Sarasota County Agrees to Over $23 Million Settlement with Wells Fargo
Sarasota County and Wells Fargo have agreed to settle a securities dispute for $23.75 million. The dispute arose as a result of a securities lending arrangement began by Wachovia Bank, prior to its acquisition by Wells Fargo. By acquiring Wachovia, Wells Fargo assumed all liabilities against the former bank as well, including this suit. Sarasota County had used Wachovia Bank for many years prior to its acquisition by Wells Fargo. As a result, the county maintained a portfolio of low risk securities with Wachovia which represented assets of the county that were not immediately needed to pay operating expenses or other bills.
According to the complaint, around 2001 the county was approached by Wachovia with the idea of beginning a securities lending program with Sarasota County’s existing securities portfolio in order to obtain a significantly higher investment return for what Wachovia claimed was zero or almost zero additional risk. The idea was that Wachovia would lend Sarasota County’s securities to various borrowers in exchange for cash collateral. Wachovia would then invest that cash in various ways to generate additional revenue. Wachovia estimated that this would earn the county several basis points more each year, representing $150,000 to $200,000 annually with little or no risk. As compensation for managing this scheme, Wachovia intended to take 40% of all revenues generated, although it expressly claimed that it would share no risk of loss.
Sarasota County was forced to amend various county guidelines in order to implement this strategy, but reiterated both in its own internal rules and in its account documentation with Wachovia that preservation of capital was still of paramount importance. Since the county had no experience with this sort of investing, Wachovia was given discretionary authority over the account, which was regularly utilized. Problems arose from this arrangement because Wachovia purportedly violated express conditions of the agreement in the securities it chose to purchase on behalf of Sarasota County. Specifically, Wachovia purchased bonds issued by Altius III Funding, Ltd., Option One Mortgage Notes, and Lehman Brothers Notes.
The county alleged that all three of these securities, which Wachovia purchased for the county for a combined $80 million, violated the investment guidelines in multiple ways. The investment guidelines absolutely forbid derivative securities, only permitting buying securities with maturities of three years or less, required securities to have an active secondary market, and required securities to be low risk. Sarasota County claimed that all three of these securities violated every single one of these terms.
Wells Fargo denied that any purchases were inappropriate. However, Sarasota County originally filed their claim alleging just under $40 million in total unrealized losses. Wells Fargo’s willingness to settle this claim for almost $24 million indicates that Wells Fargo recognized at some level either that there were failures in the investment decisions made by Wachovia or that there was a substantial chance that a jury would believe that it did. Either way, this case represents another clear indicator that institutional investors have the ability to recover for wrongful actions by their brokers, just as any individual investor would have.
If you believe that your organization has suffered losses as a result of improper investment guidance, contact our securities law firm at 1-800-259-9010 for a confidential, no obligation consultation and analysis of your particular situation, along with our recommendations about potential recovery options available to you. Cases are handled on a contingency basis and fees will be deducted from the settlement, if any, based upon an agreed upon percentage of recovery. If no recovery is made, no attorney fee will be owed.
Shepherd Smith Edwards & Kantas LTD, LLP, has a team of attorneys, consultants and staff with more than 100 years of combined experience in the securities industry and in securities law. Since 1990, we have represented thousands of investors nationwide to recover losses. We have represented clients in Federal and State courts and in arbitration through the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange Inc. (NYSE), American Arbitration Association (AAA) and in private arbitration actions. Collectively, we have represented over 1,000 investors in the last 20 years in negotiation, mediation, arbitration and litigation.