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According to Reuters, the federal judge in Calif. rescinded the bid filed by Wells Fargo & Company (WFC - Analyst Report) regarding the dismissal of a lawsuit charged against the bank. The lawsuit accused it of failing in its role as a trustee for debt issued by Medical Capital Holdings Inc., a financing company. The U.S. District Judge, David Carter, has ordered the plaintiffs to pursue the proceedings over their claims against Wells Fargo, though some have been dismissed.

It has been notified that Medical Capital raised $1.7 billion from more than 20,000 investors from 2003 to Jul 2009, when the U.S. Securities and Exchange Commission sued Calif.-based Tustin and 2 executives for fraud.  Medical Capital soon collapsed and it was discovered that investors lost between $839 million and $1.08 billion.

The aforesaid lawsuit has been filed by the investors of Medical Capital in the U.S. District Court, Central District of Calif. The investors claimed that Wells Fargo was entrusted with the distribution of money so that Medical Capital could help finance medical care providers by buying their outstanding receivables. However, Medical Capital channeled the funds toward non-medical projects and unwarranted administrative fees.

All the plaintiffs charged Wells Fargo in 63 separate breaches, which include the bank’s failure in recognizing the events of default and providing funds to Medical Capital based on materially misleading statements.

Investors purchased notes issued by 3 Medical Capital special purpose companies and Wells Fargo acted as a trustee in those. The investors demand millions of dollars as claims. However, in its defense, Wells Fargo claimed that it diligently performed its contractual obligations and has not acted in bad faith.

Previously, The Bank of New York Mellon Corporation (BK - Analyst Report) had agreed to a settlement of $114 million as claims over its role as a trustee for the Medical Capital debt.

The continuously mounting lawsuits are apprehended to dent the banks’ reputation and financials. However, this comes as some relief for investors who have lost their hard-earned money in such investments.

Currently, Wells Fargo holds a Zacks Rank #3 (Hold). Other major banks worth considering include Citigroup Inc. (C - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report) with a Zacks Rank #2 (Buy).

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