Chang v. Wells Fargo Bank, N.A.

Background

Plaintiffs alleged that Wells Fargo aided and abetted an alleged Ponzi scheme created by Jerome and Shaun Cohen and their EquityBuild entities. The alleged scheme involved investments in a real-estate program and raised approximately $135 million from approximately 800 investors. Plaintiffs alleged that the Cohens misrepresented and misused investor money, commingled funds, made payments to earlier investors, and took undisclosed fees.

Plaintiffs asserted claims for aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and negligence. In an earlier ruling, the court denied Wells Fargo’s motion to dismiss the first two claims but granted its motion as to the negligence claim, allowing plaintiffs to amend that claim. The parties later conducted discovery, attempted mediation, and negotiated the settlement addressed in this order.

Settlement Terms

The proposed settlement class consists of all persons and entities who invested in the EquityBuild Scheme and were damaged by it. Wells Fargo agreed to pay $3,750,000 into a non-reversionary settlement fund. The fund would pay class members, notice and settlement-administration costs, attorneys’ fees and expenses approved by the court, and any approved service awards for the class representatives. No money would revert to Wells Fargo.

A settlement administrator would use the receiver’s master claims list to prepopulate claim forms with the amounts investors submitted in the related receivership claims process. The proposed agreement included a release of claims relating to investments in the EquityBuild entities based on the facts alleged in the complaint. The parties proposed the Victim Connect Resource Center as the recipient of any remaining funds when additional distributions were no longer feasible.

Provisional Class Certification

For settlement purposes, the court found that the proposed class satisfied Federal Rule of Civil Procedure 23. The court found that joining an estimated 835 class members would be impracticable, that common questions existed about the alleged scheme and Wells Fargo’s alleged knowledge and assistance, and that the named plaintiffs’ claims were typical of the class claims. The court also found no conflicts of interest and determined that the named plaintiffs and their counsel had represented the class adequately and vigorously.

The court found that common questions predominated over individualized issues and that a class action was superior to separate lawsuits. The court appointed the named plaintiffs as class representatives and Rosca Scarlato, LLC as class counsel.

Preliminary Settlement Approval

Under Rule 23(e), a class settlement requires court approval. At the preliminary stage, the court asked whether the settlement appeared potentially fair, rather than conducting the complete fairness review reserved for final approval. The court found that the settlement appeared to result from serious and informed negotiations, showed no improper preferential treatment or obvious deficiencies, and fell within the range of possible approval considering the risks, expense, and delay of continued litigation.

The court also found a sufficient connection between the proposed cy pres recipient—the Victim Connect Resource Center—and the class because the organization assists victims of investment fraud, including Ponzi schemes. The court allowed the proposed notice to state that counsel intended to seek $10,000 service awards for each of five named plaintiffs, but stated that it would decide whether those awards were reasonable at the final approval hearing.

Notice and Disposition

The court found that the proposed notice plan, revised notice, and claim form satisfied Rule 23. Notice was to be sent using the receiver’s address list, and class members would receive information about the settlement, their estimated recovery, their rights to object or opt out, requested attorneys’ fees, requested service awards, and the final approval hearing.

The court GRANTED plaintiffs’ motion for preliminary approval of the class action settlement. It directed the parties to implement the notice plan, meet and confer about a schedule, submit the schedule within 21 days, and submit a joint proposed order and judgment with the final-approval motion. The court also vacated all other deadlines. This order granted preliminary approval; it did not state that final settlement approval had been entered.