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Purple Mountain Trust v. Wells Fargo & Co.

United States District Court, N.D. California

January 10, 2020

WELLS FARGO & COMPANY, et al., Defendants.



         This is a securities class action against Wells Fargo & Company, its former CEO, Timothy J. Sloan, other officers, and the former chairman of its board of directors, Stephen Sanger. Lead plaintiff Construction Laborers Pension Trust for Southern California brought suit on behalf of persons who purchased or otherwise acquired Wells Fargo common stock between November 3, 2016, and August 3, 2017, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Securities and Exchange Commission Rule 10b-5. Dkt. No. 46 ¶¶ 2, 16. The gravamen of the consolidated amended complaint is that Wells Fargo made 67 statements during the class period that were false or misleading because they did not disclose known problems with its collateral protection insurance (“CPI”) and guaranteed auto protection (“GAP”) practices for auto loan customers.

         Wells Fargo moved to dismiss under Federal Rule of Civil Procedure 12(b)(6). Dkt. No. 55. All the individual defendants have joined Wells Fargo's motion. Dkt. Nos. 56, 59, 60, 61. Sanger also filed a short brief regarding the alleged falsity of his statements and lack of scienter. Dkt. No. 59 at 1-3. Defendants say the amended complaint should be dismissed for two main reasons: 1) Wells Fargo had no obligation to disclose its improper auto insurance policies when discussing its ongoing sales practices, or “fake accounts, ” problem; and 2) statements about the company's commitment to transparency and restoring trust in the wake of that problem are not actionable. After an initial set of briefing and oral argument, the Court called for plaintiff to file a chart summarizing its allegations on a statement-by-statement basis and for defendants to file an accordingly reorganized supplemental brief. Dkt. No. 66; see Dkt. Nos. 71-1, 72. This is the Court's standard practice in securities cases.

         Before reaching the merits of the motion, a constructive comment on the amended complaint is warranted. It is counterproductive, and potentially self-defeating, to feature 67 statements as grounds for relief, particularly when many of the alleged misstatements were duplicative or run-of-the-mill boilerplate. The chart summarizing the allegations on a statement-by-statement basis magnified this problem and imposed an enormous amount of additional and largely unnecessary work on the Court and defendants. On this occasion, the Court undertook the herculean effort needed to sort through the mass of allegations, but that will not be the course of action going forward. Depending on developments in response to this order, plaintiff may be required to identify its top five allegations, and proceed on that basis. Judicial economy and efficiency, as well as reasonable constraints on litigation costs, demand no less.

         Defendants' arguments warrant dismissal of most of plaintiff's claims, but Wells Fargo and Sloan's failure to disclose the auto insurance problems -- specifically, the CPI issue -- when explicitly asked about the lay-of-the-land outside of sales practices is actionable. The heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (“PSLRA”) are met. Defendants' motion to dismiss is granted in part and denied in part, and plaintiff is granted leave to amend.


         As alleged in the consolidated complaint, prior to September 2016, some auto loan customers with Wells Fargo were improperly enrolled in, and forced to pay for, collateral protection insurance they did not need. Dkt. No. 46 ¶¶ 3, 10. CPI protects a lender's collateral, the car, if the borrower does not obtain auto insurance. CPI is unnecessary if a borrower has obtained insurance, or when the loan has been paid off. See Id. ¶ 3. Wells Fargo was aware of issues with its CPI practices by July 2016, senior executives were briefed by September 2016, and the practice was terminated later that month. Id. ¶¶ 4, 8, 10. The company also reported the problem to the Office of the Comptroller of the Currency (“OCC”), during the summer of 2016. Id. ¶ 5.

         There was no public disclosure of Wells Fargo's CPI issue until a July 2017 New York Times article. Id. ¶ 9. In a press release issued the same day and in its second quarter filing with the SEC a week later, the company acknowledged that it had been aware of problems with its CPI program for approximately a year. Id. ¶¶ 10-11. On the dates of these disclosures, the price of Wells Fargo's stock fell. Id. ¶ 14.

         Days after the 10-Q filing, the New York Times published an article reporting that Wells Fargo was under investigation by the Federal Reserve Bank of San Francisco for failing to refund unused portions of guaranteed auto protection premiums. Id. ¶ 33. GAP insurance is optional coverage that protects auto lenders against the practical reality that the collateral for an auto loan loses a tremendous amount of value almost immediately -- i.e., when it is driven off the lot. Id. ¶ 32. Other insurance only pays up to the market value of the vehicle at the time of an accident or other adverse event. Id. Many states require that unused portions of the GAP premium be paid back to customers if loan repayment is completed early. Id. ¶ 33.

         While the consolidated complaint's nonconclusory allegations are taken as true for the motion to dismiss, see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007), the parties disagree about the salient facts. Plaintiff says that a separate Wells Fargo's sales practices issue, in which bank employees were found to have opened unauthorized accounts for customers, makes certain statements failing to disclose its auto insurance problems during the class period false or misleading. See Dkt. No. 46 ¶¶ 36-39; Dkt. No. 63 at 6-7. Defendants deny the relevance of the fake accounts to this case. See Dkt. No. 55 at 6-7, 12-15. Statements relating to those improper sales practices were the subject of another securities case in this district, which has settled. See Hefler v. Wells Fargo & Co., No. 16-cv-05479-JST (N.D. Cal.). A consumer class action relating to the improper CPI policy also settled in the Central District of California. See In re Wells Fargo Collateral Prot. Ins. Litig., No. 17-ml-02797-AG-KES (C.D. Cal.). Wells Fargo has entered into consent orders, including fines, relating to its CPI policies with the Consumer Financial Protection Bureau and the OCC. Dkt. No. 46 ¶ 34.



         Well-established standards govern the motion to dismiss. The complaint must provide “a short and plain statement of the claim showing that the pleader is entitled to relief, ” Fed.R.Civ.P. 8(a)(2), including “enough facts to state a claim to relief that is plausible on its face, ” Twombly, 550 U.S. at 570. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). The plausibility analysis is “context-specific” and not only invites, but “requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679.

         Additional requirements apply because this is a securities fraud action. The circumstances constituting the alleged fraud must be stated with particularity under Federal Rule of Civil Procedure 9(b). See Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 604 (9th Cir. 2014). In addition, pursuant to the PSLRA, the complaint must “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1). For each alleged misstatement or omission, the complaint must also “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. § 78u-4(b)(2)(A).

         “To plead a claim under Section 10(b) and Rule 10b-5, [plaintiff] must allege: (1) a material misrepresentation or omission; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.” Or. Pub. Emps. Ret. Fund., 774 F.3d at 603 (citing Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)). Defendants do not contest ...

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