California sues Wells Fargo over alleged investor fraud
Jerry Brown (D)
SAN FRANCISCO (Legal Newsline) - California Attorney General Jerry Brown filed a massive $1.5 billion suit against San Francisco-based banking giant Wells Fargo on Thursday.
Brown announced the lawsuit at a press conference in the heart of the city, claiming Wells Fargo defrauded California investors.
"Wells Fargo's affiliates promised investors auction-rate securities were as safe and liquid as cash, when in fact they were not, and now investors are unable to get their money when they need it," Brown said. "This lawsuit seeks to recover $1.5 billion for Californians and holds these companies accountable for giving investors false and deceptive advice."
Auction-rate securities, commonly known as bonds, are investment with long-term maturity dates that Wells Fargo marketed as short-term investments, according to a press release issued by the attorney general's office today.
Investors were attracted to the strong interest rates than a typical bank account combined with the liquidity for easy selling of the securities.
But in February 2008, these auctions froze nationwide, leaving investors unable to turn the security into cash as promised.
"This left approximately 2,400 Californians who had invested with Wells Fargo without access to more than $1.5 billion. Almost 40 percent of Wells Fargo's auction-rate securities were held by Californians, far more than any other state nationwide." the press release states.
Three Wells Fargo affiliates refused to restore the cash value of these securities, even after other major banks like Citigroup, Wachovia and Merril Lynch had.
Brown filed suit in San Francisco County Superior Court seeking to restore the cash value of these securities and to force the affiliates to repay any profits tied to the securities. Brown is also seeking civil penalties of $25,000 per violation that according to the attorney general's office could amount to hundreds of millions of dollars.
The suit contends that three Wells Fargo's affiliates - Wells Fargo Investments, LLC, Wells Fargo Brokerage Services, LLC, and Wells Fargo Institutional Securities, LLC - violated California's securities law.
"In marketing and selling these investments, Wells Fargo's affiliates ignored clear industry and internal warning about risk and previous auction failure," the attorney general's office stated. The company also failed to inform investors about how auction-rate securities and their auctions worked.
Following the collapse of these auctions, Wells Fargo's affiliates took advantage of the situation and offered loan programs to those who needed immediate access to the money tied up in these investments, the attorney general's office said.
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