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1 ROBBINS GELLER RUDMAN


& DOWD LLP
2 SHAWN A. WILLIAMS (213113)
Post Montgomery Center
3 One Montgomery Street, Suite 1800
San Francisco, CA 94104
4 Telephone: 415/288-4545
415/288-4534 (fax)
5 shawnw@rgrdlaw.com
and
BARRETT JOHNSTON, LLC
6 TRAVIS E. DOWNS III (148274)
GEORGE E. BARRETT
BENNY C. GOODMAN III (211302)
DOUGLAS S. JOHNSTON, JR.
7 ERIC I. NIEHAUS (239023)
TIMOTHY L. MILES
655 West Broadway, Suite 1900
217 Second Avenue, North
8 San Diego, CA 92101-3301
Nashville, TN 37201-1601
Telephone: 619/231-1058
Telephone: 615/244-2202
9 619/231-7423 (fax)
615/252-3798 (fax)
travisd@rgrdlaw.com
gbarrett@barrettjohnston.com
djohnston@barrettjohnston.com
10 bennyg@rgrdlaw.com
eniehaus@rgrdlaw.com
tmiles@barrettjohnston.com
11
Co-Lead Counsel for Plaintiffs
12
UNITED STATES DISTRICT COURT
13
NORTHERN DISTRICT OF CALIFORNIA
14 PIRELLI ARMSTRONG TIRE
) No. 3:11-cv-02369-SI
CORPORATION RETIREE MEDICAL
)
15 BENEFITS TRUST, et al., Derivatively on
) (Consolidated)
Behalf of WELLS & FARGO COMPANY,
)
16
) VERIFIED CONSOLIDATED
Plaintiffs,
) SHAREHOLDER DERIVATIVE
17
vs.
) COMPLAINT FOR BREACH OF
) FIDUCIARY DUTY, ABUSE OF
18 JOHN G. STUMPF, HOWARD I. ATKINS, ) CONTROL, GROSS MISMANAGEMENT
JOHN D. BAKER II, JOHN S. CHEN,
) AND CORPORATE WASTE
19 LLOYD H. DEAN, SUSAN E. ENGEL,
ENRIQUE HERNANDEZ, JR., DONALD M. )) DEMAND FOR JURY TRIAL
20 JAMES, RICHARD D. MCCORMICK,
)
MACKEY J. MCDONALD, CYNTHIA H.
)
21 MILLIGAN, NICHOLAS G. MOORE,
)
PHILIP J. QUIGLEY, JUDITH M.
)
22 RUNSTAD, STEPHEN W. SANGER AND )
SUSAN G. SWENSON,
)
23
Defendants,
)
)
and
24
)
WELLS FARGO & COMPANY, a Delaware
25 corporation,
Nominal Defendant.
26
27
28

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)
)
)
)

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TABLE OF CONTENTS

Page

3 SUMMARY AND OVERVIEW.....................................................................................................1


4 JURISDICTION AND VENUE ......................................................................................................8
5 PARTIES .........................................................................................................................................9
6

Non-Party MERS and MERSCORP..................................................................................16

Non-Party Institutional Shareholders Which Have Demanded Action by the Board


of Directors ........................................................................................................................17

8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
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THE FIDUCIARY DUTIES OF WELLS FARGOS DIRECTORS AND OFFICERS...............18


COMMITTEES OF THE WELLS FARGO BOARD OF DIRECTORS .....................................21
BACKGROUND ...........................................................................................................................24
SUBSTANTIVE ALLEGATIONS ...............................................................................................41
Widespread Robo-Signing Begins to be Publicly Known Wells Fargo Denies
Having Participated............................................................................................................44
Wells Fargo Reports 3Q10 Results and Again Falsely Denies that Wells Fargo
Robo-Signed Foreclosure Documents ...............................................................................48
Wells Fargo Finally Admits to Robo-Signing and Identifies 55,000 Affidavits
Which Would be Re-Filed .................................................................................................51
Wells Fargo Criticized by Government Officials for Lying About Foreclosure
Processes and False Assurances that Robo-Signing Did Not Occur at Wells Fargo.........53
Large Institutional Shareholders from New York City Pension Funds, AFL-CIO
Demand that the Wells Fargo Board of Directors Take Action to Investigate Loan
Servicing Deficiencies to Help Restore Credibility...........................................................56
The United States Senate Launches Investigations and Holds Hearings on Banks
Signing and Filing of False Affidavits Several U.S. Government Officials
Weigh In.............................................................................................................................59
Class Actions and Individual Borrower Actions Continue to Accumulate
Exposing Wells Fargo to Increasing Potential Liability Courts Issue Stern
Orders Regarding Affidavits Against Wells Fargo............................................................62
The New York City Comptroller on Behalf of New York City Public Pension
Funds Shareholder Again Demand Action from Wells Fargo Board of Directors
Audit Committees ..............................................................................................................65
Defendants Cause Wells Fargo to File Its Form 10-K for the Year Ending Falsely
Contending Effectiveness of Internal Controls Potential Liability Materializes
Into $1.2 Billion in Reserves .............................................................................................70

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Wells Fargo Board File Rule 14(a) Proxy Material Urging Shareholders to Vote
Against Proposals that Would Require the Board to Conduct an Internal
Investigation.......................................................................................................................73
After Rejecting Shareholder Demands for an Interim Review the Board Awards
Executives $53 Million in Incentive Awards.....................................................................75

4
5

Investigations by the Federal Reserve System, the Office of the Comptroller of


the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift
Supervision MERS Also Enters Into Consent Order......................................................77

6
7

Government Investigations Fall Well Short of Examining the Full Extent of Well
Fargos Fraudulent Conduct of Robo-Signing Wells Fargo Accused of
Stonewalling Government Inquiries ..................................................................................81

8
9

Despite Several Investigations Evidence Suggests that Wells Fargo Continues to


Commit a Fraud Upon the Court by Engaging in the Fraudulent Business Practice
of Robo-Signing.................................................................................................................87

10
11

Wells Fargo Pays $85 Million Penalty and Enters into Consent Order to Resolve
Allegations to Predatory Lending and Steering Prime Qualified Loan Applicants
Into Subprime Loans Altering Loan Documents ...............................................................88

12
DAMAGE TO WELLS FARGO...................................................................................................92
13
CONSPIRACY, AIDING AND ABETTING, AND CONCERTED ACTION ...........................93
14
DERIVATIVE AND DEMAND FUTILITY ALLEGATIONS ...................................................93
15
COUNT I .......................................................................................................................................99
16
COUNT II ....................................................................................................................................100
17
COUNT III...................................................................................................................................100
18
COUNT IV...................................................................................................................................101
19
PRAYER FOR RELIEF ..............................................................................................................101
20
21
22
23
24
25
26
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Its not just individual people who signed affidavits that are flawed, it is a business model
based on fraud that was designed to cut corners in the foreclosure process, because these
firms continue to think they play [by] a different set of rules than every other party in every
other court case in this country, and they dont and theyre going to find that out.

3
Ohio Attorney General, Richard Cordray, October 28, 2010
4
SUMMARY AND OVERVIEW
5
1.

This is a shareholder derivative action on behalf of nominal defendant Wells Fargo &

6
Company (Wells Fargo or the Company), against its entire Board of Directors (the Board) and
7
certain top officers for breach of fiduciary duty, abuse of control, gross mismanagement and
8
corporate waste. Defendants include John G. Stumpf (Stumpf), Howard I. Atkins (Atkins), John
9
D. Baker II (Baker), John S. Chen (Chen), Lloyd H. Dean (Dean), Susan E. Engel (Engel),
10
Enrique Hernandez, Jr. (Hernandez), Donald M. James (James), Richard D. McCormick
11
(McCormick), Mackey J. McDonald (McDonald), Cynthia H. Milligan (Milligan), Nicholas
12
G. Moore (Moore), Philip J. Quigley (Quigley), Judith M. Runstad (Runstad), Stephen W.
13
Sanger (Sanger) and Susan G. Swenson (Swenson).
14
2.

Beginning at least as early as 2007, defendants caused the Company to materially

15
engage in the mass processing of loan ownership and servicing documents to facilitate home
16
foreclosure actions against homeowners who had become delinquent on their home mortgage
17
payments. Defendants mass processing included the creation and execution of thousands of court18
filed affidavits purportedly attesting to the truth and accuracy of loan documentation (including
19
whether Wells Fargo was indeed the legal owner of the loan on which it sought to foreclose)
20
referenced or submitted in conjunction with the affidavits. In truth, however, Wells Fargo and third
21
party servicing agents rarely even read the affidavits or examined the underlying documentation
22
purporting to evidence the facts they were attesting to, including loan ownership effectively
23
committing a fraud upon the court.
24
3.

Notwithstanding these facts, when information was disclosed that Wells Fargo may

25
have been falsifying court-filed affidavits, defendants caused the Company to repeatedly,
26
aggressively and defiantly deny that there were any problems with the accuracy of the Companys
27
foreclosure affidavits. In fact, the Chief Financing Officer (CFO), Atkins told shareholders that
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1 the issues concerning Wells Fargo and false affidavits were overstated and misrepresented in the
2 marketplace.
3

4.

Ultimately, the Company would be forced to admit deficiencies in more than 50,000

4 of its court-filed foreclosure affidavits. As a result of improper, and many times false affidavits, the
5 Company is and has been subject to multiple lawsuits and government investigations and likely
6 hundreds of millions of dollars in civil fines and penalties.
7

5.

In 2008, the United States embarked upon one of the largest economic crises in U.S.

8 history. At the core of the U.S. financial crisis was the collapse of the housing bubble fueled by the
9 low interest rates, easy and available credit, scant regulation and toxic mortgages. See Financial
10 Crisis Inquiry Report at xvi (2011). As home values plummeted and unemployment skyrocketed in
11 the United States and the world, the financial markets nearly came to a halt. In its wake and
12 aftermath, hundreds of U.S. banks failed, including Lehman Brothers and American International
13 Group (AIG), a renowned insurance giant.
14

6.

At the same time, lending institutions that held mortgages on homes on which

15 mortgage payments became delinquent began foreclosing on homeowners that fell significantly
16 behind on their mortgage payments. In 2009 and 2010, foreclosure actions in states where
17 foreclosures were controlled by the court system accelerated and began to dominate banks loan
18 servicing units.
19

7.

In the summer of 2010, allegations were levied that some U.S. lending institutions,

20 including nominal defendant Wells Fargo, Ally Financial Inc. (aka GMAC Mortgage Co.), Bank of
21 America, JPMorgan Chase, Citigroup and others were mass processing foreclosure documents,
22 including court-filed declarations in support of foreclosure proceedings on behalf of banks.
23

8.

The mass processing included robotically signing affidavits purporting to verify that

24 the banks actually owned the mortgages and that the homeowners were in fact delinquent on the
25 loans being foreclosed upon. In truth however, lenders, including Wells Fargo and their agents
26 executed and in many instances falsified court documents without even attempting to verify the truth
27 or accuracy of the facts asserted therein.

A euphemism for the mass processing of false

28 documentation was quickly coined robo-signing.


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As a result of the robo-signing phenomenon, lending institutions and their loan

2 servicing agents routinely submitted false sworn documents to courts and in many instances
3 succeeded in removing people from their homes without legitimate documentation evidencing that
4 the respective lending institutions had standing (legal ownership rights) to foreclose on the loans.
5

10.

In September 2010, as the public outcry regarding the process began to surge, certain

6 of the large lending institutions, including Bank of America and Citigroup, issued moratoriums on
7 foreclosures in order to investigate the propriety and veracity of allegations that said banks were
8 engaging in robo-signing and submission of false legal documentation.
9

11.

On September 22, 2010, a Wall Street Journal article, entitled GMAC Spotlight on

10 Robo-Signer, discussed some of the evidence supporting claims that robo-signing had become a
11 routine part of the lending institutions foreclosure processes. The article detailed specific events
12 and deposition testimony provided by Jeffrey Stephan and Beth Cottrell, employees of GMAC
13 Mortgage Co. and Chase Home Mortgage, respectively, wherein they each admitted to signing
14 thousands of affidavits purportedly in support of foreclosure proceedings without even verifying the
15 truth or accuracy of the facts stated in the affidavits.
16

12.

While this testimony had been elicited regarding GMAC Mortgage Co., it was

17 remarkably similar to testimony that had been elicited over a period of several months in 2010 in
18 several cases brought by Wells Fargo wherein the deponents admitted to such practices as more fully
19 explained herein below.
20

13.

Wells Fargo, however, notwithstanding growing evidence that it too was engaged in

21 robo-signing on October 12, 2010, denied that any such practices were being carried out by any of its
22 agents and boldly affirmed that its foreclosure practices were sound and its affidavits in support of
23 foreclosures were accurate:
24
25

Wells Fargos policies, procedures and practices satisfy us that the affidavits we
sign are accurate. We audit, monitor and review our affidavits under controlled
standards on a daily basis. We will stand by our affidavits and if we find an error we
will take the appropriate action.

26
14.

On October 13, 2010, the National Association of Attorneys General and the

27
Mortgage Foreclosure Multistate Group, consisting of the Attorneys General of 49 states, led by
28
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1 Tom Miller, Attorney General of the State of Iowa, issued a joint statement describing its
2 investigation into robo-signing of foreclosure documents, including affidavits purporting to support
3 foreclosures on mortgage loans. The joint statement articulated that the groups belief was that the
4 process of signing affidavits without confirming the accuracy of their contents may in fact constitute
5 a deceptive act and violate state law.
6

15.

On October 14, 2010, the Financial Times published an article entitled Spotlight

7 falls on Wells Fargo foreclosure procedures. The article disclosed that notwithstanding Wells
8 Fargos denials about its foreclosure processes regarding the verification of mortgage foreclosure
9 documents, one of its loan officers had sworn in a deposition that she signed as many as 500
10 foreclosure-related documents each day without verifying the contents of the documents other than
11 her name and her title. The documents/affidavits were then used to support lawsuits brought by
12 Wells Fargo to initiate and complete home foreclosures:
13

Spotlight falls on Wells foreclosure procedures

14

Wells Fargo, the second-biggest US mortgage servicer, has remained above


the fray in recent weeks as banks have come under scrutiny for rubber-stamping
thousands of mortgage documents without verifying their contents as required by
law.

15
16
17
18
19

Unlike Bank of America, JPMorgan Chase and GMAC, Wells Fargo has not
halted foreclosures and has maintained that it has no problems with its procedures.
Yet, a sworn deposition by one of its loan documentation officers suggests
otherwise. Xee Moua said she signed as many as 500 foreclosure-related papers a
day on behalf of the bank. Ms Moua said the only information she had verified was
whether her name and title appeared correctly.

20
21

Asked whether she checked the accuracy of the principal and interest that
Wells Fargo claimed the borrower owed an important step in banks legal actions
to foreclose Ms Moua replied: I do not.

22
23
24
25

Ms Moua nevertheless signed affidavits, reviewed by the Financial Times,


that said she had personal knowledge of the facts regarding the sums of money
which are due and owing to Wells Fargo. These affidavits were used in lawsuits
brought by Wells Fargo to repossess homes.
Ms Moua said it was her understanding the foreclosure documents had been
reviewed by outside lawyers before reaching her.

26
16.

On October 20, 2010, the Company held a conference call for analysts and investors

27
in connection with the Companys quarterly financial results. The call was hosted by Chief
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1 Executive Officer (CEO) and Chairman of the Board Stumpf and CFO Atkins. During the call
2 Stumpf and Atkins continued to assure investors and shareholders that Wells Fargos mortgage
3 servicing processes, specifically on foreclosures, were sound and that the questions in the industry
4 regarding robo-signing, at least with respect to Wells Fargo, were overblown and that the
5 Companys internal control processes already in place ensured reliability and accuracy:
6

[Stumpf:] Now, I know we have all been hearing in recent months about
business practices within our industry.

7
*

8
9

[W]e are confident that our practices, procedures, and documentation for both
foreclosures and mortgage securitizations are sound and accurate. Third, we did
not and do not plan to initiate a foreclosure moratorium.

10
*

11
12

[Atkins:] Then finally, we are confident in our foreclosure and mortgage


securitization policies, practices, and controls and the adequacy of our repurchase
reserve.

13
*

14
15
16
17
18
19
20

With that, let me shift to give you an overview of the foreclosure and
mortgage securitization issues. These are issues obviously that are very important
to consumers, mortgage investors, and shareholders. But we believe that these
issues have been somewhat overstated and, to a certain extent, misrepresented in
the marketplace. I would like to be clear here on how they impact Wells Fargo
specifically.
*

Second, our foreclosure and securitization policies, practices, and controls


in our view, are sound. To help ensure accuracy over the years, Wells Fargo has
built control processes that link customer information with foreclosure procedures
and documentation requirements.

21
22
23
24

Our process specifies that affidavit signers and reviewers are the same team
member, not different people, and affidavits are properly notarized. . . .
We ensure loans in foreclosure are assigned to the appropriate party as
necessary to comply with local laws and investor requirements, and legal
documents related to securitizations are sound, and appropriate transfers of
ownership were made.

25
*

26
27

[Stumpf:] I dont know how other companies do it, but in our Company our
process has the affidavit signer and reviewer are the same team member. And we
believe these issues they are properly notarized.

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Shortly after Wells Fargos conference call, on October 27, 2010, the Company was

2 forced to admit that contrary to prior denials, including specific denials to the Ohio Attorney
3 General, who has begun his own investigation into the Companys foreclosure process, Wells
4 Fargos control processes were deficient, and in particular, its foreclosures processes had included
5 the same robo-signing alleged to have afflicted other large lending institutions. Wells Fargo
6 disclosed further that more than 50,000 foreclosure affidavits submitted on its behalf would require
7 resubmission due to apparent robo-signing:
8

Wells Fargo Provides Update on Foreclosure Affidavits


And Mortgage Securitizations

9
*

10
11
12
13

As part of the companys review of its foreclosure affidavit procedures, the


company has identified instances where a final step in its processes relating to the
execution of the foreclosure affidavits (including a final review of the affidavit, as
well as some aspects of the notarization process) did not strictly adhere to the
required procedures. The issues the company has identified do not relate in any way
to the quality of the customer and loan data; nor does the company believe that any
of these instances led to foreclosures which should not have otherwise occurred.

14
18.

On November 9, 2010, John C. Liu (Liu), New York City Comptroller, as trustee of

15
Fire New York City Employee Pension Funds, submitted a shareholder proposal to the Company for
16
inclusion within its Definitive Proxy Statement related to the Companys annual meeting of
17
stockholders to be held during 2011. The proposal to the Board of Directors suggested by Liu and
18
the Systems boards of trustees outlined the reported deficiencies and the scope of investigations that
19
warranted immediate action by the Board of Directors and particularly the Audit Committee. The
20
proposal would require that the Board, through the Audit Committee, conduct an independent review
21
of the Companys internal controls related to loan modifications, foreclosures and securitizations,
22
and report to shareholders, at reasonable cost and omitting proprietary information, its findings and
23
recommendations by September 30, 2011.
24
19.

On November 10, 2010, the American Federation of Labor and Congress of Industrial

25
Organizations (AFL-CIO) wrote to Wells Fargo requesting submitting a proposal for the inclusion in
26
the 2011 proxy materials. The request was similar to that of the New York City Systems seeking a
27
resolution that the Company prepare a report on its internal controls over mortgage servicing
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1 operations, including among other things, procedures to prevent legal defects in the processing of
2 affidavits related to foreclosure.
3

20.

