A shareholder derivative lawsuit in US District Court, Northern District of California (In re Wells Fargo & Co. Shareholder Derivative Litigation, Case No. 16-5541), asserts that certain directors of Wells Fargo may have been privy to the opening of fraudulent credit card and deposit accounts numbering into the millions without the knowledge, or consent of the account holders. Various lawsuits – including class actions – have been brought by disgruntled account holders who accused Wells Fargo of attempting to generate fees from the unauthorized accounts.
The shareholder derivative lawsuit brought against officers, directors and senior management of Wells Fargo asserts that director defendants “knew, or consciously disregarded that Wells Fargo employees were illicitly creating millions of deposit and credit card accounts for their customers, without those customers’ knowledge or consent,” according to Court documents. Plaintiffs further alleged that Wells Fargo, “under Defendants’ watch... [Sic] defrauded their customers in an attempt to drive up ‘cross-selling’ i.e., selling complimentary Wells Fargo banking products to prospective or existing customers.”
Wells Fargo attempted to have the litigation dismissed on various fronts, including an assertion made by the defendants that plaintiffs had failed to adequately plead the material misrepresentation, or omission and scienter elements of their claims under Section 10(b) and Rule 10b-5. Defendants also asserted that plaintiff’s complaint was, in effect a so-called “shotgun pleading” that impermissibly relied upon the “group pleading” doctrine.
In the end, however US District Court Judge Jon S. Tigar of the Northern District of California refused to dismiss the complaint, in part because in his view the plaintiffs did not rely exclusively on group pleading in their complaint, but rather articulated certain allegations of SEC fraud with regard to the signing of SEC filings by each director defendant that are alleged to contain material and misleading information as provided to the US Securities and Exchange Commission (SEC).
Directors should be held to a higher standard of conduct and care
It was noted in the legal opinion and analysis as outlined in Law360 that Judge Tigar had previously held that a variety of events, including congressional testimony, consumer lawsuits, news reports and widespread termination suggested that a majority of the director defendants knew about the alleged illegal activity involving the opening of fraudulent and unauthorized accounts.
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The takeaway message here is that were a Board to become aware of repeated allegations of misconduct, any absence of a clear response on the part of directors could be interpreted as a director making a conscious decision to disregard his or her duties of oversight according to their responsibilities to the Board, the law and SEC rules and regulations – at least within the context of any motion by defendants to dismiss.
While there may be those within a firm who try to bend the rules – or engage in outright fraud – in an effort to grow the fortunes of the enterprise, directors need to be held to a higher standard.