank of America Corp. (BAC - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report) have consented to paying millions to settle such claims in the past few quarters. Thus Wells Fargo’s fate relating to this litigation will be closely followed. Notable, the suit against the other banks are still unsettled in the Miami federal court.

However, in November 2009 and April 2010, Wells Fargo refused an offer from a trial court to negotiate the disputes. However, following the Supreme Court ruling in April, which stated that federal law permits companies to force customers and employees to settle claims individually, a motion was filed by Wells Fargo to discharge a number of proposed class-action lawsuits.

Our Take

We believe that fraudulent practices by any bank need to be judged stringently and if customers were found having been cheated of their hard earned money, they would need to be duly compensated.

Wells Fargo retains a Zacks #3 Rank, which translates into a short-term Hold recommendation. Considering its fundamentals, we also have a Neutral recommendation on the stock.