Throughout December 2010 and January 2011, lawsuits began to mount and

4 institutional shareholders continued to demand that the Board of Directors conduct an independent
5 investigation concerning the Companys mortgage servicing process. For example, on January 9,
6 2011, the New York City Office of the Comptroller issued a press release titled $432 Billion
7 Pension Fund Coalition Demands Bank Directors Immediately Examine Foreclosure Practices. The
8 coalition included the five New York City Pension Funds and the Connecticut Retirement Plan and
9 Trust Funds, of Illinois State Universities Retirement Systems, the New York State Common
10 Retirement Fund, the North Carolina Retirement Systems and the Oregon Public Employees
11 Retirement Fund. The press release quoted North Carolina State Treasurer, Janet Cowell, who had
12 placed responsibility squarely on the Audit Committee:

15

The responsibility for making sure that internal controls and compliance
process are in place for mortgage and foreclosure practices rests squarely with these
Audit Committees, . . . . The recent testimonies and studies strongly suggest the
need for these Audit Committees to act swiftly and objectively in conducting an
independent and comprehensive review of these practices.

16

21.

13
14

On February 25, 2011, the Company filed its Form 10-K. The Form 10-K included a

17 disclosure confirming that in addition to a multitude of lawsuits relating to its foreclosure processes,
18 it was in fact likely that the government would initiate some form of enforcement action against the
19 Company related to the foreclosure document investigation. As a result, the Company could be
20 subject to significant civil penalties. The Company further acknowledged that it had established a
21 $1.2 billion loss reserve to cover potential losses regarding its foreclosure practices. The Form 10-K
22 provided in part:
23
24
25
26
27
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MORTGAGE RELATED REGULATORY INVESTIGATIONS Several


government agencies are conducting investigations or examinations of various
mortgage related practices of Wells Fargo Bank. The investigations relate to two
main topics, (1) whether Wells Fargo may have violated fair lending or other laws
and regulations relating to mortgage origination practices; and (2) whether Wells
Fargos practices and procedures relating to mortgage foreclosure affidavits and
documents relating to the chain of title to notes and mortgage documents are
adequate. With regard to the investigations into foreclosure practices, it is likely
that one or more of the government agencies will initiate some type of enforcement
action against Wells Fargo, which may include civil money penalties. Wells Fargo
continues to provide information requested by the various agencies.
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On March 21, 2011, the Company filed its 14(a) Proxy Statement with the Securities

2 and Exchange Commission (SEC). The members of the Board caused the Company to include
3 City Comptroller Lius stockholder proposal in its Proxy Statement filed with the SEC on March 21,
4 2011. After describing the requested resolution, however, the Board of Directors urged shareholders
5 to vote against the resolution explaining that such an investigation would amount to a distraction for
6 the Company.
7

23.

On March 31, 2011, Wells Fargo entered into a Consent Order issued by the Office of

8 the Comptroller of the Currency (OCC). The OCC made specific findings of fact that the
9 Company had engaged in unsound or unsafe banking practices related to its residential loan
10 servicing and its mortgage foreclosure processing. On April 13, 2011, Wells Fargo entered into a
11 Consent Order with the Board of Governors of the Federal Reserve. Both governmental agencies
12 reserved the right to seek civil penalties against the Company.
13

24.

On May 5, 2011, the Company filed its Form 10-Q for the first quarter of 2011

14 (1Q11), announcing it had increased its litigation loss reserve to $1.7 billion. The Form 10-Q
15 further confirmed the investigations by the State Attorneys General and the U.S. Department of
16 Justice were still ongoing and could result in significant fines and civil penalties.
17
18

JURISDICTION AND VENUE


25.

This Court has jurisdiction pursuant to 28 U.S.C. 1332(a)(1), because plaintiff and

19 defendants are citizens of different states and the amount in controversy exceeds $75,000, exclusive
20 of interest and costs.
21

26.

In addition, certain of the claims asserted herein arise under 10(b), 14(a) and 20(a)

22 of the Exchange Act, 15 U.S.C. 78j(b), 78n(a) and 78t(a), and Rule 10b-5, 17 C.F.R. 240.10b-5,
23 promulgated thereunder, and under California and Delaware law for violations of breach of fiduciary
24 duty, abuse of control, constructive fraud, corporate waste, unjust enrichment, insider trading and
25 gross mismanagement. In connection with the acts, conduct and other wrongs complained of herein,
26 defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, the
27 United States mail and the facilities of a national securities market. Thus, this Court has subject
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1 matter jurisdiction pursuant to 27 of the Exchange Act, 15 U.S.C. 78aa, as well as 28 U.S.C.
2 1331 and 1337.
3

27.

This action is not a collusive action designed to confer jurisdiction on a court of the

4 United States that it would not otherwise have.


5

28.

This Court has jurisdiction over each defendant named herein because each defendant

6 is either a corporation that conducts business in and maintains operations in this District, or is an
7 individual who has sufficient minimum contacts with this District so as to render the exercise of
8 jurisdiction by the courts of this District permissible under traditional notions of fair play and
9 substantial justice.
29.

10

Venue is proper in this Court because Wells Fargo has a substantial presence in

11 California and is headquartered in San Francisco, California. Moreover, each defendant has had
12 extensive contacts with California as a director and/or officer of Wells Fargo or otherwise, which
13 makes the exercise of personal jurisdiction over them proper, and certain of the defendants reside in
14 this District.
15

PARTIES

16

30.

Plaintiff Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust (Pirelli)

17 is a shareholder of Wells Fargo and will adequately represent the interests of Wells Fargo in this
18 action.1 Pirelli is a citizen of the State of Tennessee. Pirelli has continuously held shares of the
19 Companys common stock since January 26, 2009.
20

31.

Plaintiff City of Westland Police and Fire Retirement System (City of Westland) is

21 a shareholder of Wells Fargo and will adequately represent the interests of Wells Fargo in this
22 action. City of Westland is a citizen of the State of Michigan. City of Westland has continuously
23 held shares of the Companys common stock since May 2009.
24

32.

Nominal party Wells Fargo is a diversified financial services company that provides

25 retail, commercial and corporate banking services principally in the United States. Nominal
26
27

At January 31, 2011, there were 201,714 holders of record of the Companys common stock.

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1 defendant Wells Fargo is a Delaware corporation with its headquarters located in San Francisco,
2 California.
3

33.

Defendant John G. Stumpf has served as Chairman of Wells Fargo since January

4 2010, as CEO since 2007, as a director since 2006 and as President since 2005. As a director,
5 defendant Stumpf has agreed to abide by the terms of the Wells Fargo & Company Director Code of
6 Ethics. After the 1998 merger of Wells Fargo and Northwest Corporation, a predecessor of Wells
7 Fargo that had employed Stumpf since 1982, defendant Stumpf became the head of the Companys
8 Southwest Banking Group, and in 2000 headed the Companys new Western Banking Group.
9 Defendant Stumpf led the integration of the Companys acquisition of First Security Corporation in
10 2000, and in 2008 led one of the largest mergers in history with the Companys purchase of
11 Wachovia. Defendant Stumpf reportedly enjoyed compensation of approximately $18,756,172 in
12 2009 and $17,100,000 in 2010.
13

34.

Defendant Howard I. Atkins served as CFO and Executive Vice President of Wells

14 Fargo from 2001 to February 8, 2011. As CFO, defendant Atkins was responsible for leading the
15 Companys financial management functions, including the Companys controllers, financial
16 reporting, tax management, asset-liability management, treasury, corporate development, investor
17 relations and mergers and acquisitions. During the Relevant Period, moreover, defendant Atkins
18 issued statements in Company press releases and participated in the Companys conference calls
19 with analysts and investors, representing himself as a primary person with knowledge about the
20 Companys business, outlook, financial reports and business practices. Defendant Atkins reportedly
21 enjoyed compensation of approximately $11,500,000 in 2009 and $8,900,000 in 2010. Defendant
22 Atkins abruptly resigned from the position as CFO from the Company on February 8, 2011 and was
23 scheduled to retire on August 6, 2011, with approximately $22 million in deferred compensation and
24 benefits. Defendant Atkins is a citizen of the State of California.
25

35.

Defendant John D. Baker II has served as a director of Wells Fargo since 2009. As a

26 director, defendant Baker has agreed to abide by the terms of the Wells Fargo & Company Director
27 Code of Ethics. Previously, defendant Baker had served as a director of Wachovia Corporation since
28 2001, until it was acquired by Wells Fargo on December 31, 2008. Defendant Baker serves on the
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1 Boards Audit and Examination Committee, Corporate Responsibility Committee and Credit
2 Committee, and has agreed to abide by the terms of the respective charters of each committee on
3 which he serves. In addition to the demand futility allegations set forth specifically below, defendant
4 Bakers role on the aforementioned Board committees during the Relevant Period implicates his
5 decisions on those committees. Defendant Baker reportedly enjoyed total compensation as a Wells
6 Fargo director of $295,667 in 2010. Defendant Baker is a citizen of the State of Florida.
7

36.

Defendant John S. Chen has served as a director of Wells Fargo since 2006. As a

8 director, defendant Chen has agreed to abide by the terms of the Wells Fargo & Company Director
9 Code of Ethics. Defendant Chen reportedly enjoyed total compensation as a Wells Fargo director of
10 $275,667 in 2008, $289,789 in 2009 and $297,667 in 2010. Defendant Chen is a citizen of the State
11 of California.
12

37.

Defendant Lloyd H. Dean has served as a director of Wells Fargo since 2005. As a

13 director, defendant Dean has agreed to abide by the terms of the Wells Fargo & Company Director
14 Code of Ethics. Defendant Dean serves on the Boards Audit and Examination Committee,
15 Corporate Responsibility Committee (Chair), Credit Committee, and Risk Committee, and has
16 agreed to abide by the terms of the respective charters of each committee on which he serves. In
17 addition to the demand futility allegations set forth specifically below, defendant Deans role on the
18 aforementioned Board committees during the Relevant Period implicates his decisions on those
19 committees. Defendant Dean reportedly enjoyed total compensation as a Wells Fargo director of
20 $250,431 in 2008, $333,789 in 2009 and $297,667 in 2010. Defendant Dean is a citizen of the State
21 of California.
22

38.

Defendant Susan E. Engel has served as a director of Wells Fargo since 1998. As a

23 director, defendant Engel has agreed to abide by the terms of the Wells Fargo & Company Director
24 Code of Ethics. Defendant Engel serves on the Boards Credit Committee and Finance Committee,
25 and has agreed to abide by the terms of the respective charters of each committee on which she
26 serves. In addition to the demand futility allegations set forth specifically below, defendant Engels
27 role on the aforementioned Board committees during the Relevant Period implicates her decisions on
28 those committees. Defendant Engel reportedly enjoyed total compensation as a Wells Fargo director
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1 of $248, 431 in 2008, $307,789 in 2009 and $293,667 in 2010. Defendant Engel is a citizen of the
2 State of New York.
3

39.

Defendant Enrique Hernandez, Jr. has served as a director of Wells Fargo since 2003.

4 As a director, defendant Hernandez has agreed to abide by the terms of the Wells Fargo & Company
5 Director Code of Ethics. Defendant Hernandez serves on the Boards Audit and Examination
6 Committee, Corporate Responsibility Committee, Finance Committee (Chair), and Risk Committee,
7 and has agreed to abide by the terms of the respective charters of each committee on which he
8 serves. In addition to the demand futility allegations set forth specifically below, defendant
9 Hernandezs role on the aforementioned Board committees during the Relevant Period implicates his
10 decisions on those committees. Defendant Hernandez reportedly enjoyed total compensation as a
11 Wells Fargo director of $269,681 in 2008, $326,789 in 2009 and $304,667 in 2010. Defendant
12 Hernandez is a citizen of the State of California.
13

40.

Defendant Donald M. James has served as a director of Wells Fargo since 2009. As a

14 director, defendant James has agreed to abide by the terms of the Wells Fargo & Company Director
15 Code of Ethics. Previously, James had served as a director of Wachovia Corporation since 2004,
16 until it was acquired by Wells Fargo on December 31, 2008. Defendant James serves on the Wells
17 Fargo Boards Finance Committee, and has agreed to abide by the terms of its charter. In addition to
18 the demand futility allegations set forth specifically below, defendant Jamess role on the
19 aforementioned Board committee during the Relevant Period implicates his decisions on that
20 committee. Defendant James reportedly enjoyed total compensation as a Wells Fargo director of
21 $285,667 in 2010. Defendant James is a citizen of the State of Alabama.
22

41.

Defendant Richard D. McCormick served as a director of Wells Fargo from 1983

23 through May 3, 2011. As a director, defendant McCormick agreed to abide by the terms of the
24 Wells Fargo & Company Director Code of Ethics. Defendant McCormick served on the Boards
25 Finance Committee, and agreed to abide by the terms of its charter. Defendant McCormick
26 reportedly enjoyed total compensation as a Wells Fargo director of $246,181 in 2008, $297,789 in
27 2009 and $283,667 in 2010.
28
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Defendant Mackey J. McDonald has served as a director of Wells Fargo since 2009.

2 As a director, defendant McDonald agreed to abide by the terms of the Wells Fargo & Company
3 Director Code of Ethics. Previously, defendant McDonald had served as a director of Wachovia
4 Corporation since 1997, until it was acquired by Wells Fargo on December 31, 2008. Defendant
5 McDonald serves on the Boards Governance and Nominating Committee, and has agreed to abide
6 by the terms of its charter. In addition to the demand futility allegations set forth specifically below,
7 defendant McDonalds role on the aforementioned Board committee during the Relevant Period
8 implicates his decisions on that committee.

Defendant McDonald reportedly enjoyed total

9 compensation as a Wells Fargo director of $281,667 in 2010. Defendant McDonald is a citizen of


10 the State of North Carolina.
11

43.

Defendant Cynthia H. Milligan has served as a director of Wells Fargo since 1992.

12 As a director, defendant Milligan agreed to abide by the terms of the Wells Fargo & Company
13 Director Code of Ethics. Defendant Milligan serves on the Boards Audit and Examination
14 Committee, Corporate Responsibility Committee, Credit Committee (Chair), Governance and
15 Nominating Committee, and Risk Committee (Chair), and has agreed to abide by the terms of the
16 respective charters of each committee on which she serves. In addition to the demand futility
17 allegations set forth specifically below, defendant Milligans role on the aforementioned Board
18 committees during the Relevant Period implicates her decisions on those committees. Defendant
19 Milligan reportedly enjoyed total compensation as a Wells Fargo director of $252,431 in 2008,
20 $320,244 in 2009 and $327,101 in 2010. Defendant Milligan is a citizen of the State of Nebraska.
21

44.

Defendant Nicholas G. Moore has served as a director of Wells Fargo since 2006. As

22 a director, defendant Moore agreed to abide by the terms of the Wells Fargo & Company Director
23 Code of Ethics. Defendant Moore serves on the Boards Audit and Examination Committee (Chair),
24 Credit Committee, and Risk Committee, and has agreed to abide by the terms of the respective
25 charters of each committee on which he serves. In addition to the demand futility allegations set
26 forth specifically below, defendant Moores role on the aforementioned Board committees during the
27 Relevant Period implicates his decisions on those committees and renders him hostile to the instant
28 action. Defendant Moore reportedly enjoyed total compensation as a Wells Fargo director of
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1 $245,431 in 2008, $359,789 in 2009 and $327,667 in 2010. Defendant Moore is a citizen of the
2 State of California.
3

45.

Defendant Philip J. Quigley has served as a director of Wells Fargo since 1994, and

4 currently serves as the Boards Lead Director. As a director, defendant Quigley agreed to abide by
5 the terms of the Wells Fargo & Company Director Code of Ethics. Defendant Quigley serves on the
6 Boards Audit and Examination Committee, Governance and Nominating Committee (Chair), and
7 Risk Committee, and has agreed to abide by the terms of the respective charters of each committee
8 on which he serves. In addition to the demand futility allegations set forth specifically below,
9 defendant Quigleys role on the aforementioned Board committees during the Relevant Period hereto
10 implicates his decisions on those committees.

Defendant Quigley reportedly enjoyed total

11 compensation as a Wells Fargo director of $282,431 in 2008, $343,789 in 2009 and $348,839 in
12 2010. Defendant Quigley is a citizen of the State of California.
13

46.

Defendant Judith M. Runstad has served as a director of Wells Fargo since 1998. As

14 a director, defendant Runstad agreed to abide by the terms of the Wells Fargo & Company Director
15 Code of Ethics. Defendant Runstad serves on the Boards Corporate Responsibility Committee,
16 Credit Committee, and Finance Committee, and has agreed to abide by the terms of the respective
17 charters of each committee on which she serves. In addition to the demand futility allegations set
18 forth specifically below, defendant Runstads role on the aforementioned Board committees during
19 the Relevant Period implicates her decisions on those committees. Defendant Runstad reportedly
20 enjoyed total compensation as a Wells Fargo director of $238,431 in 2008, $293,789 in 2009 and
21 $293,919 in 2010. Defendant Runstad is a citizen of the State of Washington.
22

47.

Defendant Stephen W. Sanger has served as a director of Wells Fargo since 2003. As

23 a director, defendant Sanger agreed to abide by the terms of the Wells Fargo & Company Director
24 Code of Ethics. Defendant Sanger serves on the Boards Finance Committee (2010 only),
25 Governance and Nominating Committee (2011 only) and Risk Committee, and has agreed to abide
26 by the terms of the respective charters of each committee on which he serves. In addition to the
27 demand futility allegations set forth specifically below, defendant Sangers role on the
28 aforementioned Board committees during the Relevant Period implicates his decisions on those
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1 committees. Defendant Sanger reportedly enjoyed total compensation as a Wells Fargo director of
2 $264,431 in 2008, $317,789 in 2009 and $305,667 in 2010. Defendant Sanger is a citizen of the
3 State of Minnesota.
4

48.

Defendant Susan G. Swenson has served as a director of Wells Fargo since 1994. As

5 a director, defendant Swenson agreed to abide by the terms of the Wells Fargo & Company Director
6 Code of Ethics. Defendant Swenson serves on the Boards Audit and Examination Committee and
7 Governance and Nominating Committee, and has agreed to abide by the terms of the respective
8 charters of each committee on which she serves. In addition to the demand futility allegations set
9 forth specifically below, defendant Swensons role on the aforementioned Board committees during
10 the Relevant Period implicates her decisions on those committees and renders her hostile to the
11 instant action. Defendant Swenson reportedly enjoyed total compensation as a Wells Fargo director
12 of $252,431 in 2008, $305,789 in 2009 and $377,217 in 2010. Defendant Swenson is a citizen of the
13 State of California.
14

49.

Defendants Stumpf, Atkins, Baker, Chen, Dean, Engel, Hernandez, James,

15 McCormick, McDonald, Milligan, Moore, Quigley, Runstad, Sanger and Swenson, because of their
16 positions with the Company, possessed the power and authority to control the contents of Wells
17 Fargos quarterly reports, press releases and presentations to shareholders and analysts. They were
18 provided with copies of the Companys false and misleading reports and press releases before or
19 shortly after their issuance and had the ability and opportunity to prevent their issuance or cause
20 them to be corrected. Because of their positions with the Company, and their access to material non21 public information available to them but not to the public, defendants knew that the adverse facts
22 specified herein had not been disclosed to and were being concealed from the public and that the
23 positive representations being made were then materially false and misleading. Defendants are
24 liable for the false and misleading statements and omissions pleaded herein.
25

50.

Defendants, and each of them, acted in bad faith and breached their fiduciary duties

26 of candor, loyalty and good faith owed to Wells Fargo by causing or permitting Wells Fargo to enter
27 into transactions to the detriment of Wells Fargo. Defendants also acted in bad faith and breached
28 their fiduciary duties of candor, loyalty and good faith owed to Wells Fargo by causing Wells Fargo
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1 to issue false and misleading statements concerning its business prospects and revenue and income
2 projections.
3 Non-Party MERS and MERSCORP
4

51.

