Mullen v. Wells Fargo & Company

Background

The opinion concerns two related securities class actions against Wells Fargo & Company, C. Allen Parker, Timothy J. Sloan, and John R. Shrewsberry. The complaints assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

The investors alleged that Wells Fargo misrepresented the strength of its commercial loans and failed to disclose that it had issued billions of dollars in commercial loans to customers with poor credit quality or higher default risk. They alleged that the statements inflated Wells Fargo’s stock price during a period between March and October 2020, and that later financial disclosures revealed deterioration in the company’s credit holdings and caused the stock price to fall.

One action was filed by Steven A. Mullen, and the other was filed by Jason Wood. The complaints raised substantially overlapping allegations and proposed similar classes, although they differed in the securities covered and whether the class period included October 14, 2020.

Consolidation

Under Federal Rule of Civil Procedure 42(a), a court may consolidate actions involving common questions of law or fact. The court found that the two cases shared allegations about Wells Fargo’s disclosures and commercial-loan portfolio, as well as claims under the same federal securities laws. The motion to consolidate was therefore granted, and the court consolidated Mullen v. Wells Fargo, No. 20-07674, with Wood v. Wells Fargo, No. 20-07997.

Lead Plaintiff

The Private Securities Litigation Reform Act generally creates a presumption in favor of the candidate who filed a complaint or responded to the required notice, has the largest financial interest in the relief sought, and satisfies Federal Rule of Civil Procedure 23. The court considered four candidates: Paul Coyne and Coyne Fenwick Holdings, Inc.; Saran Roley; Norfolk County Council as Administrating Authority of the Norfolk Pension Fund; and Hawaii Employees’ Retirement System.

The court focused primarily on estimated losses. It used a last-in, first-out, or LIFO, method, which matches sales during the class period with the most recently purchased shares. The court also required the candidates to calculate gains and losses separately for each investment account and then combine the resulting net figures. Under that approach, Hawaii Employees’ Retirement System’s overall net loss was approximately three times Norfolk’s loss, making the Retirement System the presumptive lead plaintiff.

The court found that the Retirement System’s claims were typical because it alleged the same injury and legal theories as the other class members. The court also found that the Retirement System could adequately represent the class. Although the court noted concerns about its failure to report bonds, it found that omission minor under the circumstances. The court also considered the Retirement System’s experience in six securities class actions and the litigation experience of its proposed manager.

Other Rulings and Instructions

The court denied Roley’s request to serve as co-lead plaintiff. It stated that multiple lead plaintiffs are generally appointed when they had a meaningful relationship before the litigation and remain connected beyond the lawsuit. Roley claimed no relationship with the other candidates, and the court found that her proposed benefit of adding an individual perspective was not a sufficient reason for multiple lead plaintiffs.

The court appointed Hawaii Employees’ Retirement System as lead plaintiff and Elmira Tsang as its case manager. It instructed the Retirement System to conduct due diligence and an interview process before selecting class counsel, without giving its current counsel special preference. The Retirement System was directed to advertise for applicants, keep the application period open until April 22, 2021, decide on counsel by May 6, 2021, and file a motion seeking approval of its selection by May 26, 2021.

Disposition

The cases were consolidated. Hawaii Employees’ Retirement System was appointed lead plaintiff, Elmira Tsang was designated its manager, and Roley’s request for co-lead status was denied. The order addressed case management and class-representation issues; it did not decide whether the alleged securities-law violations occurred.