A Manhattan federal judge has dismissed three shareholder lawsuits accusing Wachovia Corp and its former executives of lying about the bank's exposure to risky mortgage loans, which caused its near collapse.
"Bad judgment and poor management are not fraud, even when they lead to the demise of a once venerable financial institution," U.S. District Judge Richard Sullivan wrote in a ruling made public on Friday.
Wachovia agreed in October 2008 to be bought by Wells Fargo & Co, after suffering a deposit run as credit markets seized up and investors worried about mortgage losses tied to its purchase of California lender Golden West Financial Corp.
Wells Fargo completed the $12.5 billion purchase on Dec. 31, 2008, after outbidding Citigroup Inc, and assumed Wachovia's liabilities.
The U.S. Securities and Exchange Commission is preparing civil charges against Wachovia for overcharging investors on mortgage debt backed by loans whose value was falling, The Wall Street Journal reported on Monday, citing people familiar with the matter. Wells Fargo has declined to comment on that report.
Once the fourth-largest U.S. bank by assets, Wachovia struggled as more borrowers fell behind on its roughly $120 billion of "option" adjustable-rate mortgages, including many from its $24.2 billion purchase of Golden West in 2006.
The "Pick-A-Pay" loans let borrowers make low payments that did not cover monthly interest, causing principal to rise.
'COLOSSAL BLUNDER,' BUT NOT FRAUD
Shareholders claimed that Wachovia loosened underwriting guidelines and aggressively marketed the loans, while publicly touting its risk controls and "very conservative" standards.
But Sullivan said investors failed to show fraud by Wachovia officials including Ken Thompson, the chief executive who bought Golden West and was ousted two years later.
"The more compelling inference is that defendants simply did not anticipate the full extent of the mortgage crisis and the resulting implications for the Pick-A-Pay loan portfolio," Sullivan wrote.
"Although a colossal blunder with grave consequences for many, such a failure is simply not enough to support a claim for securities fraud," the judge added.
Sullivan left intact some claims in a fourth lawsuit by bondholders against various Wachovia defendants, various underwriters and KPMG, Wachovia's auditor.
Wells Fargo spokeswoman Mary Eshet said the San Francisco-based bank is pleased there was no finding of fraud by Wachovia or its management. She said it will defend against allegations of misstatements in offering documents.
Ira Press and Geoffrey Jarvis, who respectively represent plaintiffs in two of the dismissed cases, were not immediately available for comment. Daniel Cohen, whose firm represented plaintiffs in the third dismissed case, declined to comment. A lawyer for KPMG did not immediately return a call for comment.
The cases, all in the U.S. District Court, Southern District of New York, are: In re: Wachovia Equity Securities Litigation, No. 08-06171; Stichting Pensionenfonds ABP v. Wachovia Corp, No. 09-04473; FC Holdings AB et al v. Wells Fargo & Co et al, No. 09-05466; and In re Wachovia Preferred Securities & Bond/Notes Litigation, No. 09-06351.
(Reporting by Jonathan Stempel in New York; Additional reporting by Joe Rauch in Charlotte, North Carolina, editing by Matthew Lewis)
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