Non Party Mortgage Electronic Registration System, Inc. (MERS) is a wholly-

5 owned subsidiary of MERSCORP, Inc. was created in 1994 by the mortgage finance industry,
6 including Wells Fargo, Bank of America, HSBC, the Mortgage Bank Association and others. The
7 purpose of MERS was to maintain a database to simplify the tracking and servicing of individual
8 mortgages and speed up the recording and transfer of mortgages as opposed to physically recording
9 transfers and assignment documentation in state and county clerks offices. Mortgage lenders or
10 originators designated MERS as its assignee or nominee with the power to assign and transfer the
11 mortgage. According to MERS, the MERS system is the only central database of mortgage loan
12 information. Further, according to MERS, the data on MERS system is provided and maintained by
13 MERS members, including Wells Fargo. MERS is supported by membership and transaction fees
14 paid by MERS members. According to MERS, it has received no income from foreclosures.
15

52.

In a stipulated consent order entered into by the OCC and MERS on April 13, 2011,

16 the functionality of MERS is described as follows in summary. MERSCORPs shareholders include


17 federally regulated financial institutions that own and/or service residential mortgages. MERSCORP
18 operates a national electronic registry that tracks beneficial ownership interests and servicing rights
19 associated with residential mortgage loans and any changes in those interests or right. Members of
20 MERS, including Wells Fargo, receive a substantial portion of the services provided by
21 MERSCORP and MERS. MERS serves as mortgagee of record and nominee for the participating
22 members in local land records. MERS takes action as mortgagee through documents executed by
23 certifying officers of MERS. MERS has designated these individuals, who are officers or
24 employees of members or certain third-parties who have contractual relationships with members, as
25 officers of MERS. By virtue of these designations, the certifying officers execute legal documents in
26 the name of MERS, such as mortgage assignments and lien releases.
27

53.

As of the date of this filing, the MERS Board of Directors consist of the following

28 individuals, including Joe Jackson, Senior Vice President, Wells Fargo N.A.:
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1
2

Filed09/12/11 Page20 of 108

Name
Kurt Pfotenhauer,
Chairman
Bill Beckmann

Title
CEO

Albert Celini

Vice President, Single Family


Operations and Technology
Senior Vice President, Director of
Strategy for Mortgage Operations

President and CEO

3
4
5

Diane Citron

Joe Jackson

Senior Vice President

Brian McCrackin

Director of Finance

Gwen Muse-Evans

Vice President and Chief Risk


Officer for Credit Portfolio
Management
Executive Vice President

9
10
11
12
13
14

Robert Reynolds
Eric Schuppenhauer
David H. Stevens

Senior Vice President, Home


Lending
President and CEO

Lawrence P.
Washington

Managing Director and Servicing


Portfolio Strategy Executive

Company
American Land
Title Association
MERSCORP,
Inc.
Freddie Mac

Location
Washington, DC

Ally Financial,
Inc.

New York, NY and


Fort Washington,
PA
Des Moines, IA

Wells Fargo
Bank, N.A.
CitiMortgage,
Inc.
Fannie Mae

Reston, VA
McLean, VA

St. Louis, MO
Washington, DC

SunTrust Banks,
Inc.
JPMorgan Chase

Richmond, VA

Mortgage
Bankers
Association
Bank of
America, N.A.

Washington, DC

Columbus, OH

Jacksonville, FL

15 Non-Party Institutional Shareholders Which


Have Demanded Action by the Board of Directors
16
54.
During the Relevant Period and particularly in the fall of 2010 when robo-signing
17
phenomenon began to be reported in the market place, certain large institutional shareholders of
18
Wells Fargo and other large loan originators and services voiced their concerns to Wells Fargo
19
concerning its particular mortgage servicing practices reported in the media. For example, in
20
November 2010, Liu, New York City Comptroller, submitted a shareholder proposal to the
21
Company for inclusion within its Definitive Proxy Statement related to the Companys annual
22
meeting of stockholders to be held during 2011. The letter included a proposal that the Board direct
23
the Audit Committee to an internal review of the Companys internal controls related to foreclosure
24
processes and report its conclusions to the shareholders, and include such proposal in the Companys
25
2011 shareholder proxy materials. The November 9, 2010 letter was sent to the Board on behalf of
26
the following institutions:
27
(a)
New York City Employees Retirement System;
28
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(b)

New York City Fire Department Pension Fund;

(c)

New York City Teachers Retirement System and New York City Police

(d)

New York City Board of Education Retirement System;

(e)

Connecticut Retirement Plans and Trust Funds;

(f)

Illinois State Board of Investment;

(g)

Illinois State Universities Retirement System;

(h)

New York State Common Retirement Fund; and

(i)

North Carolina Retirement Systems.

3 Pension Fund;

55.

10

Together, each of the above institutions reportedly held, collectively, tens of millions

11 of shares in Wells Fargo valued at more than $1 billion to $1.6 billion. The Board, while including
12 the shareholder proposal in the 2011 proxy material, recommended that shareholders vote against the
13 proposal.
14

THE FIDUCIARY DUTIES OF WELLS FARGOS


DIRECTORS AND OFFICERS

15
56.

Each director and officer of Wells Fargo owed Wells Fargo and its shareholders the

16
duty to exercise the highest degree of candor, good faith and loyalty in the management and
17
administration of the Companys affairs, as well as in the use and preservation of Wells Fargos
18
property and assets. Delaware law holds: Loyalty. Good faith. Independence. Candor. These are
19
words pregnant with obligation. The Supreme Court did not adorn them with half-hearted
20
adjectives. Directors should not take a seat at the board table prepared to offer only conditional
21
loyalty, tolerable good faith, reasonable disinterest or formalistic candor. In re Tyson Foods, Inc.
22
Consol. Sholder Litig., No. 1106-CC, 2007 Del. Ch. LEXIS 120, at *10-*11 (Del. Ch. Aug. 15,
23
2007).
24
57.

The conduct of Wells Fargos directors and officers complained of herein involves a

25
knowing and culpable violation of their fiduciary obligations, the absence of good faith on their part,
26
and a reckless disregard for their duties to the Company which the directors and officers were aware
27
or should have been aware posed a risk of serious injury to the Company. The conduct of Wells
28
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1 Fargos directors and officers who engaged in illegal conduct has been ratified by Wells Fargos
2 Board, which has failed to take any action against them, despite knowledge of such actions and
3 rejected the taking of action proposed by shareholders, specifically, that the Company do an internal
4 audit of its foreclosure practices among other things and report findings to Company shareholder.
5

58.

To discharge their fiduciary duties of candor, good faith and loyalty, Wells Fargos

6 directors and officers were required, among other things, to:


7

(a)

in good faith, manage, conduct, supervise and direct the business and affairs

8 of Wells Fargo and its subsidiaries in accordance with applicable state and federal laws;
9

(b)

neither violate nor knowingly permit any director, officer or employee of

10 Wells Fargo to violate applicable federal and state laws, rules and regulations or any rule or
11 regulation of Wells Fargo;
(c)

12

remain informed as to the status of Wells Fargos operations, and upon receipt

13 of notice or information of imprudent, unsound or unlawful practices, to make a reasonable inquiry


14 in connection therewith, and to take steps to correct such conditions or stop such practices; and
15

(d)

ensure that Wells Fargo was operated in a diligent, honest and prudent manner

16 in compliance with all applicable federal and state laws, rules and regulations.
17

59.

By reason of their corporate positions and their ability to control the business and

18 corporate affairs of Wells Fargo, defendants were required to use their ability to control Wells Fargo
19 in a fair, just and equitable manner, as well as to act in furtherance of the best interests of Wells
20 Fargo and not in furtherance of their own personal interests or ideology. In violation of their
21 fiduciary duties of candor, loyalty and good faith, defendants caused Wells Fargo to conduct its
22 business in an unsafe, imprudent, dangerous and illegal manner.
23

60.

Defendants participated in the wrongdoing complained of herein in order to

24 improperly benefit themselves, instead of acting in the best interests of the Company, and to remain
25 as directors and officers of a public corporation and to continue and prolong the illusion of Wells
26 Fargos success and to conceal the adverse facts concerning Wells Fargos actual financial condition
27 so that they could protect and perpetuate their directorial and/or executive positions and increase the
28 substantial compensation, perks and prestige they obtained thereby. Such participation involved,
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1 among other things, planning and creating (or causing to be planned and created), proposing (or
2 causing the proposal of) and authorizing, approving and acquiescing in the illegal conduct
3 complained of herein.
4

61.

During the Relevant Period, each of the defendants occupied a position with Wells

5 Fargo or was associated with the Company in such a manner as to make them privy to confidential
6 and proprietary information concerning Wells Fargo and its operations, finances and financial
7 condition. Because of these positions and such access, each of the defendants knew that the true
8 facts specified herein regarding Wells Fargos business and finances had not been disclosed to and
9 were being concealed from its shareholders and the public. Defendants, as corporate fiduciaries
10 entrusted with non-public information, were obligated to disclose material adverse information
11 regarding Wells Fargo and to take any and all actions necessary to ensure that the officers and
12 directors of Wells Fargo did not act upon such privileged non-public information in a manner which
13 caused the Company to violate the law.
14

62.

Defendants breached their duties of candor, loyalty and good faith by allowing or by

15 themselves causing the Company to misrepresent its financial results and prospects, as detailed
16 herein, and by failing to prevent defendants from taking such illegal actions. Each of the defendants
17 participated in the issuance and/or review of false and misleading statements, including the
18 preparation of false and misleading press releases, SEC filings and reports to Wells Fargo
19 shareholders. In addition, as a result of defendants illegal actions and course of conduct, the
20 Company is the target of an investigation by the SEC.
21

63.

Pursuant to Wells Fargos Director Code of Ethics, Wells Fargo expects its directors

22 to act in a manner that will serve the best interests of Wells Fargo; that is fair, honest and
23 trustworthy; that is in compliance with applicable laws, rules and regulations; that will preserve
24 confidential information; that will avoid conflicts of interest or the appearance of conflicts of
25 interest; and that will protect and promote the proper use of Wells Fargos assets.
26

64.

27

One of the Boards key responsibilities is to ensure that the Company,


through its management, maintains high ethical standards and effective policies
and practices designed to protect the Companys reputation, assets and business.

28
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The Company has established corporate governance guidelines, which state:

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2

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The Board has adopted and promotes the Wells Fargo Code of Ethics and Business
Conduct applicable to all team members, and has adopted a Director Code of Ethics
applicable to members of the Board. Directors shall be familiar with, and are
expected to conduct their activities in accordance with, the Director Code of Ethics.

3
65.

The Companys Team Member Code of Ethics and Business Conduct states:

4
5
6

To preserve and foster the publics trust and confidence, complete honesty
and fairness is required in conducting internal and external business. Its
important that every Wells Fargo team member understands that the honesty, trust,
and integrity essential for meeting the highest standards of corporate governance are
not just the responsibility of senior management or boards of directors.

7
COMMITTEES OF THE WELLS FARGO BOARD OF DIRECTORS
8
66.

During the Relevant Period, the Companys Board maintained five separate

9
committees on which certain director defendants sat. The Board Committees were the Audit and
10
Examination Committee, the Credit Committee, the Financial Committee and the Governance and
11
Nominating Committee.
12
67.

Audit and Examination Committee: Under Wells Fargos Audit and Examination

13
Committee Charter, the members of the committee are required, among other things, to:
14
(a)

review and discuss with management the Companys annual and quarterly

15
financial statements;
16
(b)

review annual and quarterly earnings press releases in advance of their

(c)

discuss or review financial information and earnings guidance provided to

17
issuance;
18
19
Wells Fargos shareholders, securities analysts and members of the financial press;
20
(d)

review any reports by management regarding the effectiveness of, or any

21
deficiencies in, the design or operation of disclosure controls and procedures or internal controls, and
22
any fraud, whether or not material, that involves management or other employees who have a
23
significant role in Wells Fargos internal controls; and
24
(e)

monitor compliance with the Companys Code of Ethics and Business

25
Conduct by Wells Fargos directors, officers and employees.
26
27
28
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Here, the members of the Audit and Examination Committee (defendants Baker, Dean,

2 Hernandez, Milligan, Moore, Quigley and Swenson) failed to discharge their fiduciary duties and
3 obligations under the Audit and Examination Committee Charter.
4

68.

Corporate Responsibility Committee: Under Wells Fargos Corporate Responsibility

5 Committee Charter, the members of the committee are required, among other things, to:
6

(a)

oversee the Companys policies, programs, and strategies regarding social

7 responsibility matters, including those relating to the Companys fair and responsible mortgage
8 lending and the Companys government relations; and
9

(b)

monitor the Companys reputation and relationships with its external

10 stakeholders, including its customers regarding social responsibility matters.


11

Here, the members of the Corporate Responsibility Committee (defendants Baker, Dean,

12 Hernandez, Milligan and Runstad) failed to discharge their fiduciary duties and obligations under the
13 Corporate Responsibility Committee Charter.
14

69.

Credit Committee: Under Wells Fargos Credit Committee Charter, the members of

15 the committee are required, among other things, to:


16

(a)

review the quality of the Companys credit portfolio and the trends affecting

18

(b)

oversee the effectiveness and administration of credit-related policies;

19

(c)

review the adequacy of the allowance for credit losses; and

20

(d)

to report to the Board regarding these matters.

17 that portfolio;

21

Here, the members of the Credit Committee (defendants Baker, Dean, Engel, Milligan,

22 Moore and Runstad) failed to discharge their fiduciary duties and obligations under the Credit
23 Committee Charter.
24

70.

Finance Committee: Under the Wells Fargos Finance Committee Charter, the

25 members of the committee are required, among other things, to:


26

(a)

oversee the Companys major financial risks, including liquidity and funding

27 risk, market risk and financial risks (including credit risk) related to the Companys investment
28 security portfolio;
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(b)

oversee the Companys capital management and planning processes;

(c)

review financial strategies for achieving financial objectives;

(d)

review financial performance results;

(e)

oversee reputation risk related to the Committees responsibilities described in

5 the Finance Committee Charter; and


6

(f)

report to the Board the conclusions of the Committee regarding these matters.

Here, the members of the Finance Committee (defendants Engel, Hernandez, James and

8 Runstad) failed to discharge their fiduciary duties and obligations under the Finance Committee
9 Charter.
71.

10

Governance and Nominating Committee: Under Wells Fargos Governance and

11 Nominating Committee Charter, the members of the committee are required, among other things, to:
12

(a)

recommend to the Board the corporate governance guidelines applicable to the

14

(b)

oversee an annual review of the Boards performance;

15

(c)

review from time to time director compensation and recommend any changes

13 Company;

16 for approval of the Board;


17

(d)

oversee the Companys engagement with stockholders and other interested

18 parties concerning governance and other related matters; and


19

(e)

oversee reputation risk related to the responsibilities described in the

20 committees Charter.
21

72.

During the Relevant Period, the members of the Governance and Nominating

22 Committee (defendants McDonald, Milligan, Quigley, Sanger and Swenson) failed to discharge their
23 fiduciary duties and obligations under the Governance and Nominating Committee Charter.2
24
25

Risk Committee: Under Wells Fargos Risk Committee Charter, which was created in 2011,
the members of the committee are required, among other things, to:

26
27

(a)
oversee the Companys strategies, policies, procedures and systems,
established by management to identify, assess, measure and manage major risks
faced by Wells Fargo;

28
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73.

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The chart below illustrates which respective committee each Company board member

2 served on throughout the Relevant Period of 2010 through 2011:


3
4
5
6
7
8
9
10
11
BACKGROUND
12
74.

As early as 2007, Wells Fargo, including its subsidiaries, agents and partners,

13
including MERSCORP and MERS and through the height of the financial crisis instituted home
14
foreclosure proceedings in judicial foreclosure states throughout the country. Wells Fargo also
15
instituted home foreclosure processes in non-foreclosure states like California. In both sets of
16
scenarios, as part of an intentional and strategic business practice, Wells Fargo, knowing and/or
17
recklessly implemented and employed a policy and business strategy to accelerate the home
18
foreclosure process by mass processing declarations or affidavits to be submitted in court
19
proceedings and filed with state agencies purporting to evidence accurate transfer and recording of
20
title on properties it sought to foreclose upon.
21
75.

The Wells Fargo business practice and strategy was knowingly or recklessly designed

22
to avoid the work and cost associated with obtaining facts or documents representing ownership,
23
standing and the right to foreclose on properties. The Company, through certain of its employees,
24
25
26
27

(b)
review and discuss policies with respect to risk assessment and risk
management, including the Companys major financial, operational, compliance or
reputational risk exposures; and
(c)

monitor the steps management has taken to control such risk exposures.

28
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1 has admitted the process was designed to and permitted Wells Fargo employees and agents to submit
2 affidavits purportedly with personal knowledge without determining the accuracy and truthfulness of
3 the affidavits it was executing and filing in courts around the country. The Companys practice and
4 procedures of mass processing foreclosure documents was also designed to and/or had the effect of
5 concealing the possibility that title and standing could not be perfected in which case the Company
6 would be at risk of writing down millions if not billions of dollars in mortgages. Therefore, in
7 addition to the accelerated foreclosure processes facilitated by MERS, even internally, volume and
8 speed were paramount such that certain Wells Fargo departments or units and units working on
9 behalf of Wells Fargo functioned as foreclosure mills, along with other large banks, often employing
10 the same individuals posing as company vice presidents, purportedly as Wells Fargo senior
11 executives or vice presidents in order for the affidavits to appear legitimate.
12

76.

According to a number of Wells Fargo employees, Wells Fargo executes all of the

13 documents necessary for foreclosures nationwide from an office in Fort Mill, South Carolina. Based
14 almost exclusively on information generated by a Wells Fargo proprietary Matrix computer system,
15 Company employees in the document execution department sign all foreclosure documents and
16 affidavits that are presented to them without personally verifying any substantive information. See
17 84-85, 87. By design, the sole responsibility of employees in the document execution department
18 is, as the name suggests, to execute documents and affidavits, trusting that some other division of
19 Wells Fargo has confirmed that the information is correct.
20

77.

Defendant Atkins, during the Company's 3Q10 financial results conference call

21 conceded that Wells Fargos process for executing affidavits was indeed designed by the Company
22 and the Company was in fact aware of how it was designed to work. See 16 (To help ensure
23 accuracy over the years, Wells Fargo has built control processes that link customer information with
24 foreclosure procedures and documentation requirements.). But in the same conference call,
25 defendant Atkins falsely represented that [o]ur process specifies that affidavit signers and reviewers
26 are the same team member, not different people, and affidavits are properly notarized. Id. Despite
27 these misrepresentations, defendant Atkins and the other defendants knew that Wells Fargos
28 foreclosure affidavit process including the Companys reliance on its Matrix computer system as
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1 described by certain Wells Fargo Home Mortgage employees was designed, implemented and
2 executed in a fashion that would not only permit, but require Company employees to cause Wells
3 Fargo to file false affidavits with the courts and state agencies.
4

78.

Among those Wells Fargo employees, during the Relevant Period and as early as

5 2007, was Linda Green (Green), who executed loan documentation as Vice President of Wells
6 Fargo. Green, whose name appeared as a vice president on countless mortgage assignments used by
7 Wells Fargo, was fraudulently used by Docx employees including Chris Pendley who signed for
8 Linda Green approximately 4,000 documents a day. Lynn Szymoniak, who was fighting
9 foreclosure, and was an attorney and fraud investigator specializing in forged documents, researched
10 over 10,000 mortgages and noticed the many different ways in which Greens name was signed. As
11 explained in a 60 Minute special by Scott Pelley some of the details of Docx and robo-signer Green
12 were reported:
13
14

One of the strangest signatures belonged to the bank vice president who had
signed Szymoniaks newly discovered mortgage documents. The name is Linda
Green. But, on thousands of other mortgages, the style of Greens signature changed
a lot.

15
16
17
18
19

And, even more remarkable, Szymoniak found Green was vice president of
20 banks - all at the same time.
Where did all those documents come from? We went searching for the
Linda Green and found her in rural Georgia. She told us she has never been a bank
vice president.
In 2003, she was a shipping clerk for auto parts when her grandson told her
about a job at a company called Docx. . . .

