An attorney representing the plaintiffs said the $627 million to be forked… (Reed Saxon, Associated…)
In the latest legal fallout from the mortgage implosion, Wells Fargo & Co. has agreed to pay $590 million and accounting firm KPMG has agreed to pay $37 million to settle class-action lawsuits centering on controversial "pick-a-pay" loans issued by Oakland's World Savings and later by Wachovia Corp.
Wells Fargo disclosed the proposed settlement Friday in a quarterly filing with the Securities and Exchange Commission. If approved by a judge, the deal would settle claims of misrepresentation that investors brought against Wachovia, which acquired World Savings' parent company in 2006 and was taken over in turn by Wells Fargo during the financial crisis.
Wells Fargo also said demands from Freddie Mac and Fannie Mae that it repurchase soured loans may cost it as much as $1.8 billion in addition to the $1.2 billion it had set aside for such costs as of June 20.
In a related mortgage bombshell, Bank of America Corp. said in its quarterly filing Thursday that Fannie and Freddie were demanding that it buy back delinquent loans "in numbers that were not expected." BofA agreed in January to pay the mortgage finance giants $3 billion to settle such claims, an amount it said at the time appeared adequate.
Bank of America in June announced an additional $20 billion in charges related to home loans written by Countrywide Financial Corp., the aggressive Calabasas lender it acquired in 2008. But New York Atty. Gen. Eric Schneiderman has urged a state court judge to reject as inadequate a key settlement agreement: a proposed $8.5-billion payment to investors in mortgage bonds not backed by Fannie and Freddie.
Investors spooked by the prospect of still more mortgage losses drove Bank of America shares down 66 cents, or 7.5%, to $8.17 on Friday, after a 7.4% fall Thursday.
Wells Fargo's shares fell 53 cents, or 2%, to $25.21 on Friday. Common stock in the San Francisco-based bank has fallen 13% since its recent high of $29.01 on July 22, before the big sell-off in the stock market began.
Darren Robbins, a San Diego attorney representing the plaintiffs, said the $627 million to be forked over by Wells and KPMG is the largest total settlement so far of any securities class-action claims resulting from the mortgage and credit meltdowns.
The runner-up: a $624-million settlement by Bank of America and KPMG in federal court in Los Angeles of a shareholder class action alleging that Countrywide misled investors about its financial condition and lending practices.
"There were about five litigations by various entities," Robbins said. "This suit is the only one that survived.... It's a dramatic recovery."
Wells told investors its financial reporting would not be affected by the settlement with Wachovia investors because it already had set aside funds to cover the gigantic payout. It admitted no liability or wrongdoing by Wachovia in settling with the plaintiffs, which are pension funds and other large investors that bought Wachovia's bonds and preferred stock.
Wells Fargo and KPMG, which had audited the books of Charlotte, N.C.-based Wachovia, said they had agreed to the settlement terms to avoid the expense and distractions of the litigation.
Several lawsuits consolidated before U.S. District Judge Richard J. Sullivan in New York alleged that Wachovia had been negligent in failing to disclose the risks embedded in the portfolio of pick-a-pay loans, which gave borrowers the option of paying so little that the amount they owed went up instead of down.
Sullivan in March tossed out many claims against Wachovia and its former managers, including dismissing lawsuits filed on behalf of Wachovia's common shareholders. Sullivan rejected claims that the managers, including former Wachovia Chief Executive Ken Thompson, had intentionally defrauded or misled investors.
"Although a colossal blunder with grave consequences for many, such a failure is simply not enough to support a claim for securities fraud," Sullivan ruled. "Bad judgment and poor management are not fraud, even when they lead to the demise of a once venerable financial institution."
However, he let securities lawsuits filed on behalf of the holders of Wachovia bonds and preferred shares proceed on grounds of negligence.