Shareholders and robosigning: Is Wells Fargo ruling a portent?
The state and federal regulators who announced the $25 billion foreclosure settlement with five major banks last week aren’t the only folks complaining about robosigning. The exposure of that practice — in which bank representatives, in order to speed up foreclosures, signed thousands of mortgage-related affidavits without actually reading them — sparked the nationwide foreclosure investigations that led to the $25 billion settlement. The robosigning scandal also spawned shareholder derivative suits. Board members at Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase have all been accused of breaching their duty to shareholders by permitting robosigning and other flawed foreclosure practices to take place.
Last week U.S. District Judge Susan Illston of San Francisco federal court ruled that shareholders can proceed with their case against Wells Fargo board members. In a 13-page opinion, the judge found that the plaintiffs, represented by Robbins Geller Rudman & Dowd and Barrett Johnston, had adequately alleged the futility of demanding action from the Wells Fargo board because board members’ “substantial likelihood of liability for breach of fiduciary duty” presented a conflict of interest. Illston pointed to allegations that at the same time the bank was attempting to stymie a federal investigation of its foreclosure practices, board members signed a proxy statement advising shareholders to vote down a proposed internal investigation because it was already cooperating with the government. “If, as alleged, defendants did not disclose material information within the board’s control, defendants breached their duty of loyalty to the company,” Illston wrote.
The judge dismissed claims of gross negligence and abuse of control, but refused to toss the breach of duty allegations. (She also dismissed claims the board wasted corporate assets in granting executive bonuses but said plaintiffs’ lawyers could replead them.) Wells Fargo counsel Gilbert Serota of Arnold & Porter told me Tuesday that the bank believes Illston’s finding on the demand futility question is “erroneous,” and Wells Fargo is “considering the best way to remedy that.” The bank also disputes the allegations in the shareholders’ complaint. “When the real facts are disclosed,” Serota said, “the court is going to see that Wells Fargo properly cooperated with the government.”
The big question for the other banks that signed the nationwide foreclosure settlement, though, is whether Illston’s robosigning ruling improves the prospects for shareholder derivative suits against them. JPMorgan Chase, for example, was just hit with a Manhattan State Supreme Court robosigning derivative complaint filed by Robbins Geller, one of the plaintiffs’ firms in the Wells Fargo case. Earlier this month, shareholders in a consolidated derivative class action against Bank of America in Manhattan federal court voluntarily dismissed their robosigning-based case, but said they planned to refile in Delaware Chancery Court. Two derivative suits against Citigroup alleging flawed foreclosure practices were consolidated in Manhattan federal court in December, but the docket indicates no activity since then.
But those banks, according to the plaintiffs’ allegations in the Wells suit, were quicker to renounce robosigning than Wells Fargo. JPMorgan Chase and Ally Financial were the first to halt foreclosures to investigate robosigning allegations, doing so in September 2010. Bank of America followed in October. Wells Fargo was still insisting at the time that its foreclosure practices were sound. According to the shareholder complaint, Wells continued to permit robosigning of foreclosure documents well into 2011, after it told shareholders it was cooperating with the government investigation.
Illston’s ruling rests on the alleged discrepancy between what Wells Fargo was telling its shareholders and what it was actually doing (according to the plaintiffs). Shareholders from the other banks may have a harder time persuading a judge of that discrepancy. Nevertheless, I’m sure that won’t stop them from trying.
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