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Wells Fargo & Company (WFC - Analyst Report) agreed to shell out a sum of $105 million to settle a lawsuit filed against it by Medical Capital Holdings Inc. The lawsuit alleged that Wells Fargo, acting as a trustee for debt issued by Medical Capital Holdings, failed to protect the investors against fraud.

The settlement agreement was filed in the U.S. District Court in Santa Ana, CA. This was subsequent to a judge's dismissal of Wells Fargo's bid to seek relief from the charges in April.

Notably, 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 the California-based medical receivables financing company and its higher management for fraud. Medical Capital soon collapsed and investors lost between $839 million and $1.08 billion.

The aforesaid lawsuit was filed by the investors of Medical Capital in the U.S. District Court, Central District of Calif. They 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. Investors purchased notes issued by 3 Medical Capital special purpose companies and Wells Fargo acted as a trustee for them. The investors claimed millions of dollars as compensation.  

In February, The Bank of New York Mellon Corporation (BK - Analyst Report) agreed to a settlement of $114 million as claim over its role as a trustee for the Medical Capital debt. Furthermore, Joseph Lampariello, the former president of Medical Capital Holdings, pleaded guilty in May 2012.

We believe that the settlement of the lawsuit comes as some relief for investors who lost their hard-earned money. However, it is expected to add to the legal expenses of Wells Fargo.

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). Banks with better Zacks Rank include Fifth Third Bancorp (FITB - Analyst Report) and State Street Corporation (STT - Analyst Report). Both carry a Zacks Rank #2 (Buy).

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