20
21
22
23
24

They were sitting in a room signing their name as fast as they possibly could to
any kind of nonsense document that was put in front of them, Szymoniak said.
Docx, and companies like it, were recreating missing mortgage assignments
for the banks and providing the legally required signatures of bank vice presidents
and notaries. Linda Green says she was named a bank vice president by Docx
because her name was short and easy to spell. As demand exploded, Docx needed
more Linda Greens.

25

So youre Linda Green? Pelley asked Chris Pendley.

26

Yeah, cant you tell? Pendley, who is a man, replied.

27

Pendley worked at Docx at the same time and signed as Linda Green.

28
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When you came in to Docx on your first day, what did they tell you your job
was gonna be? Pelley asked.

2
3

They told me that I was gonna be signing documents for using someone
elses name, Pendley remembered.

How many banks were you vice president of in a given day? Pelley asked.

I would guess somewhere around five to six, Pendley said.

79.

The 60 Minutes expos went further with Pendley in which he said that he alone

8 signed 4,000 documents per day.


9
10
11

Pendley showed us how he signed mortgage documents as Linda Green. He


told us Docx employees had to sign at least 350 an hour. Pendley estimates that he
alone did 4,000 a day.
Shawanna Crite worked at Docx and was also a Linda Green. She says
she both signed and notarized the mortgage documents.

12
80.

The CBS interview and expos continued and disclosed that 60 Minutes had been told

13
by Green that some of the bank vice presidents signing foreclosure documents were high school kids
14
and their signatures were entered into evidence in untold thousands of foreclosure suits that sent
15
families packing.
16
17
18

Szymoniak says that the banks whose paperwork was handled by the Docx
forgery mill include Wells Fargo, HSBC, Deutsche Bank, Citibank, U.S. Bank and
Bank of America. We contacted all of them. Each said it farmed out its mortgage
servicing work to other companies and it was those mortgage servicing firms that
hired Docx.

19
81.

Green indeed executed foreclosure documents, purportedly on behalf of MERS, as its

20
Vice President. More notably, MERS, of which Wells Fargo is a member and also sits on MERS
21
Board of Directors, identifies its address as 2701 Wells Fargo Way, Minneapolis, MN, sharing an
22
address with Wells Fargo. For example, set forth below in a March 2007 affidavit signed by Green
23
as Vice President of MERS sharing an address with Wells Fargo:
24
25
26
27
28
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82.

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In addition, well before it became more widely disclosed, Wells Fargo and the

2 defendants knew or recklessly disregarded that the Company the business practice designed to speed
3 foreclosures and conceal the likelihood of millions of imperfect title transfer and assignments, had
4 already been challenged in foreclosure around the country. Wells Fargo employees had testified in
5 legal proceedings that they had executed hundreds of thousands of false affidavits purporting to
6 evidence ownership and standing to foreclosure on mortgages wherein they had no personal
7 knowledge of the facts to which they were affirming. For example, as part of several lawsuits that
8 had been instituted by Wells Fargo, deposition testimony of Wells Fargo employees detailed the
9 Wells Fargo policy and practice of executing hundreds of foreclosure-related documents to
10 accelerate and facilitate the foreclosure process. The testimony of multiple employees confirmed
11 that Wells Fargo mass-processed foreclosure affidavits filed in agencies and courts around the
12 country, were falsified in order to accelerate foreclosure proceedings. A number of these depositions
13 were taken months before Wells Fargos public denials of such practices. These facts were known
14 or deliberately disregarded by defendants, who designed and/or turned a blind eye to Wells Fargos
15 execution and submission of false documents to courts and permitted this conduct while rewarding
16 Company executives, including defendant Stumpf, with huge compensation packages.
17

83.

Xee Moua: On March 9, 2010, Xee Moua (Moua), another Wells Fargo employee,

18 testified that she had signed as many as 500 foreclosure-related documents each day without
19 verifying the contents of the documents other than her name and her title effectively committing a
20 fraud upon the court on behalf of Wells Fargo. See Wells Fargo Bank N.A. v. John P. Stipek, et al.,
21 No. 50 2009 CA 01243 (Circuit Court of the 15th Jud. Cir. Palm Beach County). The same Wells
22 Fargo documents/affidavits were then used by Wells Fargo to support lawsuits brought by Wells
23 Fargo, including the Stipek case, to initiate and complete home foreclosures. Moua testified, in
24 substance, that it was Wells Fargos practice, process and procedure not to have those executing
25 foreclosure documents personally review the underlying materials. Instead, others, including
26 attorneys apparently retained by Wells Fargo or liaisons who process the loans purportedly
27 reviewed said documents, however, Moua could not affirm the truth of the fact.
28
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84.

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During Mouas March 9, 2010 testimony, Moua testified that in addition to being told

2 by her supervisor that she had authority to execute affidavits on behalf of Wells Fargo, she had
3 received a document she referred to as a Corporate Vote from the Wells Fargo Legal Department,
4 approved by management, which provided authorization to sign loan foreclosure documents on
5 behalf of Wells Fargo.
6

Q.

As a Work Director what are your job responsibilities?

A.

Job responsibilities are pretty much the same: I help out my team with
any execution of documents; I oversee that these documents are executed
and returned in a timely manner to our attorneys . . . .

8
9

10

Q.

How does your job as a Work Director differ from the job as a processor?

11

A.

I have more responsibilities, I do have authorization to execute on behalf


of Wells Fargo.

12
*

13
Q.

Was there some form of certificate or something that gave you that
authorization?

A.

Not necessarily. All we have is a corporate vote from our legal


department indicating we are authorized to execute on behalf of Wells
Fargo. . .

14
15
16

17
18

A.

This authorization is actually approved by management, and its sent


over to our legal department.

19
*

20
Q.

So did you receive a document evidencing this corporate vote?

A.

Yes, sir.

Q.

And in what form, is it a letter that you received?

A.

Its a document. Its a document signed by legal.

21
22
23
24
*

25
Q.

How many documents would you say you sign a day?

A.

In a days workload, hundreds.

26
27
*

28
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Q.

And when you say hundreds when youre referencing documents, you
mean the previous documents that you listed; whether it be an affidavit,
an affidavit for judgment, substitution of trustee, those documents?

A.

Yes, sir.

2
3
4

Filed09/12/11 Page37 of 108

Q.

When you sign these documents, what do you do, what do you look at on
the documents?

A.

Make sure my information is there and correct, and I sign.

Q.

When you say your information?

A.

My name, my title.

Q.

Anything else?

A.

That is it.

6
7
8
9
10
11
85.

Further discussing specific documents signed for purposes of advancing a foreclosure,

12
Moua testified that she had no personal knowledge whatsoever of the underlying facts attested to:
13
Q.

Well, Ill move on from that. I believe its the third sentence in Paragraph
2, it says that: Wells Fargo Bank Successor By Merger to Wells Fargo
Home Mortgage, Inc. is responsible for the collection of this loan
transaction and pursuit to any delinquency in payments; on what do you
base that knowledge?

A.

I dont base that knowledge on anything. As far as I know, this is already


confirmed by the attorney or the liaison, so I would not have no
knowledge of that, that paragraph.

Q.

You dont have no personal knowledge?

A.

No personal knowledge, whatsoever.

14
15
16
17
18
19
20
86.

John Kennerty: On May 14, 2009, Herman John Kennerty (Kennerty) executed an

21
affidavit again purportedly as Vice President of Wells Fargo Bank, N.A., attorney in fact for
22
Deutsche Bank National Trust Company, purporting to represent a legal ownership and assignment
23
of a property in Massachusetts. On October 12, 2009, Kennerty, on behalf of Wells Fargo, N.A., as
24
its Vice President of Loan Documentation, executed a Power of Attorney purporting to provide the
25
Harmon Law Offices in Newton, MA, permission to enter a property for purposes of foreclosing on
26
the mortgage on that property.
27
28
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87.

Kennerty has since testified in deposition in the case of Geline v. Northwest Trustee

25
Services, et al., No. 09-2-46576-2 SEA, Superior Court for King County, Washington, that he was
26
an employee of Wells Fargo Home Mortgage, a subsidiary of Wells Fargo Bank. He testified that he
27
was a loan administration manager, and a Vice President in the Companys document default group.
28
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1 The document default group, according to Kennerty, was responsible for ordering and obtaining
2 collateral documents for loans, the execution of assignments and the execution of foreclosure related
3 documents. Kennertys testimony included the following:
4

Q.

By whom are you employed?

A.

Wells Fargo.

Q.

Can you tell me which part of Wells Fargo?

A.

Wells Fargo Home Mortgage.

Q.

Which is a subsidiary of Wells Fargo Bank?

A.

Right.
*

10
11

Q.

And thats what youre doing now?


*

12
13

A.

With Wells Fargo, I am a loan administration manager managing our


default document group.

Q.

Why dont you tell me what your job duties are of that.

A.

Theres three main areas within the default doc. group. The first one is
the ordering and obtaining of collateral documents for loans. The
assignment team, the execution of assignments, as well as the executable
team which is the executing of other foreclosure-related documents.

14
15
16
17

18
19

Q.

Are you also vice president?

20

A.

Of loan documentation.

21

22

Q.

Can you tell me about how many documents you sign a day?

23

A.

Anywhere from 50 to 150.


*

24
25

28
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Q.

So youre getting these documents, the loss mitigation declaration, and


the beneficiary declaration, and those two documents are printed and
presented to you by somebody else for signing; right?

A.

Correct.

26
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Q.

Somebody comes and brings you those documents and you sit down to
sign them. And youre looking at the documents to make sure that the
date is correct and consistent with the date youre signing the document;
correct?

A.

Yes.

2
3
4

5
Q.

So youre simply signing the document thats presented to you and


youre just making sure that the date is correct?

A.

Correct.

6
7
8

88.

Stanley Silva: On January 4, 2010, in Jones, et al. v. Wells Fargo Bank, et al.,

9 No. CV10-01660, another person, Stanley Silva (Silva), not employed by Wells Fargo, but
10 nevertheless signed documents on its behalf, also admitted to the practice of robo-signing notices of
11 foreclosures. Silva testified that he did not even work in the foreclosures department and did not
12 review any documents prior to signing the notices of foreclosures and had no idea if the information
13 in the notice of default was correct. Nevertheless, Silva routinely executed the notices of defaults
14 with verifying the accuracy of the information contained therein. Silva testified he signed about 200
15 default notices over a four-year period. Silvas testimony included the following:
16

A.

We dont work in foreclosures.

17

Q.

You dont work in foreclosures?

18

A.

No.

19

Q.

You dont sign notices of default stating foreclosures?

20

A.

I sign notices of default, yes.

21

Q.

And what do you understand the effect of a notice of default is?

22

A.

It starts the clock ticking on the formal foreclosure period.

23

Q.

But that is not working in foreclosures is your testimony under oath here
today on this video?

A.

Correct.

Q.

Does a notice of default put the property in foreclosure?

A.

It starts the formal process of the foreclosure time frames.

24
25
26
27
*

28
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Q.

What documents do you review prior to signing a notice of default?

A.

We dont review any documents.

Q.

What documents are provided to you in connection with a loan where a


notice of default is presented to you for your signature?

A.

Nothing.

4
5
89.

To illustrate just how wide-spread Wells Fargos robo-signing business model of

6
committing frauds upon courts pervaded the Courts can be found in case of Wells Fargo Bank, N.A.
7
et al. v. John C. Kosar and Linda S. Kosar, No. MG-10-000400, Civil Division, Court of Common
8
Pleas for Allegheny County, Pennsylvania. There, homeowners who were sued for foreclosure by
9
Wells Fargo, filed a Motion to Stay and Petition for Rule to Show Cause Why Action Should not Be
10
Dismissed, With Prejudice, for Widespread, Systematic and Deliberate Violations of the Rules of
11
Court and for Attorneys Fees, after discovery the use of robo-signing in their case and 89 other cases
12
filed in the first few months of 2010 in that county alone.
13
90.

The original verification to the foreclosure pleading was filed by Wells Fargos

14
counsel on the basis the plaintiff (Wells Fargo) was either outside the jurisdiction and/or the
15
verification could not be filed within the time allowed for filing the pleading. A substitution
16
verification was subsequently filed by well-known robo-signer Moua.
17
91.

Reportedly, upon investigation by counsel for the homeowner by researching the

18
docket in that county of foreclosure cases filed by Wells Fargo, the homeowner defendants presented
19
the court in the motion and/or petition a list of 89 cases in that county alone filed in the first few
20
months of 2010 where Wells Fargo had engaged the same exact conduct of filing attorney
21
verifications followed up by false robo-signed verifications. It was noted that 58 of the robo-signed
22
verifications were by Moua and the rest by other now well-known Wells Fargo robo-signers
23
including China Brown, Kennerty and Anne Neeley. As demonstrated herein, the Company has
24
employed this same fraudulent business model across virtually every county in every state
25
(employing judicial foreclosures) across the country.
26
92.

As of the date this action was filed, May 13, 2011, the Board has been hostile to this

27
action, rendering a pre-suit demand futile because they actively participated in this concerted action
28
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1 to obtain the financial and social benefits of such positions for themselves and to enrich and further
2 the personal and business interests of all defendants identified herein. As a result of defendants
3 wrongful acts, the Company has suffered and continues to be exposed to severe damage to its
4 reputation, goodwill and its ability to conduct future operations, and has been exposed to millions (or
5 billions) of dollars in potential liability for violating federal and state laws and regulations.
6

93.

A majority of the Board or all of its members has demonstrated, as alleged herein,

7 that a pre-suit demand would have been futile. In fact, the Board has already, in substance, rejected
8 a demand and shareholder proposal by shareholders to conduct comprehensive independent internal
9 review of the Companys mortgage servicing procedures, among the requested relief sought by this
10 action. See 149. For this reason alone, among others alleged herein, the entire Board has
11 particularly articulated that it could not consider a pre-suit demand in a disinterested fashion and will
12 not take action to comprehensively investigate the conduct alleged herein or remedy material
13 weaknesses in the Companys internal controls unless forced to through litigation:
(a)

14

A majority of the Board, in particular defendant Stumpf, have a strong

15 likelihood of liability for the claims alleged herein, including knowing of reckless misrepresentations
16 on October 12, 2010, October 20, 2010 and November 5, 2010 concerning the Companys mortgage
17 servicing processing and procedures. 107, 110-113, 117-118.
18

(b)

The Board, or a majority of them, refused to implement a moratorium on

19 foreclosures even after the Company admitted that its foreclosure affidavits, in judicial foreclosure
20 states, failed to meet legal requirements and would have to be re-submitted. 16, 107, 110-111,
21 114, 117.
22

(c)

The Board and the relevant Committees of the Board responsible for the

23 overall risk management of the Company permitted the Company and in particular, defendants
24 Stumpf and Atkins, to file materially false Sarbanes-Oxley certifications falsely stating that they
25 each had evaluated the Companys disclosure controls and determined that they were effective when
26 in truth each of the individual defendants, including a majority of the Board, knew or deliberately
27 disregarded that the Company had in fact designed flawed processes and procedures, including the
28 Companys Foreclosure Matrix system. Prior to the issuance of the statements and filings with the
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1 SEC, the Company employees testified under oath in substance that a Foreclosure Matrix system
2 and the Companys policies and procedures encouraged and in fact required Wells Fargo employees
3 to falsely attest in affidavits filed with the court to facts to which they did not have personal
4 knowledge. 84-85, 87.
5

(d)

The Board has already rejected institutional shareholder requests and

6 shareholder proposal that, in light of alleged and admitted robo-signing, the Audit Committee
7 conduct a comprehensive and independent review of the Companys mortgage servicing practices.
8 54, 119-122. Instead, the Board recommended generally that shareholders vote against a
9 shareholder proposal that would have required such a review. 149. The Boards basis for rejection
10 and recommendation to vote against the proposal was that such an investigation would distract it
11 from coordinating with regulatory investigators. The Board knew and acknowledged, however, that
12 the regulatory investigation were limited to only a sample of Company loan files. Id.
13

(e)

The Company, through its Board and executives, from 2007 to the present

14 (referred to as the Relevant Period), has permitted the Company to take positions in investigations
15 concerning its servicing mortgage procedures, in particular, the Office of the United States Trustee,
16 which according to its Executive Director, Clifford White III, is responsible for investigating
17 possible foreclosure improprieties, which amount to stonewalling and refusing to cooperate with
18 inquiries and requests for documents, which were designed to determine the cause and impact of
19 robo-signing at Wells Fargo and other lenders. 165-166.
20

(f)

The Board or a majority of its members has demonstrated during the Relevant

21 Period that they will permit the Company to take litigation positions of denial of wrongdoing,
22 including permitting the Company to design processes solely for the purpose of concealing unlawful
23 predatory conduct, the purpose of which was to take advantage of the economically vulnerable. This
24 is evidenced by findings of fact and conclusions of law after trial in Gutierrez, 730 F. Supp. 2d at
25 1124, which exposed the Company to $200 million judgment. 187-189.
26

(g)

The Board with knowledge that Stumpf and Atkins had caused the Company

27 to misrepresent to the public and shareholders that Wells Fargo's servicing processes and procedures
28 were sound, and issue false denials of robo-signing, nevertheless approved millions of dollars in
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1 incentive awards to Stumpf and Atkins crediting, among other things their risk management and
2 credibility with the investment community. 150-152.
3

(h)

Similarly, the Board, or a majority of its members, has permitted the

4 Company to design, implement and execute practices that would have the effect of encouraging its
5 employees to steer qualified loan applicants into subprime loans resulting in consent order and a fine
6 of $85 million. 174-175.
7
8

SUBSTANTIVE ALLEGATIONS
94.

On April 21, 2010 the Company issued a press lease entitled WELLS FARGO

9 REPORTS $2.5 BILLION IN NET INCOME which stated in relevant part:


10

Wells Fargo & Company reported diluted earnings per common share of $0.45 and
net income of $2.5 billion for first quarter 2010.

11

13

Once again the resiliency and advantages of Wells Fargos diversified


business model proved themselves in a difficult business environment, even as we
continued to make smooth progress with our industrys largest merger, our
integration with Wachovia, said Chairman and CEO John Stumpf.

14

95.

12

On May 7, 2010 the Company filed its Form 10-Q for the period ending March 31,

15 2010. The Form 10-Q repeated the 1Q10 financial results reported in the Companys April 21, 2010
16 press release. Under Financial Review, the 1Q10 stated in relevant part:
17
18

Our vision is to satisfy all our customers financial needs, help them
succeed financially, be recognized as the premier financial services company in
our markets and be one of Americas great companies. . . . All of our business
segments contributed to the strong earnings results in first quarter 2010.

19

21

Our company earned $2.5 billion in first quarter 2010, or $0.45 diluted
earnings per common share. This earnings performance is an example of how our
business model is capable of producing solid results in different stages of the
economic cycle.

22

96.

20

The May 7, 2010 Form 10-Q also included a section describing the Companys

23 internal controls and assured Wells Fargo shareholders that defendants Stumpf and Atkins had
24 evaluated the Companys disclosure controls and had declared them effective:
25
26
27

As required by SEC rules, the Companys management evaluated the


effectiveness, as of March 31, 2010, of the Companys disclosure controls and
procedures. The Companys chief executive officer and chief financial officer
participated in the evaluation. Based on this evaluation, the Companys chief
executive officer and chief financial officer concluded that the Companys
disclosure controls and procedures were effective as of March 31, 2010.

28
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The 1Q10 also included the certification of defendant Stumpf regarding the adequacy

2 of the Companys internal controls over financial reporting:


3

I, John G. Stumpf, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2010, of Wells Fargo & Company;

5
*

6
7
8

4.
The registrants other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:

9
(a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
[and]

10
11
12

13

(c)
Evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation . . . .

14
15
16

17
18
19

5.
The registrants other certifying officer(s) and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process, summarize
and report financial information; and

20
21
22

(b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
control over financial reporting.

23
24
98.

