A federal judge has rejected a bid by Wells Fargo & Co to dismiss a lawsuit by investors who said it failed in its role as trustee for debt issued by a financing company that collapsed in 2009 in an estimated billion-dollar fraud.
A 50-page decision by U.S. District Judge David Carter in Santa Ana, California on Tuesday clears the way for a possible trial against the fourth-largest U.S. bank over its dealings with Medical Capital Holdings Inc.
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The judge also ruled outright for the investors on some claims in the class action, and dismissed other claims against San Francisco-based Wells Fargo.
Investors contended that Wells Fargo was supposed to disburse money so that Medical Capital could offer financing to medical care providers by purchasing their outstanding receivables.
Instead, they said the bank failed to stop Medical Capital from diverting their money to such things as non-medical projects and excessive administrative fees.
"It is a tremendous result for us to be able to go forward on claims that could total hundreds of millions of dollars," Mark Molumphy, a lawyer at Cotchett Pitre & McCarthy who represents the investors, said in a Wednesday phone interview.
A Wells Fargo spokesman did not immediately respond on Wednesday to requests for comment.
Carter ruled six weeks after Bank of New York Mellon Co said it would pay $114 million to settle claims over its own role as a trustee for Medical Capital debt.
According to court papers, Medical Capital had raised $1.7 billion from more than 20,000 investors from 2003 to July 2009, when the U.S. Securities and Exchange Commission sued the Tustin, California-based company and two executives for fraud.
Medical Capital was soon shut down. A receiver later found that investors lost between $839 million and $1.08 billion, and that the company had used a "Ponzi-like scheme" to extract excess fees. (http://www.medicalcapitalreceivership.com/)
In the Wells Fargo case, investors had bought notes issued by three Medical Capital special purpose companies for which Wells Fargo was trustee.
These investors accused Wells Fargo of 63 separate breaches, including failing to declare events of default and disbursing funds to Medical Capital based on inaccurate, incomplete or missing documentation.
Wells Fargo has argued that it neither acted in bad faith, nor acted negligently in performing its contractual obligations.
"Plaintiffs have deposed every Wells Fargo employee they could think of," the bank's lawyers said in a February 11 filing.
"There is no evidence that any of them knew of wrongdoing by Medical Capital, or even suspected wrongdoing" until 2009, after payment defaults and the SEC probe had begun, the lawyers added.
In his decision, Carter nonetheless said the noteholders "have shown a genuine dispute as to whether any breach by Wells Fargo was a cause-in-fact of their losses."
He also said they could pursue a claim that Wells Fargo distributed some funds in bad faith.
Joseph Lampariello, a former Medical Capital president, last May pleaded guilty to criminal wire fraud related to the alleged scheme. He has yet to be sentenced, court records show.
The cases are all in the U.S. District Court, Central District of California. The master case is In re: Medical Capital Securities Litigation, No. 10-ml-02145. The Wells Fargo cases are Masonek et al v. Wells Fargo Bank et al, No. 09-1048; Bain et al v. Wells Fargo Bank et al, No. 10-0548; and Abbate et al v. Wells Fargo Bank et al, No. 10-06561.
(Reporting by Jonathan Stempel in New York; Editing by Steve Orlofsky)