Purple Mountain Trust v. Wells Fargo & Company

Background

This securities class action was brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The lead plaintiff, Construction Laborers Pension Trust for Southern California, sued on behalf of people who purchased or otherwise acquired Wells Fargo common stock between November 3, 2016, and August 3, 2017. The defendants included Wells Fargo, former chief executive Timothy J. Sloan, other officers, and former board chairman Stephen Sanger.

The consolidated amended complaint challenged 67 statements made during the class period. It alleged that the statements were false or misleading because Wells Fargo did not disclose known problems with its collateral protection insurance program or its guaranteed auto protection practices for auto-loan customers. The complaint alleged that some customers were improperly enrolled in and charged for unnecessary collateral protection insurance. It also alleged problems involving refunds of unused guaranteed auto protection premiums.

Wells Fargo moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not adequately state a legal claim. The individual defendants joined the motion.

Court’s analysis

The court evaluated the alleged statements under the ordinary requirement that a complaint contain enough facts to make a claim plausible, as well as heightened requirements for securities-fraud cases. Federal Rule of Civil Procedure 9(b) requires fraud to be pleaded with particularity, and the Private Securities Litigation Reform Act requires a plaintiff to identify each misleading statement, explain why it was misleading, and plead particular facts supporting a strong inference that the defendant knew the statement was false or acted with conscious recklessness.

For a claim under Section 10(b) and Rule 10b-5, the plaintiff had to allege a material misrepresentation or omission, the required state of mind, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. The defendants did not contest the connection, reliance, or economic-loss elements. The court therefore focused on falsity, scienter, and loss causation.

The court dismissed claims based on statements limited to Wells Fargo’s sales practices. It concluded that those statements did not create a misleading impression about the company’s auto-insurance programs because the statements were specifically directed to sales practices, and the complaint did not adequately allege that the insurance programs were sales practices or banking products.

The court also dismissed claims based on statements about Wells Fargo’s commitment to transparency, accountability, rebuilding trust, and similar subjects. Those statements were not capable of objective verification and therefore were not actionable misrepresentations. Claims based on risk-factor disclosures were dismissed because the complaint did not adequately allege that the identified risks had already occurred when the statements were made.

Claims concerning Wells Fargo’s disclosure controls and procedures were dismissed because the complaint did not explain to whom information had to be disclosed, what information had to be disclosed, or why the company’s processes were inadequate. The court also dismissed claims based on Wells Fargo’s response to the Senate Banking Committee concerning policies, procedures, and internal controls.

The court rejected claims based on Wells Fargo’s estimates of litigation expenses because the complaint did not plead particular facts showing that increases in those estimates resulted from the collateral protection insurance or guaranteed auto protection issues rather than other matters.

Statements 1 and 13

The court found that two statements adequately alleged actionable securities fraud. Statement 1 concerned Sloan’s November 3, 2016 response at a banking conference. Sloan said that Wells Fargo would review activities outside its previously disclosed sales-practices issues and that he was not aware of any issues. The complaint also alleged that Sloan later testified that the collateral protection insurance issue had been brought to his attention in late August or early September 2016, and that Wells Fargo decided to end the program. The court concluded that these allegations were sufficiently particular to claim that Statement 1 was false.

Statement 13 was Wells Fargo’s written response to questions from the Senate Banking Committee about whether misconduct existed in other business lines, including insurance and other loan products. Wells Fargo stated that the activity at issue was limited to certain employees in its Community Banking Division. The court said the statement might not have been literally false because the people responsible for the insurance problems were alleged to work in that division. But the court concluded that Wells Fargo’s failure to disclose the collateral protection insurance issue made its broader response misleading.

The court also found that the alleged omissions were material, meaning that a reasonable investor could have viewed the information as significantly changing the overall information available for investment decisions. The complaint adequately alleged scienter, meaning knowledge of falsity or conscious recklessness, based on Wells Fargo’s later disclosure that it had reviewed and discontinued the collateral protection insurance program and Sloan’s later testimony. The court further found that loss causation was adequately pleaded because the complaint connected disclosures about the insurance problems with declines in Wells Fargo’s stock price.

Section 20(a) claim

The court held that the complaint adequately alleged a primary securities-law violation, which was required for a Section 20(a) controlling-person claim. But it dismissed the Section 20(a) claim because the allegations that the individual defendants controlled Wells Fargo’s statements and employees were conclusory. The court emphasized that holding a high-ranking corporate position alone does not establish controlling-person status.

Disposition

The motion to dismiss was granted in part and denied in part. The Section 10(b) and Rule 10b-5 claims against Wells Fargo and Sloan based on Statements 1 and 13 were allowed to proceed. The remaining claims were dismissed, including the Section 20(a) claim. The plaintiff was granted leave to file a second amended complaint by January 31, 2020. The order stated that no new claims or parties could be added without the court’s prior approval.