Additionally, the 1Q10, Note 10, included a report on Guarantees and Legal

25
Actions.

However, under Legal Actions, the Company did not report any litigation or

26
investigations concerning its fraudulent foreclosure practices, nor did the Company disclose the
27
known fact that certain of its employees had already testified under oath that Wells Fargos
28
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1 foreclosure practices and policies permitted and in fact encouraged the robo-signing of foreclosure
2 documents. The testimony of several of its vice president would later lead to more in-depth
3 investigation and exposure to additional liability, including the wide-spread use of robo-signing.
4

99.

On July 21, 2010 the Company issued a press release entitled WELLS FARGO

5 REPORTS NET INCOME OF $3.06 BILLION; UP 20% FROM PRIOR QUARTER. In addition
6 to reporting strong financial results for the quarter, defendants caused or recklessly permitted the
7 Company to falsely claim that it had in fact supported a regulatory environment that separated
8 consumer protections and prudent risk management:
9
10
11

Wells Fargo & Company reported diluted earnings per common share of $0.55 for
second quarter 2010 compared with $0.45 for first quarter 2010 and $0.57 for second
quarter 2009. Net income was $3.06 billion for second quarter 2010 compared with
$2.55 billion in first quarter 2010 and $3.17 billion in second quarter 2009. For the
six months ended June 30, 2010, the Companys net income was $5.6 billion, or
$1.00 per share, compared with $6.2 billion, or $1.13 per share, a year ago.

12
*

13

16

Having long supported a legal and regulatory environment that promotes


consumer protections, financial reporting transparency and clarity, as well as
prudent risk management, we support the general principles inherent in the
financial reform bill, as they are consistent with how Wells Fargo operates. We
remain concerned that some aspects of regulatory reform may have unintended
negative impacts for Americas financial system, consumers and businesses.

17

100.

14
15

On August 9, 2010, the Company filed its Form 10-Q for the period ending June 30,

18 2010 with the SEC. The Form 10-Q repeated the 2Q10 financial results reported in the Companys
19 July 21, 2010 press release and again failed to disclose ongoing actions. Though not individually
20 material to the Companys bottom-line, each section revealed material deficiencies within the
21 Companys internal controls, which ultimately hurt shareholders and homeowners. Instead, under
22 Controls and Procedures the 2Q10 falsely stated that defendants Stumpf and Atkins had evaluated
23 the Companys controls and that they were in fact effective:
24
25
26

As required by SEC rules, the Companys management evaluated the


effectiveness, as of June 30, 2010, of the Companys disclosure controls and
procedures. The Companys chief executive officer and chief financial officer
participated in the evaluation. Based on this evaluation, the Companys chief
executive officer and chief financial officer concluded that the Companys
disclosure controls and procedures were effective as of June 30, 2010.

27
28
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The Companys August 9, 2010 Form 10-Q also included the Sarbanes-Oxley

2 certifications by defendants Stumpf and Atkins quoted above in 97.


3 Widespread Robo-Signing Begins to be Publicly Known Wells Fargo Denies Having
Participated
4
102. In August and September 2010, the news organizations began to publicize evidence
5
that had been discovered as part of foreclosure actions brought by banks. For example, on
6
September 22, 2010, a Wall Street Journal article, entitled GMAC Spotlight on Robo-Signer,
7
discussed some of the evidence supporting claims that robo-signing had become a routine part of the
8
lending institutions foreclosure processes. The article detailed specific events and deposition
9
testimony provided by Jeffrey Stephan and Beth Cottrell, employees of GMAC Mortgage Co. and
10
Chase Home Mortgage, respectively, wherein they each admitted during depositions taken in late
11
2009 and 2010, to signing thousands of affidavits purportedly in support of foreclosure proceedings
12
without even verifying the truth or accuracy of the facts stated in the affidavits:
13
This week, mortgage-servicing giant GMAC Mortgage Co. halted
foreclosures in 23 states due to questions about documents signed by one of its robo14
signers, Jeffrey Stephan.
15
Until now, Mr. Stephan was an anonymous middle manager whose job is to
sign affidavits, assignments of mortgages and other documents that establish a banks
16
ownership of a mortgage, thus giving the bank the right to foreclose.
17
*
*
*
18
In two sworn depositions given by Mr. Stephan over the last 10 months, he
19
said that assistants brought as many as 500 documents a day to this desk at
GMACs office in Fort Washington, Pa. Some months, he would sign more than
10,000 documents related to home foreclosures. By signing the documents, he was
20
stating that he had personally reviewed the details of each case.
21
The problem is, according to depositions Mr. Stephan gave in December
and June, he didnt really look at each case. In fact, he assumed that all the
22
details were correct, and just signed off on each one.
23
*
*
*
24
Now, lenders have begun withdrawing the affidavits signed by Mr. Stephan,
25
thereby ending dozens of foreclosure proceedings across Florida, Maine and
Texas. Many lawyers who represent borrowers in foreclosure have argued that the
banks trying to repossess these homes dont have the standing to do so, and are
26
seeking to block the actions.
27
On Monday, GMAC confirmed that it suspended foreclosure sales and
28
evictions in 23 states so that it can investigate its foreclosure procedures.
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2

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Ally Financial Inc., GMACs parent company, said Mr. Stephan is still
working there and admitted there had been irregularities.

3
4
5
6

Other servicers, as well, have been questioned over their practices. On


May 17, Ice Legal, the Royal Palm Beach, Fla.-based law firm that first deposed
Mr. Stephan last December, took a sworn deposition from Beth Cottrell, another
robo-signer. Working as an operations specialist for Chase Home Mortgage, a
division of J.P. Morgan Chase & Co., she said she regularly signed off on about
18,000 foreclosure affidavits and other documents each month, without ever
personally reviewing the files associated with the loans.

7
103.

On or around October 1, 2010, it was reported that in an email to Housing Wire,

8
Wells Fargo spokesman Jason Menke wrote as follows: Wells Fargos policies, procedures and
9
practices satisfy us that the affidavits we sign are accurate. We audit, monitor and review our
10
affidavits under controlled standards on a daily basis. We will stand by our affidavits and if we find
11
an error we will take the appropriate action.
12
104.

On October 2, 2010, the dailyfinance.com published an article entitled Robo-

13
Signing: Documents Show Citi and Wells Also Committed Foreclosure Fraud that described the
14
fraudulent process noting that the alleged conduct of submitting false affidavits to a court was
15
fraud and that Wells Fargo was continuing in its denial of the practice. The article disclosed
16
publicly the details of the Kennerty deposition discussed above at 87, infra.:
17
18
19
20

Documents submitted to a court are supposed to be true as submitted. As an


attorney, if I file with a court a document in which I swore that I personally verified
the information contained within the document is true, but I didnt actually do that,
Id get in real trouble. Its simple: Thats fraud in the eyes of the court.

23

GMAC, JPMorgan Chase (JPM), Bank of America (BAC) and One West Bank
employees routinely sign hundreds of documents without verifying what theyre
signing. Those documents are then submitted to courts as if the documents were
true, to enable the banks to foreclose on delinquent properties. Wells Fargo (WFC)
and Citigroups (C) CitiMortgage told The New York Times their employees do not
engage in similar practices. Yet, new evidence Ive found shows they have. At
deadline, I was still awaiting a response from CitiMortgage.

24

Confusion at Wells Fargo

25

For example, in one case I reviewed, Herman John Kennerty of Wells Fargo gave a
deposition describing the department he oversees for Wells Fargo. Its a department
dedicated to simply signing documents. Kennerty testified that he signs 50 to 150
documents a day, verifying only the date on each. Although the foreclosure in that
case was upheld, Wells Fargo did not dispute Kennertys signing practices.

21
22

26
27
28
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On October 5, 2010, the Attorney General of the State of North Carolina wrote to

2 Wells Fargos General Counsel James Strother communicating his concern about reports of robo3 signing in the mortgage servicing industry and growing evidence that the practice was not isolated to
4 GMAC Mortgage Co., JPMorgan Chase, and Bank of America. The Attorney General of North
5 Carolina implored Wells Fargo to review its practices in North Carolina and submit a report
6 identifying its practice for the execution of affidavits in North Carolina:
7
8

James M. Strother
General Counsel
Wells Fargo & Company

10

Dear Mr. Strother:

11

This office has received information indicating that it is a prevalent practice


in the mortgage servicing industry for employees of mortgage entities to routinely
sign off on large number of affidavits without personal knowledge of the accuracy of
the affidavits contents. . . .

12
13
14
15
16

We are very concerned about these practices. The use of unverified affidavits
to obtain legal relief strikes at the heart of the integrity of the legal process and could
constitute a fraud upon the court. Moreover, submitting defective affidavits could
possibly result in homeowners losing their homes to foreclosure without a valid
underlying basis.

17
18

106.

The letter also requested Wells Fargo to promptly do an internal review and provide

19 North Carolina evidence of its good faith effort to verify documentation before instituting
20 foreclosure actions in North Carolina. Wells Fargo, reportedly in a December 2, 2010 letter from
21 Wells Fargos Deputy, David Moskowitz, communicated Wells Fargos rejection of the request
22 citing its apparent cooperation with the authority.
23

107.

On October 12, 2010, defendants caused the Company to issue a press release again

24 falsely reaffirming that its foreclosure affidavits were indeed accurate and that Wells Fargo not be
25 instituting a moratorium to investigate its processes as some of the other banks had done:
26
27
28
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Wells Fargo Affirms Affidavit Accuracy

Confirms no foreclosure moratorium

In response to media inquiries we recently received, we are confirming that


Wells Fargo has no plans to initiate a foreclosure moratorium. Our affidavit
procedures and daily auditing demonstrate that our foreclosure affidavits are
accurate.

4
5
6
7

As always, as a standard business practice, we continually review and


reinforce our policies and procedures. This includes conducting additional reviews
before loans go to foreclosure sale. If we find an error or if an improvement is
needed, we take action. We are satisfied that our foreclosure affidavit process is
sound.

8
108.

On October 13, 2010, the Star Tribune published an article entitled Rapid-fire

9
foreclosures alleged at Wells Fargo that also summarized the vast amount of evidence
10
demonstrating that Wells Fargo engaged in the fraudulent business practice of robo-signing,
11
notwithstanding the Companys repeated denials:
12
13
14
15
16

Wells Fargo & Co. mortgage loan processors have acknowledged signing
hundreds of foreclosure documents a day without verifying the informations
accuracy, calling into question the banks assertion that it did not make errors in
documents used to evict people from their homes.
A Wells Fargo vice president in South Carolina said she signed anywhere
between 300 to 500 foreclosure documents over a two-hour period each day,
without verifying much of the information. A second Wells Fargo employee said
he signed 50 to 150 foreclosure documents a day, verifying only the dates.

17
*

18
19

Banks face accusations that they were in such a rush to process foreclosures
that they were robo signing hundreds or thousands of foreclosure affidavits a day
without verifying their accuracy.

20
21

Since allegations of foreclosure impropriety emerged late last month, Wells


Fargo has stood virtually alone among the giant mortgage lenders in insisting it
did nothing wrong.

22
23

On Wednesday, the San Francisco-based bank issued a statement saying its


affidavit procedures and daily auditing demonstrate that its foreclosure affidavits
are accurate.

24
*

25
26
27

Wells Fargo said it has no plans to initiate a foreclosure moratorium. Our


records show that Wells Fargos foreclosure affidavits are accurate,
spokeswoman Vickee Adams said. When we find team members that do not
follow procedure, we fix whatever weve done incorrectly.

28
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109.

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On October 14, 2010, the Financial Times published an article entitled Spotlight

2 falls on Wells Fargo foreclosure procedures. The article disclosed that notwithstanding Wells
3 Fargos denials about its foreclosure processes regarding the verification of mortgage foreclosure
4 documents, a Company Vice President of Loan Documentation, Moua, had sworn in a deposition
5 (taken months before the robo-signing phenomenon began to receive public notoriety) that she
6 signed as many as 500 foreclosure-related documents each day without verifying the contents of the
7 documents other than her name and title. The October 14, 2010 Financial Times article which made
8 this information more generally known is set forth below:
9
10
11

Spotlight falls on Wells foreclosure procedures


Wells Fargo, the second-biggest US mortgage servicer, has remained above
the fray in recent weeks as banks have come under scrutiny for rubber-stamping
thousands of mortgage documents without verifying their contents as required by
law.

12
13
14
15

Unlike Bank of America, JPMorgan Chase and GMAC, Wells Fargo has not
halted foreclosures and has maintained that it has no problems with its procedures.
Yet, a sworn deposition by one of its loan documentation officers suggests
otherwise. Xee Moua said she signed as many as 500 foreclosure-related papers a
day on behalf of the bank. Ms Moua said the only information she had verified
was whether her name and title appeared correctly.

16
17

Asked whether she checked the accuracy of the principal and interest that
Wells Fargo claimed the borrower owed an important step in banks legal actions
to foreclose Ms Moua replied: I do not.

18
19
20
21

Ms Moua nevertheless signed affidavits, reviewed by the Financial Times,


that said she had personal knowledge of the facts regarding the sums of money
which are due and owing to Wells Fargo. These affidavits were used in lawsuits
brought by Wells Fargo to repossess homes.
Ms Moua said it was her understanding the foreclosure documents had been
reviewed by outside lawyers before reaching her.

22
Wells Fargo Reports 3Q10 Results and Again Falsely Denies that Wells Fargo Robo-Signed
23 Foreclosure Documents
24

110.

On October 20, 2010, defendants caused the Company to issue its 3Q10 financial

25 results in a press release. Wells Fargo emphasized that its record earnings were a direct result of its
26 core business, helping customers succeed financially. In addition to reporting its financial results,
27 the Company specifically denied that its servicing or foreclosure practices were unsound and stated
28 that it was confident in its foreclosure policies and practices:
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1
2
3

Filed09/12/11 Page52 of 108

Wells Fargo & Company reported diluted earnings per common share of $0.60 for
third quarter 2010 compared with $0.55 for second quarter 2010 and $0.56 for third
quarter 2009. Net income was $3.34 billion in third quarter 2010 compared with
$3.06 billion in second quarter 2010 and $3.24 billion in third quarter 2009. For the
nine months ended September 30, 2010, net income was $8.95 billion, or $1.60 per
common share, compared with $9.45 billion, or $1.69 per common share, a year ago.

4
5
6
7

Record earnings in the third quarter reflect the success of the Wachovia
merger and the benefits of Wells Fargos steady commitment to our core business
of helping customers succeed financially, said Chairman and CEO John
Stumpf . . . .

10

With respect to recent industry-wide foreclosure issues, there are several


important facts to know about Wells Fargo. Foreclosure is always a last resort,
and we work hard to find other solutions through multiple discussions with
customers over many months before proceeding to foreclosure. We are confident
that our practices, procedures and documentation for both foreclosures and
mortgage securitizations are sound and accurate. For these reasons, we did not,
and have no plans to, initiate a moratorium on foreclosures.

11

111.

8
9

On the same day, October 20, 2010, the Company held a conference call for analysts

12 and investors. The call was hosted by defendant Stumpf. During the call he and other Wells Fargo
13 officers, including defendant Atkins, again assured investors and shareholders that Wells Fargos
14 mortgage servicing processes, specifically on foreclosures, were sound and that the questions in the
15 industry regarding robo-signing, at least with respect to Wells Fargo, were overstated and
16 misrepresented in the marketplace and that the Companys internal control processes already in
17 place ensured reliability and accuracy:
18
19
20
21
22
23
24
25
26

[Stumpf:] Now, I know we have all been hearing in recent months about
business practices within our industry. I am proud of Wells Fargos adherence to a
culture of doing what is right for customers, which not incidentally benefits [our]
team members, our communities, and our shareholders in the long run. For us,
this means doing the hard work early and building processes that adhere to our
standards as a Company. This is as true in our approach to merger integration as it
is to our day-to-day business operations.
Let me quickly give you my views on the latest topic, related to mortgage
foreclosures and repurchases. Howard will address this topic in more detail later
on the call, but there are a couple of important points I want to make up front.
First, foreclosure is always a last resort . . . .
Second, we are confident that our practices, procedures, and
documentation for both foreclosures and mortgage securitizations are sound and
accurate. Third, we did not and do not plan to initiate a foreclosure moratorium.

27
28
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112.

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In addition to defendant Stumpfs comments, defendant Atkins repeated the false

2 assertion that the Companys loan servicing policies were sound, falsely stating that the document
3 reviewers and affidavit signer was the same team member:
4
5
6
7
8
9

[Atkins:] Then finally, we are confident in our foreclosure and mortgage


securitization policies, practices, and controls and the adequacy of our repurchase
reserve.
*

With that, let me shift to give you an overview of the foreclosure and
mortgage securitization issues. These are issues obviously that are very important to
consumers, mortgage investors, and shareholders. But we believe that these issues
have been somewhat overstated and, to a certain extent, misrepresented in the
marketplace. I would like to be clear here on how they impact Wells Fargo
specifically.

10
*

11
12
13
14
15

Second, our foreclosure and securitization policies, practices, and controls


in our view, are sound. To help ensure accuracy over the years, Wells Fargo has
built control processes that link customer information with foreclosure procedures
and documentation requirements.
Our process specifies that affidavit signers and reviewers are the same team
member, not different people, and affidavits are properly notarized. Not all banks
in our understanding do it this way. If we find errors, we fix them; and we fix them
as promptly as we can.

16
17
18
19
20
21
22
23
24
25
26

We ensure loans in foreclosure are assigned to the appropriate party as


necessary to comply with local laws and investor requirements, and legal
documents related to securitizations are sound, and appropriate transfers of
ownership were made.
*

[Nancy Bush NAB Research Analyst:] John, I have just got one question
for you. . . . [T]here have been a couple of instances detailed in the press of Wells
Fargo robo-signing etc. And there is a great deal of speculation that at some point
you guys are going to cave and we are going to find out all this bad stuff about
your foreclosure procedures.
*

[Stumpf:] I dont know how other companies do it, but in our Company our process
has the affidavit signer and reviewer are the same team member. And we believe
these issues they are properly notarized.
And if we find an error we will fix it. I mean that is just humans do make
errors, but that is what our process is. One reviewer, one signer, same person.

27
28
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113.

Filed09/12/11 Page54 of 108

On October 20, 2010, the Company filed its 3Q10 Quarterly Supplement in a filing

2 with the SEC. The 3Q10 Quarterly Supplement also reiterated false statements concerning the
3 soundness of the Companys foreclosure practices:
4

3Q10 Quarterly Supplement

3Q10 Overview

Record earnings $3.34 billion net income, up 9%

8
9

We remain confident in our foreclosure and mortgage securitization


policies, practices and controls and adequacy of repurchase reserve

10
Overview of foreclosure and mortgage securitization
11
I.

Foreclosure is a last resort

12
*

13

14
15

Since January 2009, we have helped over 556,000 borrowers avoid


foreclosure through active and trial loan modifications and have
forgiven $3.5 billion of principal. During that same time period, we
completed fewer than 230,000 owner-occupied foreclosure sales
*

16

17

II.

Our foreclosure and securitization documentation processes are sound

18

Our process specifies that affidavit signers and reviewers are required to be
the same team members, and affidavits are properly notarized. If we find
errors we fix them

We ensure appropriate documents for loans in foreclosure are assigned in


compliance with local laws and investor requirements

Legal documents related to securitizations appropriately transferred


ownership

We have implemented additional reviews on pending foreclosures, prioritized


to ensure the review is complete before the loans go to foreclosure sale

19
20
21
22
23
24

Wells Fargo Finally Admits to Robo-Signing and Identifies 55,000 Affidavits Which Would be
25 Re-Filed
26

114.

On October 27, 2010, the defendants caused the Company to issue a press release

27 admitting that the Companys foreclosure processes had in fact failed to adhere to its reported
28 procedures and that it had permitted certain of its foreclosure documents to be submitted to the
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1 courts without the appropriate or authentic signatures on the foreclosure documents effectively
2 committing a fraud upon the court. The Company admitted that it would have to re-do more than
3 55,000 foreclosure affidavits:
4

Wells Fargo Provides Update on Foreclosure Affidavits


And Mortgage Securitizations

5
6
7
8

Wells Fargo & Company is continuing its ongoing efforts to monitor and
assess its foreclosure affidavit procedures. We understand the concern over
foreclosure procedures on the part of homeowners in these difficult economic times,
and want to do everything we can to assure that the procedures we have in place
provide Wells Fargo borrowers and others with confidence that foreclosure
proceedings we initiate are done appropriately, said Mike Heid, co-president of
Wells Fargo Home Mortgage.

