Wachovia Executives lies About Health of Stock Leads to half a Billion Payoff

Pension funds who bought faulty Wachovia preferred securities and bonds between mid-2006 to mid-2008 scored a big win today. The commercial bank, who was taken over by Wells Fargo when it failed in 2008, agreed to pay over half a billion for misleading institutional investors as to the health of their option ARM portfolio. The class action suit lead by Pennsylvania law firm Kessler Topaz scored a $590 million payout from Wachovia (paid for by Wells Fargo) and even got its auditor KPMG to pony up $37 million.

Orange County Employees’ Retirement System, Louisiana Sheriffs’ Pension fund and the Southeastern Pennsylvania Transportation Authority were the court appointed plaintiffs in the class action suit. Unfortunately since this was a settlement, former Wachovia bank executives, like CEO Robert Steel, didn’t admit wrong doing but the discovery tied to the section 11 (negligence part of the 1933 Securities act) charges the pension funds brought forward clearly scared the pants off these bankers. Considering the common shareholders just had their similar case against Wachovia thrown out, this reads like the institutional investors out lawyered the bank.

“We estimated actual losses to be proven at trial to be around $1.5bn -2bn. So we think a 25-40% out of court recovery like this is very successful,” said attorney David Kessler of Kessler Topaz.

Of course if the pension funds had paid attention to mortgage expert Mark Hanson’s warnings about Wachovia’s pick-a-pay book back in 2007 they might have not gotten themselves into this big of a loss in the first place. It was Hanson’s self made u-tube videos about the accounting games Wachovia and Wells Fargo were playing that made him a cult classic among hedge funds shorting these banks during the financial crisis. CNBC’s Herb Greenberg was one of the first pundits to publish his views in December 2007 after Hanson wrote “The Hybrid-term ARM and Pay-Option implosion are all happening simultaneously and are about to heat up drastically”.

This settlement also highlights that eventually if investors stick with their convictions, and not just write off assets the banks mislead them on, lawsuits can help them get some of their money back. I knew in September 2008, when I was first to publish a New York Post story calling Robert Steel a liar for the low loss numbers he was claiming on Jim Cramer’s Mad Money show, that it could be a silver bullet in forthcoming investor lawsuits. Steel had said on CNBC only $10 billion out of $500 billion were problematic loans but when the FDIC finally seized the bank a much high number came to light and proved my reporting was spot on.

While it’s good that mom and pop investors in pension funds are getting millions back I have to wonder if the feds will ever go after the mega millions Wachovia executives pocketed for themselves. Or ever figure out how blatantly they lied to public investors while pumping the health of their faulty stock. It sounds like stealing to me and doesn’t that type of behavior usually equal jail time? Since this is a civil settlement, not litigated in conjuction with a criminal case, there is no reason the Feds can’t still charge former Wachovia executives for lying to stockholders and go take a look at some of that sealed discovery the Kessler Topaz lawyers are sitting on. I’m sure there are plenty of damaging emails that we’d all like to see.


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  1. Harold Bond says

    I just stopped by your blog and thought I would say hello. Looking forward to reading more down the road.

  2. Kevin Eshbach says

    I was wondering when Wachovia was going to start to feel some slight pain for their shenigans. With their extremely aggressive growth plans the fact they were breaking the law comes as no surprise.

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