9
10
11
12
13

The company believes it has designed an appropriate process for the


generation of foreclosure affidavits. Completed foreclosure affidavits that are
submitted to the courts are signed and notarized as one of the last steps in a multistep process intended to comply with applicable law and ensure the quality of
customer and loan data in foreclosure proceedings. This customer and loan data is
derived directly from the companys official systems of record. This data and its
transmission to external foreclosure counsel are subject to quality controls, and audits
are performed to assure the quality, accuracy, and reliability of these automated
systems.

14
15
16
17

As part of the companys review of its foreclosure affidavit procedures, the


company has identified instances where a final step in its processes relating to the
execution of the foreclosure affidavits (including a final review of the affidavit, as
well as some aspects of the notarization process) did not strictly adhere to the
required procedures. The issues the company has identified do not relate in any way
to the quality of the customer and loan data; nor does the company believe that any
of these instances led to foreclosures which should not have otherwise occurred.

18
19
20
21
22

Out of an abundance of caution and to provide an additional level of


assurance regarding its processes, the company is electing to submit supplemental
affidavits for approximately 55,000 foreclosures which are pending before courts
in 23 judicial foreclosure states. November 2010, subject to state and local
requirements. If the company is unable to complete an individual court filing by the
designated court review date, it will request a court extension to assure the file
contains a supplemental affidavit before the judge rules on the case. Additionally,
Wells Fargo reaffirms that it does not plan to institute a moratorium on
foreclosure sales.

23

25

At Wells Fargo, foreclosure is a last resort, Heid said. In September 2010,


borrowers who have completed foreclosure were on average 16 months delinquent
on their payments. When all options have been exhausted, we believe foreclosures
should not be delayed.

26

115.

24

On October 21, 2010, Oppenheimer Equity Research issued a report entitled, Wells

27 Fargo Core Earnings Power Stronger Than What's Visible on the Surface. The report credited the
28
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1 Company and defendant Stumpf for convincing shareholders that its foreclosure servicing
2 processes and procedures did not include robo-signing, but instead were sound:
3

Wells Fargo

Core Earnings Power Stronger Than Whats Visible on the Surface

Wells posted a solid quarter with stable core operating trends in most of the
key operating line items. The reported $0.60 contained about $0.08 of benefit from
reserve releases, and thus the core was just a bit shy of our $0.56 estimate. The
reason for the shortfall was from the pre-provision earnings (PPE) as the net chargeoffs improved more than expected. We are shaving back our revenue and earnings
assumptions a bit. However, we continue to think that the company has earnings
power of over $4 per share in 2012 as the current results are dragged down not just
by credit costs, but also merger costs and operating costs related to dealing with
credit costs. We continue to recommend the stock.

6
7
8
9
10
11

We feel that WFC did a very convincing job on the call arguing that their
foreclosure procedure and documentation processes are sound and that the
mortgage put-back issues are contained and manageable for them.

12 Wells Fargo Criticized by Government Officials for Lying About Foreclosure Processes and
False Assurances that Robo-Signing Did Not Occur at Wells Fargo
13
116. A day after the Companys October 27, 2010 press release, Ohio Attorney General
14
Richard Cordray (Cordray) characterized Wells Fargos plan to submit supplemental affidavits for
15
approximately 55,000 foreclosures as more of a band-aid than a cure. Cordray stated that Wells
16
Fargo and several other banks clearly dont recognize the seriousness of submitting fraudulent
17
testimony to a court of law, and cannot seriously hope to rectify this problem by filing supplemental
18
affidavits purportedly out of an abundance of caution. Cordray also remarked to Bloomberg News
19
that Wells Fargo had specifically represented to him and potentially other State Attorney Generals,
20
that it did not have robo-signing issues. He added that he believed, as others had opined, that the
21
submission of false affidavits constituted a fraud on the Court. Excerpts of Cordrays comments are
22
set forth below:
23
We spoke with Wells Fargo when we started our investigation before the 50 state
24
attorneys general got together. They assured us that they were different from the
other financial firms. They did not have these robo-signing problems, now were
25
finding theyre acknowledging they have those problems in at least 55,000 cases.
So theyre going to become a focus of our investigation and were going to have to
26
take steps as needed to clean this up.
27

28
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1
2
3
4

I think that these firms need to understand the financial exposure theyve
created for themselves. They have defrauded our courts. They now think they can
just say oops, give us that evidence back and will give you better evidence. The
courts are not going to take kindly to thatThe courts are going to impose [sanctions
and penalties on] the firms and they need to look to a global solution to this problem,
where they put it behind them by reaching agreements with lenders and investors to
clean up this problem immediately.

5
6
7
8
9

12
13
14
15

I think they should be halting foreclosures in every case where they know
theyve submitted fraudulent evidence. They should not simply try to put in new
evidence and think the courts are going to accept that thats not going to be good
enough. These courts are going to give sanctions, theyre upset at being defrauded
having evidence presented to them as good when it was not good and its not going
to be enough for them just to say Oh we made a mistake. Here are some different
evidence.
*

10
11

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Well, theres new evidence as to Wells Fargo. There was a deposition of one
of their employees, taken in South Carolina, that demonstrates a similar problem to
the Jeff Stefan GMAC problem from his deposition in Maine. The boiler room of
these operations are pretty unappetizing affairs. These people did not know what
they were signing but they were ordered to go ahead and sign anyway. Its not just
individual people who signed affidavits that are flawed, it is a business model based
on fraud that was designed to cut corners in the foreclosure process, because these
firms continue to think they play a different set of rules than every other party in
every other court case in this country, and they dont and theyre going to find that
out.

16
117.

On November 5, 2010, the Company filed its Form 10-Q for the period ending

17
September 30, 2010. The Form 10-Q was signed by Richard Levy, Executive Vice President and
18
Controller, Principal Accounting Officer. In addition to setting forth the Companys financial
19
condition, the Company, through the Form 10-Q, again admitted what it had initially denied without
20
basis, i.e., that its foreclosure affidavits, at least 55,000 of them, would have to be re-filed because
21
they failed to meet certain requirements:
22
23
24
25
26
27
28
650452_1

We believe we have designed an appropriate process for generating foreclosure


affidavits and documentation for both foreclosures and mortgage securitizations. . . .
Although we have identified instances where final steps relating to the execution of
foreclosure affidavits (including a final review of the affidavit, as well as some
aspects of the notarization process) were not strictly adhered to, we do not believe
that any of these instances related to the quality of the customer and loan data or led
to foreclosures which should not have otherwise occurred. Accordingly, we do not
plan on instituting a moratorium on foreclosure sales. Nevertheless, out of an
abundance of caution and to provide an additional level of assurance regarding our
processes, we recently announced that we are submitting supplemental affidavits for
approximately 55,000 foreclosures pending before courts in 23 judicial foreclosure
states.
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In addition, the Company explained the wide-ranging financial exposure that it could

2 or would materialize if in fact it was found that Wells Fargo had failed under its servicing
3 agreements with loan originators to perform its obligations, or any acts, omissions which involve
4 malfeasance, bad faith gross negligence or reckless disregard to the Companys duties. The
5 Company explained that Wells Fargo would not be indemnified for such conduct. In addition, the
6 Company explained that Wells Fargo may not be reimbursed for costs associated with the re7 execution or re-delivery of documents in connection with foreclosures or litigation costs associated
8 with borrowers who challenge the validity of foreclosures, especially if they relate to securitized
9 loans. Moreover, if certain documents required for foreclosure are missing, or defective, the
10 Company could be obligated to repurchase the loans:
11
12
13
14
15

If our review causes us to re-execute or redeliver any documents in


connection with foreclosures, we will incur costs which may not be legally or
practically reimbursable to us to the extent they relate to securitized mortgage loans.
Further, if the validity of any foreclosure action is challenged by a borrower, whether
successfully or not, we may incur significant litigation costs, which may not be
reimbursable to us to the extent they relate to securitized mortgage loans. In
addition, if a court were to overturn a foreclosure due to errors or deficiencies in
the foreclosure process, we could have liability to a title insurer that insured the
title to the property sold in foreclosure. Any such liability may not be reimbursable
to us to the extent it relates to a securitized mortgage loan.

16
17
18
19
20

Recent press reports have also contained speculation that foreclosures of


securitized mortgage loans could be impaired or delayed due to the manner in which
the loans are assigned to the securitization trusts. One cited concern is that
securitization loan files may be lacking mortgage notes, assignments or other critical
documents required to be produced on behalf of the trust. Although we believe that
we delivered all documents in accordance with the requirements of each
securitization involving our mortgage loans, if any required document with respect
to a securitized mortgage loan sold by us is missing or defective, as discussed above
we would be obligated to cure the defect or to repurchase the loan.

21
*

22
23
24

We may be terminated as a servicer or master servicer, be required to


repurchase a mortgage loan or reimburse investors for credit losses on a mortgage
loan, or incur costs and other liabilities if we fail to satisfy our servicing
obligations, including our obligations with respect to mortgage loan foreclosure
actions.

25
26
27
28
650452_1

We act as servicer and/or master servicer for mortgage loans included in


securitizations and for unsecuritized mortgage loans owned by investors. . . . If we
commit a material breach of our obligations as servicer or master servicer, we may
be subject to termination if the breach is not cured within a specified period of time
following notice, which can generally be given by the securitization trustee or a
specified percentage of security holders, causing us to lose servicing income. In
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1
2
3
4
5
6
7
8

Filed09/12/11 Page59 of 108

addition, we may be required to indemnify the securitization trustee against losses


from any failure by us, as a servicer or master servicer, to perform our servicing
obligations . . . .
We may incur costs if we are required to, or if we elect to re-execute or re-file
documents or take other action in our capacity as a servicer in connection with
pending or completed foreclosures. We may incur litigation costs if the validity of a
foreclosure action is challenged by a borrower. If a court were to overturn a
foreclosure because of errors or deficiencies in the foreclosure process, we may have
liability to a title insurer of the property sold in foreclosure. These costs and
liabilities may not be legally or otherwise reimbursable to us, particularly to the
extent they relate to securitized mortgage loans. In addition, if certain documents
required for a foreclosure action are missing or defective, we could be obligated to
cure the defect or repurchase the loan. We may incur liability to securitization
investors relating to delays or deficiencies in our processing of mortgage assignments
or other documents necessary to comply with state law governing foreclosures. . . .

9
Large Institutional Shareholders from New York City Pension Funds, AFL-CIO Demand that the
10 Wells Fargo Board of Directors Take Action to Investigate Loan Servicing Deficiencies to Help
Restore Credibility
11
119. On November 9, 2010, John C. Liu, New York City Comptroller, as trustee of Fire
12
New York City employee pension funds, submitted a shareholder proposal to the Company for
13
inclusion within its Definitive Proxy Statement related to the Companys annual meeting of
14
stockholders to be held during 2011.
15
Ms. Laurel A. Holschuh
16
Corporate Secretary
Wells Fargo & Company
17
*

18
19
20
21
22
23
24
25
26
27
28
650452_1

I write to you on behalf of the Comptroller of the City of New York, John C. Liu.
The Comptroller is the custodian and a trustee of the New York City Employees Retirement
System, the New York City Fire Department Pension Fund, the New York City Teachers
Retirement System, and the New York City Police Pension Fund, and custodian of the New
York City Board of Education Retirement System (the Systems). The Systems boards of
trustees have authorized the Comptroller to inform you of their intention to present the
enclosed proposal for the consideration and vote of stockholders at the companys next
annual meeting.
120.

The proposal to the Board suggested by Liu and the Systems Boards of Trustees

outlined the reported deficiencies and the scope of investigations that warranted immediate action by
the Board and particularly the Audit Committee:
Wells Fargo & Company is a leading originator, securitizer and servicer of
home mortgages.
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1
2

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Reports of widespread irregularities in the mortgage securitization,


servicing and foreclosure practices at a number of large banks, including missing
or faulty documentation and possible fraud, have exposed the Company to
substantial risks.

3
*

4
5

Fitch Ratings warned the probes may highlight weaknesses in the processes,
controls and procedures of certain [mortgage] servicers and may lead to servicer
rating downgrades.

6
*

7
8
9
10
11
12
13
14

The Audit Committee of the Board of Directors is responsible for ensuring


the Company has adequate internal controls governing legal and regulatory
compliance. With the Companys mortgage-related practices under intensive legal
and regulatory scrutiny, we believe the Audit Committee should act proactively and
independently to reassure shareholders that the Companys compliance controls
are robust.
Resolved, shareholders request that the Board have its Audit Committee
conduct an independent review of the Companys internal controls related to loan
modifications, foreclosures and securitizations, and report to shareholders, at
reasonable cost and omitting proprietary information, its findings and
recommendations by September 30, 2011.

16

The report should evaluate (a) the Companys compliance with (i)
applicable laws and regulations and (ii) its own policies and procedures; (b)
whether management has allocated a sufficient number of trained staff; and (c)
policies and procedures to address potential financial incentives to foreclose when
other options may be more consistent with the Companys long-term interests.

17

121.

15

On November 10, 2010, the American Federation of Labor and Congress of Industrial

18 Organizations (AFL-CIO) wrote to Wells Fargo as a current shareholder of more than 3,000 shares
19 of the Companys stock, submitting a proposal for the inclusion in the 2011 proxy materials. The
20 request was similar to that of the New York City Systems seeking a resolution that the Company
21 prepare a report on its internal controls over mortgage servicing operations, including among other
22 things, procedures to prevent legal defects in the processing of affidavits related to foreclosure.
23
24
25
26
27
28
650452_1

Laurel A. Holschuh
Corporate Secretary
Wells Fargo & Company
*

On behalf of the AFL-CIO Reserve Fund (the Fund), I write to give notice
that pursuant to the 2010 proxy statement of Wells Fargo & Company (the
Company), the Fund intends to present the attached proposal (the Proposal) at
the 2011 annual meeting of shareholders (the Annual Meeting). The Fund requests

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that the Company include the Proposal in the Companys proxy statement for the
Annual Meeting.

2
3
4

The fund is the beneficial owner of 3817 shares of voting common stock (the
Shares) of the Company. . . .
The Proposal is attached. I represent that the Fund or its agent intends to
appear in person or by proxy at the Annual Meeting to present the Proposal.

5
*

6
7

RESOLVED: Shareholders recommend that Wells Fargo & Company (the


Company) prepare a report on the Companys internal controls over its
mortgage servicing operations, including a discussion of:

8
9
10

the Companys participation in mortgage modification programs to


prevent residential foreclosures,

the Companys servicing of securitized mortgages that the Company


may be liable to repurchase, and

the Companys procedures to prevent legal defects In the processing


of affidavits related foreclosure.

11
12
13

122.

The AFL-CIO proposal included the following supporting statement regarding the

14 reasons for its proposal specifying that an investigation and report would provide the transparency
15 necessary to improve the now-tarnished representation of the Company, especially in light of the
16 large number of homes Wells Fargo had already foreclosed upon:
17
18
19

Our Company has foreclosed on a large number of home mortgages.


According to an estimate by SNL Financial, our Company has $17.5 billion of its
residential mortgage loans in foreclosure, and another $36.4 billion of mortgages
it services for other lenders in foreclosure as of June 30, 2010. (Wall Street
Journal, J.P. Morgan, BofA, Wells Fargo Tops in Foreclosed Home Loans, October
12, 2010.)

20
21
22
23
24
25
26

. . . We believe that our Company should provide greater disclosure of its efforts
to prevent foreclosures by its participation in government mortgage modification
programs such as the Home Affordable Modification program as well as our
Companys proprietary mortgage modifications.
*

In our view, our Companys shareholders will benefit from a report that
provides greater transparency regarding our Companys mortgage servicing
operations. We believe that such a report will also help improve our Companys
corporate reputation by disclosing its responses to the foreclosure crisis, including
its efforts to modify mortgage to prevent foreclosures, to properly service investorowned mortgages, and to comply with state foreclosure laws.

27
28
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123.

Filed09/12/11 Page62 of 108

On November 20, 2010, The Charlotte Observer published an article entitled N.C.

2 AG questions Wells Fargo foreclosure practices reporting that the North Carolina Attorney
3 Generals Office sent a letter to Wells Fargo & Co. expressing concerns about its foreclosure
4 practices after the San Francisco bank said its resubmitting affidavits in 23 other states not including
5 North Carolina, a quasi-judicial state. The article noted, in particular, that submission of false
6 affidavits could be considered a fraud on the court, which in turn could expose the Company to
7 significant liability. The article stated, in part:
8
9

The bank said its filing supplemental documents in 23 states, including


South Carolina, where judges sign off on foreclosures. North Carolina - a quasijudicial state where clerks of court review affidavits in foreclosure cases - is not
among those states.

10
11

If you maintain confidence in your proceedings, I question why you would


believe it necessary to re-file affidavits, Adam Hartzell, senior deputy attorney
general for consumer protection, wrote in the letter.

12
13

If Wells Fargo intends to take such measures in other states, I do not


understand why Wells Fargo would not also take similar action in North Carolina,
he added.

14
15
16
17

The use of unverified affidavits could be considered a fraud upon the court,
he wrote. In particular, he said, Wells could be asserting that it attempted to
modify loans for struggling borrowers without having a valid basis for those
assertions.
Bank of America and other lenders have halted foreclosure sales as they
review their procedures. Wells has not.

18
This further heightens the concerns of the state of North Carolina, Hartzell
19

wrote.

20 The United States Senate Launches Investigations and Holds Hearings on Banks Signing and
Filing of False Affidavits Several U.S. Government Officials Weigh In
21
124. On November 18, 2010 the Senate held a hearing on the robo-signing scandal.
22
During the hearing, Sen. Sherrod Brown (D-Ohio) drew a correlation between robo-signing and the
23
predatory lending practices which many of the large banks had participated in and which led to the
24
subprime crisis stating, The predatory practices of the mortgage servicing industry are remarkably
25
similar to the predatory practices that led to the subprime crisis. The biggest mortgage servicers
26
have poorly maintained, lost, or forged documentation. They ignored the interests of homeowners in
27
28
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1 exchange for outsized profits. . . . Indifference, foreclosed homes, and broken neighborhoods
2 shouldnt be a formula for record profits.
3

125.

In written testimony presented at the hearing, John Walsh (Walsh), Acting

4 Comptroller of the Currency noted that completed foreclosures had increased an astonishing 53.6%
5 over the last year as well as other forfeiture actions including new short sales, which increased an
6 amazing 126.5% and new deed-in-lieu-of-foreclosures actions rose 55% over the last year. Walsh
7 identified certain of the issues relating to the operational breakdowns at certain banks and stated that
8 his investigation was only limited to a sample of individual loan files only where foreclosures
9 have either been initiated or completed:

15

To date, four large national bank servicers [including Wells Fargo] have
publicly acknowledged procedural deficiencies in their foreclosure processes. The
lapses that have been reported represent a serious operational breakdown in
foreclosure governance and controls that we expect national banks to maintain. . . .
At the same time, we initiated plans for intensive, on-site examinations of the eight
largest national bank mortgage servicers. Through these examinations we are
independently testing the adequacy of governance over their foreclosure processes to
ensure foreclosures are completed in accordance with applicable legal requirements
and that affidavits and claims are accurate. As part of our examinations we also are
reviewing samples of individual loan files where foreclosures have either been
initiated or completed to test the validity of bank self- assessments. . . .

16

126.

10
11
12
13
14

Walsh added that the scope of the investigation which had initially centered upon

17 improper attestations of accuracy, had broadened to include the accuracy of all of the underlying
18 information regarding the foreclosure process:
19
20
21
22
23
24

The concerns about improper foreclosure practices initially centered on two


issues that deal with the documentation required to effect foreclosure actions. The
first issue involves requirements under some state laws for individuals to sign
affidavits attesting personal knowledge of the accuracy and completion of required
documentation essential to a valid foreclosure proceeding. The second issue is
whether, in similar situations where required by state law, individual notaries may
have violated procedures in notarizing documentation by, for example, notarizing the
documents after they had been signed, rather than in the presence of the individual
signing the affidavit. As the situation has evolved, concerns have broadened to
include the accuracy of all information underlying the foreclosure process, and the
physical possession and control over documents necessary to foreclose on a home.
Our examinations are investigating all of these issues.

25
(Emphasis added in original.)
26
127.

Elizabeth A. Duke, Member of the Board of Governors of the Federal Reserve

27
System (FRB) submitted written testimony on the significance of the information in the
28
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1 foreclosure documentation and the affidavits that must be executed, including whether the bank
2 agent that is advocating foreclosure action is legally entitled to bring the action:
3
4
5
6
7
8
9
10

Foreclosure documentation typically requires an assertion that the agent


bringing forth the action has the legal right to foreclose and that the loan is in default.
The document filing would contain details of the transaction and the amounts owed.
Problems associated with so-called robo-signing of documents include documents
signed by individuals who do not have personal knowledge of the facts being
asserted, documents signed by individuals who are not properly authorized to make
such claims or assertions, notarized signatures on documents that were not
executed in the presence of a notary or that have other violations of proper notary
procedures, and documents that contain inaccurate amounts, dates, or other facts.
Lenders and servicers are responsible for ensuring that the person who signs a
document is duly authorized and has appropriate knowledge obtained from a review
of the case. In addition, servicers and lenders are responsible for ensuring the
accuracy of records and the facts recited in the documents.
128.

Phyllis Caldwell, Chief of Homeownership Preservation Office, U.S. Department of

11 the Treasury wrote that the mortgage servicers should be held accountable:
12
13

The reports of robo-signing, faulty documentation and other improper


foreclosure practices by mortgage servicers are unacceptable. If servicers have
failed to comply with the law, they should be held accountable.

14

129.

David H. Stevens, Assistant Secretary of Housing Federal Housing Administration

15 Commissioner, U.S. Department of Housing and Urban Development wrote that the conduct denied
16 then admitted by Wells Fargo was a continuation of a decade of bad behavior and abuse was indeed
17 shameful:
18
19

Of course, as I mentioned, the job is far from over. Recent reports of faulty
documentation and fraudulent affidavits in the foreclosure process remind us that
we continue to pay a very steep price for nearly a decade of abuses and bad
behavior.

20
21

As Secretary Donovan has said, the notion that many of the very same
institutions that helped cause this housing crisis may well be making it worse is not
only frustrating its shameful.

22
*

23
24
25

Servicers that are not meeting FHAs standards will face the full strength of our
enforcement authority, including the levying of fines, sanctions, and if necessary,
stripping institutions of their FHA approval. Prior to the start of FHAs current
servicer review process, which began in May 2010, an evaluation of the practices of
one servicer yielded over $700,000 in administrative fees.

26
130.

Adam J. Levitin (Levitin), Associate Professor of Law, Georgetown University

27
Law Center, explained that the key issue is the falsification of court documents that could, as
28
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1 discussed by other commentators, be found to be a fraud on the court. In the case of Wells Fargo
2 and certain other banks, which filed false affidavits in multiple courts around the country, actions by
3 governing bodies could result in substantial liability for:
4
5
6
7
8

Perhaps the most disturbing problem that has appeared in foreclosure cases is
evidence of counterfeit or altered documents and false notarizations. To give some
examples, there are cases in which multiple copies of the true original note are
filed in the same case, with variations in the true original note; signatures on note
alleges that have clearly been affixed to documents via Photoshop; blue ink
notarizations that appear in blank ink; counterfeit notary seals; backdated
notarizations of documents issued before the notary had his or her commission; and
assignments that include the words bogus assignee for intervening asmts, whose
address is XXXXXXXXXXXXXXXX.

9 Class Actions and Individual Borrower Actions Continue to Accumulate Exposing Wells Fargo
to Increasing Potential Liability Courts Issue Stern Orders Regarding Affidavits Against Wells
10 Fargo
11

131.

In Reginald Jones v. USA, N.A., No. 09-2904 RWT (D. Md.), Wells Fargo Bank,

12 N.A. is named as defendant in a class action seeking damages of not less than $100,000,000. The
13 action asserts class members had their due process rights violated by the submission of fraudulent
14 (and robo-signed) affidavits by Wells Fargo and other defendants in connection with certain
15 foreclosure proceedings in violation of Maryland procedural rules and/or fundamental fairness.
16

132.

Additionally, in November and December of 2010, a New York court state judge,

17 pursuant to a previous Administrative Order issued by the Chief Judge, denied 127 foreclosure cases
18 including numerous ones initiated by Wells Fargo because there have been numerous instances
19 alleged as to robo signing of documents and a failure to attest to the accuracy of documents in
20 mortgage foreclosure proceedings. Specifically, the order in Wells Fargo Bank, N.A. v. Joseph
21 Gennarelli, et al., Index No. 31089/09 (Supreme Court State of New York, I.A.S. Term, Part
22 XXIV Suffolk County, Dec. 1, 2010), which was issued by Judge Cohalan in all 127 cases
23 including numerous ones involving Wells Fargo, stated in full part:
24
25

Pursuant to an Administrative Order of the Chief Judge, dated October 20,


2010, all residential mortgage foreclosure actions require an affirmation from the
attorney representing the plaintiff/lender/bank, as stated in the affirmation attached to
this order, that he/she has inspected all documents.

26
27
28
650452_1

The plaintiff [Wells Fargo] is also directed on any future application to


provide a copy of this Courts order, the prior application/motion papers and an
updated affidavit of regularity/merit from the plaintiff/lender/banks representative
that he/she has reviewed the file in this case and that he/she documents that all
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paperwork is correct. The plaintiff/lender/banks representative shall also provide in


said affidavit of regularity her/his position, length of service, training, educational
background and a listing of the documents and financial records reviewed
substantiating the review of the amounts owed. The affidavit should also include that
she/he has personally reviewed both the mortgage and the note and any assignments
for accuracy.

2
3
4

The plaintiff bears the burden of proof in a summary judgment proceeding


and judgment will only be awarded when all doubt is removed as to the existence of
any triable issue of fact. Under the present circumstances, where there have been
numerous instances alleged as to robo signing of documents and a failure to
attest to the accuracy of documents in mortgage foreclosure proceedings, the
plaintiff must prove its entitlement to foreclose on a mortgage as a matter of law by
establishing the regularity and accuracy of the financial documentary evidence
submitted and the Court will be scrutinizing all documents for accuracy.

133.

5
6
7

In December 2010, another Wells Fargo employee, Alden Berner (Berner), testified

10 in an action captioned that his role as a legal process specialist was limited to verifying facts on
11 foreclosure documents and only to verify facts on the documents. However, in his deposition
12 Berner testified that he used a computer only to verify the name of the lender or loan servicer against
13 the name of the investment entity that owns the loan. Berner testified that he does not know who
14 places the information in the system he relies on, and does not review any attachments in the
15 complaints and that he did not review the actual loan document itself, nor did he review the note or
16 the mortgage. Further, Berner did not look at any documents that actually transfer or assign
17 ownership of any note or mortgage. Thus, the verifications he was submitting to courts was not
18 really verifying anything. Berner and others who submit verifications without actually verifying
19 anything have become known as robo verifiers.
134.

20
21 steps

which

On December 20, 2010, the New Jersey court system, sua sponte, took a number of
according

to

press

release

issued

that

day

(available

at

22 http://www.judiciary.state.nj.us/superior/press_release.htm), were intended to protect the integrity


23 of filings of foreclosures in New Jersey. On that day, the New Jersey courts issued two orders. As
24 the press release stated, in the first order to show cause, a judge directed six lenders and service
25 providers who have been implicated in irregularities in connection with their foreclosure practices to
26 show cause why the processing of uncontested residential mortgage foreclosure actions they have
27 filed should not be suspended. See In the Matter of Residential Mortgage Foreclosure Pleading
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1 General Equity Part, Mercer County. Wells Fargo was among the six lenders given such notice. In a
2 second order,3 a judge issued an administrative order that details the scope of the problem and
3 orders certain procedures to safeguard the mortgage foreclosure documentation preparation and
4 filing process. The press release notes that this second order requires 24 lenders and service
5 providers who have filed more than 200 residential foreclosure actions in 2010 to demonstrate
6 affirmatively that there are no irregularities in their handling of foreclosure proceedings, via
7 submissions to a special master.
8

135.

The New Jersey courts administrative order specifically called out Wells Fargo as

9 one of six institutions with robo-signing activities that the order noted were pervasive problems
10 in foreclosure and bankruptcy filings in state courts. As the order put it, [r]obo-signers are
11 mortgage lender/servicer employees who sign hundreds in some cases thousands of affidavits
12 submitted in support of foreclosure claims without any personal knowledge of the information
13 contained in the affidavits. Robo-signing may also refer to improper notarizing practices or
14 document backdating.
15

136.

16

Wells Fargo employees have admitted in depositions to signing documents


without verifying the information contained therein. In one foreclosure case, a
loan administration manager stated that he signed 50 to 150 documents per day,
including assignments, declarations, and affidavits related to foreclosure. He
signed the documents without checking the information and relied on employees of
another department to ensure the accuracy of the information. The manager and
others with the same position could sign as a Vice President of Loan
Documentation for purposes of executing loan documents but were not otherwise
officers of the company.

17
18
19
20
21
22
23
24

With respect to Wells Fargo, the New Jersey Administrative Order stated:

In another foreclosure case, an employee stated that she spent about two
hours a day signing between 300 to 500 documents. She held the title of Vice
President of Loan Documentation for the purpose of signing the documents. She did
not review or have personal knowledge of the facts in the documents, relying on
outside counsel or an employee in the foreclosure department for accuracy.
Similarly, for a bankruptcy case in Texas, a Wells Fargo employee stated that she
sometimes did not personally review documents before signing, relying on the
expertise of the document preparer.

25
26
3
See In the Matter of Residential Mortgage Foreclosure Pleading and Document
27 Irregularities,
Administrative Order 01-2010 (Dec. 10, 2010).
28

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1 (Footnotes omitted.)
2 The New York City Comptroller on Behalf of New York City Public Pension Funds Shareholder
Again Demand Action from Wells Fargo Board of Directors Audit Committees
3
137. On January 6, 2011, New York City Comptroller Liu sent a letter to Wells Fargos
4
Board. He urged that the Board take immediate, independent action to restore confidence in the
5
Companys internal controls and compliance. The letter noted managements public comments that
6
the allegations of robo-signing were overblown were contrary to the findings of regulators, which
7
had begun their own investigations. Specifically, we call on the Audit Committee . . . to conduct an
8
independent review of the Companys internal controls related to loan modifications, foreclosures
9
and securitizations and to include a report to shareholders with findings and recommendations in the
10
Companys 2011 proxy statement. Liu stated that such a review should evaluate
11
(a)
the Companys compliance with (i) applicable laws and regulations and (ii) its own
12
policies and procedures;
13

(b)

whether management has allocated a sufficient number of trained staff; and

14

(c)

policies and procedures to address potential financial incentives to foreclose when


other options may be more consistent with the Companys long-term interests. He
added that we do not consider your existing audit firm to be independent since the
firm previously signed off on the Companys internal controls.

138.

The January 6, 2011 letter addressed to the Chairman of the Audit Committee,

15
16
17

18 Nicholas G. Moore, stated as follows:


19
20
21
22

Reports in fall 2010 of widespread irregularities in the mortgage and


foreclosure processes at the nations largest banks have exposed Wells Fargo &
Company (the Company) to intensive legal and regulatory scrutiny. Despite
managements assurance that the concerns are overblown and will be resolved
quickly, preliminary findings by top federal regulators suggest that internal control
failures at the banks are in fact widespread. Moreover, according to the November
report of the Congressional Oversight Panel (COP), exposed banks could suffer
severe capital losses.

23
24
25
26
27

As major institutional investors collectively holding $50.6 million Wells


Fargo common shares, with a December 31 market value of $1.6 billion, we believe
it is incumbent upon the Board of Directors to take immediate, independent action to
restore confidence in the Companys internal controls and compliance. Specifically,
we call on the Audit Committee you chair to conduct an independent review of
Companys internal controls related to loan modifications, foreclosures and
securitizations and to include a report to shareholders with findings and
recommendations in the Companys 2011 proxy statement.

28
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The requested review, the scope of which we further detail below, is already
the subject of a shareholder resolution submitted by New York City Pension Funds
for the Companys spring 2011 annual meeting. However, we believe the urgency
and seriousness of our concerns require more immediate Board action.

3
The Congressional Oversight Panels November 2010 Report
4
5
6
7
8
9

In its November 2010 oversight report, the COP characterized the view
expressed by management at the large banks that current concerns over foreclosure
irregularities are overblown, reflecting mere clerical errors that can and will be
resolved quickly as the best case scenario. In its worst case scenario, the COP said
severe capital losses could destabilize exposed banks and potentially threaten
overall financial stability.
*

11

In addition, banks could be vulnerable to litigation from homeowners who


claim to have suffered improper foreclosures. Even the prospect of such losses,
states the COP report, could damage a banks stock price or its ability to raise
capital. The report also states that, as a result of flawed documentation, borrowers
may have been denied modifications.

12

The Federal Foreclosure Task Forces Preliminary Findings

13

On November 23rd, a week after the COP released its report, Assistant
Treasury Secretary Michael Barr informed members of the Financial Stability
Oversight Council that a federal foreclosure task force investigating some of the
nations largest mortgage servicers had found widespread and inexcusable
breakdowns in basic controls in the foreclosure process. . . .

10

14
15
16

Federal Reserve Governor Daniel K. Tarullos December 1st Congressional


Testimony

17
18
19
20

Most recently, Federal Reserve Governor Daniel K. Tarullo updated the


Senate Banking Committee on a related interagency examination by the four federal
banking regulators. In his December 1st testimony, Mr. Tarullo said preliminary
findings suggest significant weaknesses in risk-management, quality control,
audit, and compliance practices as underlying factors contributing to the problems
associated with mortgage servicing and foreclosure documentation. The agencies
have also found shortcomings in staff training.

21
22
23
24
25
26
27

Mr. Tarullo testified that foreclosures are costly to all parties, noting their
harmful impacts on homeowners, lenders, mortgage investors and local governments,
as well as the broader economy. It just cannot be the case, he said, that
foreclosure is preferable to modification for a significant proportion of mortgages
where the deadweight costs of foreclosure, including a distressed sale discount, are
so high.
Among the possible explanations for the prominence of foreclosures, he cited
lack of servicer capacity to execute modifications, purported financial incentives for
servicers to foreclose rather than modify, . . . and conflicts between primary and
secondary lien holders. Although servicers are required to act in the best interests
of the investors who own the mortgages, an October 2010 study provides
compelling empirical support for the view that perverse incentives and conflicts of

28
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interest lead banks to foreclose upon or deny loan modifications to homeowners


improperly.

2
Federal Regulators and Congress May Impose Structural Reforms
3
4
5

Given the range of problems associated with mortgage servicing, including


the degree to which foreclosure has been preferred to mortgage modification, Mr.
Tarullo testified that structural solutions may be needed. In addition to possible
regulatory actions, recent House and Senate Hearings on the foreclosure crisis raise
the prospect of additional legislative remedies.

10

For example, a bill introduced by Reps. Brad Miller (D-NC) and Keith
Ellison (D-MN) in April 2010, before the recent round of hearings, would address
one of the conflicts cited by Mr. Tarullo. The Mortgage Servicing Conflict of Interest
Elimination Act would bar servicers of first loans they do not own from holding any
other mortgages on the same property. Enactment of the legislation would
presumably force the Company, which is one of four banks that control more than
half the mortgage servicing market and more than half the home equity loan market,
to divest its servicing businesses or its interests in home mortgages.

11

Scope and Timeline for Independent Review

12

In light of the above, we urge the Audit Committee to immediately retain


independent advisors to review the Companys internal controls related to loan
modifications, foreclosures and securitizations. The review should evaluate (a) the
Companys compliance with (i) applicable laws and regulations and (ii) its own
policies and procedures; (b) whether management has allocated a sufficient number
of trained staff; and (c) policies and procedures to address potential financial
incentives to foreclose when other options may be more consistent with the
Companys long-term interests. For the purposes of this review, we do not consider
your existing audit firm to be independent since the firm previously signed off on the
Companys internal controls.

7
8
9

13
14
15
16
17
18
19
20
21
22
23
24

The Audit Committee should disclose its findings and recommendations in


the Companys 2011 proxy statement. In the event that the Committee is unable to
complete its review prior to the filing of the Companys 2011 proxy statement, we
request that the Committee provide a preliminary report in the proxy statement
detailing the scope of the review, the firm(s) retained to perform it, any preliminary
findings and remedial steps taken to date, and the expected completion date.
*

As you know, the Audit Committee is ultimately responsible for the


Companys compliance with legal and regulatory requirements as well as its
internal controls over financial reporting. The Committee, however, appears to be
relying on managements internal review and assurance that any foreclosure
irregularities are mere clerical errors that will be resolved quickly, while awaiting the
outcome of various investigations by federal and state authorities.

25
26
27
28
650452_1

It may be too late to protect the Company from the worst consequences of
any past compliance failures. It is nonetheless critical that the Audit Committee
take immediate, independent action to assess the Companys mortgage-related
internal controls and address any underlying weaknesses. This will help to prevent
future compliance failures and restore the confidence of shareholders, regulators,
legislators and mortgage market participants.
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1 (Footnote omitted.)
2

139.

The letter was signed by Liu, New York City Comptroller, New York City Pension

3 Funds; Denise Nappier, Connecticut State Treasurer, Connecticut Retirement Plans and Trust Funds;
4 William R. Atwood, Executive Director, Illinois State Board of Investment; William E. Mabe,
5 Executive Director, Illinois State Universities Retirement System; Thomas D. DiNapoli, New York
6 State Comptroller, New York State Common Retirement Fund; Janet Cowell, North Carolina State
7 Treasurer, North Carolina Retirement Systems; and Ted Wheeler, Oregon State Treasurer, Oregon
8 State Treasury.
9

140.

On January 9, 2011, the New York City Office of the Comptroller issued a press

10 release titled $432 Billion Pension Fund Coalition Demands Bank Directors Immediately Examine
11 Foreclosure Practices. The coalition included the five New York City Pension Funds and the
12 Connecticut Retirement Plan and Trust Funds, of Illinois State Universities Retirement Systems, the
13 New York State Common Retirement Fund, the North Carolina Retirement Systems and the Oregon
14 Public Employees Retirement Fund:
15

$432 BILLION PENSION FUND COALITION DEMANDS BANK


DIRECTORS IMMEDIATELY EXAMINE FORECLOSURE PRACTICES

16
17
18
19
20
21
22
23
24
25
26

. . . A coalition of seven major public pension systems called on the boards of


directors of Bank of America (NYSE: BAC), Citigroup (NYSE: C), JP Morgan
Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC) to immediately undertake
independent examinations of the banks mortgage and foreclosure practices.
Led by New York City Comptroller John C. Liu on behalf of the five NYC
Pension Funds, the coalition also includes the Connecticut Retirement Plans and
Trust Funds, the Illinois State Board of Investment, the Illinois State Universities
Retirement System, the New York State Common Retirement Fund, the North
Carolina Retirement Systems, and the Oregon Public Employees Retirement Fund.
The coalition of pension funds called for the banks Audit Committees to
launch independent examinations of their loan modification, foreclosure, and
securitization policies and procedures.
This will help to prevent future compliance failures and restore the
confidence of shareholders, regulators, legislators and mortgage markets
participants, the coalition advised in its letter.
The coalition members insistence on immediate action reflects the urgency
of their concerns over mishandled mortgages.

27
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The January 9, 2011 press release went further, describing that the Board could no

2 longer pretend that these false affidavits were simple paperwork failures and placed oversight
3 responsibility directly on the shareholders of the Audit Committee, again demanding that they
4 conduct comprehensive and independent reviews:
5
6
7
8
9

The banks boards cannot continue to pretend the foreclosure mess is the
result of technical glitches and paperwork errors Comptroller Liu said. There is
a fundamental problem in their procedures that endangers not just homeowners,
but shareholders, and local economies. Given the risks involved, only a swift and
unbiased audit can reassure shareholders that the pension funds of 700,000 working
and retired New Yorkers are in safe hands. The boards of directors have no time to
waste.
The coalition represents more than $430 billion in pension fund investments,
including $5.7 billion invested in the four banks.

10
11
12
13

We dont know exactly what the banks were doing, and we dont know if
they did it right, New York State Comptroller Thomas P. DiNapoli said, Millions
of families have lost their homes, and the investments of the million members of the
Common Retirement System have been put at risk. As investors, we need to
understand what happened. A full and open examination of the procedures used to
foreclose on millions of families is the only way to make sure our investments are
protected and no one is ever wrongfully evicted from their home.

14
15
16

Federal Reserve Governor Daniel K. Tarullo testified to the Senate Banking


Committee on December 1 that the Federal Reserves preliminary findings on bank
foreclosure procedures suggested significant weaknesses in risk-management,
quality control, audit and compliance practices as underlying factors contributing to
the problems associated with mortgage servicing and foreclosure documentation.

17
18
19
20

The Congressional Oversight Panel has estimated that banks potential


mortgage liability could total $52 billion, borne largely by the four banks contacted
by the pension funds. The Panels November 16 report, Examining the
Consequences of Mortgage Irregularities for Financial Stability and Foreclosure
Mitigation, concluded that banks could suffer disabling damage if they were found
to have misrepresented the quality of loans sold for securitization and forced to
reabsorb billions in troubled loans.

21
22
23
24
25
26
27

The responsibility for making sure that internal controls and compliance
process are in place for mortgage and foreclosure practices rests squarely with
these Audit Committees, said North Carolina State Treasurer Janet Cowell. The
recent testimonies and studies strongly suggest the need for these Audit
Committees to act swiftly and objectively in conducting an independent and
comprehensive review of these practices.
The coalition of pension funds called for the banks to report the findings of
their independent examinations in their 2011 proxy statements this spring. As of
December 31, 2010, the coalitions combined holdings in each bank included: 97.1
million Bank of America shares valued at $1.3 billion; 226.6 million Citigroup shares
valued at $1.1 billion; 40.7 million JPMorgan Chase shares valued at $1.7 billion;
and 50.6 million Wells Fargo shares valued at $1.6 billion.

28
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1
2
3
4
5

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The New York City Comptroller serves as the investment advisor to,
custodian and trustee of the New York City Pension Funds. The New York City
Pension Funds are comprised of the New York City Employees Retirement System,
Teachers Retirement System, New York City Police Pension Fund, New York City
Fire Department Pension Fund and the Board of Education Retirement System. The
New York City Pension Funds hold a combined 138,786,887 total shares in Bank of
America Corporation (NYSE: BAC), Citigroup Inc. (NYSE: C), JPMorgan Chase &
Co. (NYSE: JPM), and Wells Fargo & Company (NYSE: WFC) for a combined
asset value of $1,933,160,319 as of 12/31/2010.

6 Defendants Cause Wells Fargo to File Its Form 10-K for the Year Ending Falsely Contending
Effectiveness of Internal Controls Potential Liability Materializes Into $1.2 Billion in Reserves
7
142. On January 19, 2011, the Company issued a press release entitled WELLS FARGO
8
REPORTS RECORD QUARTERLY AND FULL YEAR NET INCOME; Q4 Net Income of $3.4
9
billion; Q4 Revenue of $21.5 billion which stated in relevant part:
10
Wells Fargo & Company reported record net income of $12.4 billion, or $2.21 per
diluted common share, for 2010, up from $12.3 billion, or $1.75 per share, for 2009.
11
Fourth quarter 2010 net income was a record $3.4 billion, or $0.61 per common
share, compared with $3.3 billion, or $0.60 per common share, for third quarter 2010
12
and $2.8 billion, or $0.08 per common share, for fourth quarter 2009. Earnings per
share for fourth quarter 2009 were reduced by $0.47 for the combined dividends and
13
deemed dividend upon redemption and full repayment of TARP preferred stock.
14
In 2010 Wells Fargo saw solid growth in a variety of businesses, with record
net income for the full year as well as the fourth quarter, said Chairman and CEO
15
John Stumpf. As the U.S. economy showed continued signs of improvement, our
diversified model continued to perform for our stakeholders, as demonstrated by
16
growth in loans and deposits, solid capital levels and improving credit quality.
17
143. On the same day the Company held a conference call for analysts and investors. The
18
call was hosted by defendants Stumpf and Atkins. During the call, defendant Atkins explained that
19
the Company had reduced the value of its Mortgage Servicing Rights (MSR) to reflect the higher
20
costs associated with residential foreclosures:
21
[Atkins:] Before turning to credit quality I would like to make a few points
22
about the mortgage business on slide 8. Mortgage banking non-interest income
increased $258 million in the fourth quarter. Not coincidentally we also had
23
approximately $200 million higher operating expenses in the quarter to process all
these originations an example of our ability to modify capacity and variable
24
expenses up and down as volume ebbs and flows.
25
26
27

On slide 8, for purposes of analysis, weve broken down mortgage fees into
component parts, originations and servicing. On the origination side the total gain on
origination activities was $2.5 billion in the fourth quarter, but that included $464
million provided for repurchase reserves, up $94 million from the third quarter. This
addition primarily reflected an increase in loss severity projections even though
unresolved repurchase demands are down again in the quarter. The $2.9 billion

28
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gain from origination activities was up 27% from the third quarter on a 27% increase
in originations.

2
3
4
5
6
7
8
9
10

All in servicing revenue was $240 million in the quarter. Im often asked
where in the income statement we account for higher residential foreclosure costs.
And in fact the present value of projected residential mortgage foreclosure costs is
reflected in the MSR valuation, so when foreclosure expenses are projected to rise,
the full higher expected costs reduce current period earnings through a reduction
in the MSR.
As you can see on this slide, we reduced the value of our MSR by $143
million in the fourth quarter for higher projected servicing and foreclosure costs. We
review and adjust our servicing and foreclosure cost projections within our MSR
valuation each quarter and have been adding to this cost for several quarters now to
reflect the current higher cost environment.
The ratio of MSRs as a percent of loan service for others was 86 basis points,
up slightly from 72 basis points in the third quarter simply due to the higher
mortgage rates in the quarter. But we expect we will once again be at the lower end
of the peers on this metric.

11
144.

On February 25, 2011 the Company filed its Annual Report on Form 10-K with the

12
SEC for the fiscal year ending December 31, 2010 (the 2010 Annual Report). The 2010 Annual
13
Report repeated the financial results in the Companys January 19, 2011 press release. With respect
14
to the Companys internal controls and procedures, the 2010 Annual Report falsely stated that during
15
2010, the Companys internal controls were effective:
16

19

As required by SEC rules, the Companys management evaluated the


effectiveness, as of December 31, 2010, of the Companys disclosure controls and
procedures. The Companys chief executive officer and chief financial officer
participated in the evaluation. Based on this evaluation, the Companys chief
executive officer and chief financial officer concluded that the Companys
disclosure controls and procedures were effective as of December 31, 2010.

20

145.

17
18

With respect to internal controls over financial reporting, the 2010 Annual Report

21 falsely stated that:


22
23
24
25

The Companys management is responsible for establishing and maintaining


adequate internal control over financial reporting for the Company. Management
assessed the effectiveness of the Companys internal control over financial reporting
as of December 31, 2010, using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework. Based on this assessment, management concluded that as
of December 31, 2010, the Companys internal control over financial reporting
was effective.

26
146.

The 2010 Annual Report was signed by defendants Baker, Chen, Dean, Engel,

27
Milligan Moore, Quigley, Runstad, Hernandez, James, McCormick, McDonald, Sanger, Stumpf and
28
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1 Swenson, and also included certifications of defendant Stumpf regarding the adequacy of the
2 Companys internal controls over financial reporting substantially similar to the one referenced in
3 97 above.
4

147.

Also buried in the Companys 2010 Annual Report on Form 10-K was a disclosure

5 confirming that in addition to a multitude of lawsuits relating to its foreclosure processes, it was in
6 fact likely the government would initiate some form of enforcement action against the Company
7 related to the foreclosure document investigation and, as a result, the Company could be subject to
8 significant civil penalties. The Company further acknowledged that it had established a $1.2 billion
9 loss reserve to cover potential losses regarding its foreclosure practices. The 2010 Annual Report
10 provided in part:
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
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MORTGAGE FORECLOSURE DOCUMENT LITIGATION Seven


purported class actions and several individual borrower actions related to foreclosure
document practices were filed in late 2010 and in early 2011 against Wells Fargo
Bank, N.A. in its status as mortgage servicer. The cases have been brought in state
and federal courts. Of the individual borrower cases, the majority are filed in state
courts in California and Ohio. Two other class actions were filed against Wells
Fargo Bank, but Wells Fargo is named as a defendant as corporate trustee of the
mortgage trust and not as a mortgage servicer. The actions generally claim that
Wells Fargo submitted fraudulent or untruthful affidavits or other foreclosure
documents to courts to support foreclosures filed in the state. Specifically, plaintiffs
allege that Wells Fargo signers did not have personal knowledge of the facts alleged
in the documents and did not verify the information in the documents ultimately filed
with courts to foreclose. Plaintiffs attempt to state legal claims ranging from
wrongful foreclosure to deceptive practices to fraud and seek relief ranging from
cancellation of notes and mortgages to money damages.
On December 20, 2010, the New Jersey Supreme Court, the New Jersey
Administrative Office of the Courts, and the Superior Court of New Jersey for
Mercer County jointly began an action against Wells Fargo and other large mortgage
servicing companies in state court in New Jersey. This action seeks to enjoin
pending foreclosures and sales and to require servicers to certify and prove
compliance with new foreclosure procedures in New Jersey, or be held in contempt
of court. Wells Fargo has filed its initial response to the New Jersey action.
MORTGAGE RELATED REGULATORY INVESTIGATIONS Several
government agencies are conducting investigations or examinations of various
mortgage related practices of Wells Fargo Bank. The investigations relate to two
main topics, (1) whether Wells Fargo may have violated fair lending or other laws
and regulations relating to mortgage origination practices; and (2) whether Wells
Fargos practices and procedures relating to mortgage foreclosure affidavits and
documents relating to the chain of title to notes and mortgage documents are
adequate. With regard to the investigations into foreclosure practices, it is likely
that one or more of the government agencies will initiate some type of enforcement
action against Wells Fargo, which may include civil money penalties. Wells Fargo
continues to provide information requested by the various agencies.
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1 Wells Fargo Board File Rule 14(a) Proxy Material Urging Shareholders to Vote Against
Proposals that Would Require the Board to Conduct an Internal Investigation
2
148. On March 21, 2011, the Company filed its 14(a) Proxy Statement with the SEC. The
3
members of the Board, defendants, caused the Company to include Lius stockholder proposal styled
4
ITEM 9 STOCKHOLDER PROPOSAL REGARDING A REPORT ON INTERNAL CONTROLS
5
FOR MORTGAGE SERVICING OPERATIONS in its Proxy Statement filed with the SEC on
6
March 21, 2011 in connection with the annual meeting of stockholders scheduled for May 3, 2011
7
which stated:
8
The New York City Employees Retirement System, the New York City Fire
9
Department Pension Fund, the New York City Teachers Retirement System, the
New York City Police Pension Fund, and the New York Board of Education
Retirement System as joint filers, c/o The City of New York, Officer of the
10
Comptroller, 1 Centre Street, Room 629, New York, NY 10007, which in the
aggregate held 16,622,857 shares of common stock on November 17, 2010, intend to
11
submit a resolution to stockholders for approval at the annual meeting. The
proponents resolution and supporting statement are printed below.
12
13

Supporting Statement and Resolution

14

Whereas: Wells Fargo & Company is a leading originator, securitizer and


servicer of home mortgages.

15
16
17
18
19
20
21
22
23
24
25
26
27
28
650452_1

Reports of widespread irregularities in the mortgage securitization,


servicing and foreclosure practices at a number of large banks, including missing
or faulty documentation and possible fraud, have exposed the Company to
substantial risks.
According to these reports, the specialized needs of millions of troubled
borrowers overwhelmed bank operations that were designed to process routine
mortgage payments. As the New York Times (10/24/10) reported, computer systems
were outmoded; the staff lacked the training and numbers to respond properly to the
flood of calls. Traditional checks and balances on documentation slipped away as
filing systems went electronic, and mortgages were packaged into bonds at a
relentless pace.
Morgan Stanley estimated as many as 9 million U.S. mortgages that have
been or are being foreclosed may face challenges over the validity of legal
documents.
Mortgage servicers are required to act in the best interests of the investors
who own the mortgages. However, a foreclosure expert testified before the
Congressional Oversight Panel that perverse financial incentives lead servicers to
foreclose when other options may be more advantageous to both homeowner and
investor.
Fifty state attorneys general opened a joint investigation and major federal
regulators initiated reviews of bank foreclosure practices, including the Federal
Reserves examination of the largest banks policies, procedures, and internal
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controls related to loan modifications, foreclosures and securitizations to determine


whether systematic weaknesses led to improper foreclosures.

2
3

Fitch Ratings warned the probes may highlight weaknesses in the processes,
controls and procedures of certain [mortgage] servicers and may lead to servicer
rating downgrades.

4
5

While federal regulators and state attorneys general have focused on flawed
foreclosures, reported Bloomberg (10/24/10), a bigger threat may be the cost to
buy back faulty loans that banks bundled into securities.

6
7
8
9
10
11

Mortgage repurchases cost Bank of America, Citigroup, JP Morgan Chase


and Wells Fargo $9.8 billion in total as of September 2010, according to Credit
Suisse. Goldman Sachs estimated the four banks face potential losses of $26 billion,
while other estimates place potential losses substantially higher.
The Audit Committee of the Board of Directors is responsible for ensuring
the Company has adequate internal controls governing legal and regulatory
compliance. With the Companys mortgage-related practices under intensive legal
and regulatory scrutiny, we believe the Audit Committee should act proactively and
independently to reassure shareholders that the Companys compliance controls are
robust.

12
13
14

Resolved, shareholders request that the Board have its Audit Committee
conduct an independent review of the Companys internal controls related to loan
modifications, foreclosures and securitizations, and report to shareholders, at
reasonable cost and omitting proprietary information, its findings and
recommendations by September 30, 2011.

15
16
17

The report should evaluate (a) the Companys compliance with (i) applicable
laws and regulations and (ii) its own policies and procedures; (b) whether
management has allocated a sufficient number of trained staff; and (c) policies and
procedures to address potential financial incentives to foreclose when other options
may be more consistent with the Companys long-term interests.

18
149.

The Companys Board responded to the above stockholder proposal stating it had

19
already done a review, and that government agencies were also doing a review of a sample of
20
documents and an additional internal review might be a distraction.:
21
Position of the Board
22
23

The Board recommends a vote AGAINST this proposal, which is identified as


Item 9 on the enclosed proxy card, for the following reasons:

24

The Company has already undertaken comprehensive internal selfassessments and reviews of our mortgage servicing processes and practices
including controls related to loan foreclosures and securitizations;

Our federal banking regulators have conducted independent in-depth


examinations of the Companys mortgage servicing policies, procedures and
internal controls, including detailed reviews of samples of our mortgage loan
files; and

25
26
27
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An additional independent review would not constitute an effective use of the


Companys resources and could distract our efforts to cooperate with reviews
undertaken by our federal banking regulators.

3
4
5
6
7
8
9

Filed09/12/11 Page78 of 108

Therefore, the Board believes that the extensive reviews of mortgage


servicing processes and procedures that the Companys internal audit function, as
well as its operational risk group, have each recently completed, coupled with the
separate independent examinations recently conducted by the federal banking
regulators, are sufficient to address the concerns raised in the proposal. As such,
our Board believes that an additional independent review of the Companys
mortgage servicing operations would not be an efficient use of the Companys
resources and could distract the Companys efforts to cooperate with the reviews
being made by its regulators.
Accordingly, the Board recommends that you vote AGAINST this
proposal.

10
After Rejecting Shareholder Demands for an Interim Review the Board Awards Executives
11 $53 Million in Incentive Awards
12

150.

Notwithstanding the Boards recommendation to shareholders to vote AGAINST the

13 proposals made by institutional investors that the Audit Committee conduct an internal investigation
14 into the Companys foreclosure practices, the Board and specifically the Human Resources
15 Committee voted to approve millions in bonuses to defendants Stumpf, Atkins and other Company
16 executives. For fiscal year 2010, the Company paid its top five executives (including defendants
17 Stumpf and Atkins) over $53,435,000 in compensation which included $9,935,000 in bonuses
18 (Annual Incentive Awards) and $28,000,000 in Long-Term Equity Incentive Award:
19
20
21
22
23
24
25
26

Named Executive
John G. Stumpf
Howard I. Atkins
David A. Hoyt
Mark C. Oman
Carrie L. Tolstedt
TOTAL
151.

Base Salary
($)
2,800,000
1,700,000
2,000,000
2,000,000
1,700,000
9,200,000

Annual
Incentive Long-Term Equity Total 2010
Award
Incentive Award
Pay
($)
($)
($)
3,300,000
11,000,000 17,100,000
1,700,000
5,500,000
8,900,000
2,000,000
6,500,000 10,500,000
1,500,000
5,000,000
8,500,000
1,235,000
5,500,000
8,435,000
9,935,000
28,000,000 53,435,000

According to the Companys Proxy Statement, these executives (including defendants

27 Stumpf and Atkins), were awarded bonuses for 2010 based on, among other things, the strong
28
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1 financial performance of the Company for 2010 which included record net income for 2010 and by
2 exceeding target performance measures which included exceeding an EPS of at least $1.43.
3

152.

The executive compensation for these executives was recommended by the Human

4 Resources Committee of the Board (in its capacity as the compensation committee) which included
5 defendants, Sanger (Chair), Chen, Engel, James, McCormick and McDonald and approved by the
6 Board. The Board and the Human Resources Committee remarkably explained that the basis for the
7 awards were in part due to defendants Stumpf and Atkins guidance of the Company through the
8 financial crisis, risk management and credibility with the investment community. The Board,
9 through its comments and recommendations in the proxy statement, virtually endorsed the
10 misrepresentations of both defendants Stumpf and Atkins concerning the submission of phony
11 affidavits, further evidencing their inability to consider a demand in a disinterested fashion:
12
13
14
15
16
17
18

In determining 2010 annual incentive awards for the named executives, the
HRC considered information pertaining to the factors described above under
Compensation Program Governance.
*

Stumpf.
In making the 2010 annual incentive compensation award
determination for Mr. Stumpf, the HRC considered, among other factors, the
following:
the Companys record 2010 net income of $12.4 billion, EPS of $2.21 . . . ;
the Companys relative performance versus the Financial Performance Peer
Group . . .;

19
*

20
21
22
23

positioning the Company for future success following the financial crisis and
regulatory reform;
*

the Boards assessment of Mr. Stumpfs success in achieving his qualitative


performance objectives.

24
25
26
27

. . . In 2010, Mr. Stumpfs leadership was critical to achieving success in


strategic imperatives related to merger integration and cultural assimilation,
enhanced relationships with government agencies, communities and investors, and
financial success without jeopardizing our risk management principles. Upon
consideration of Mr. Stumpfs performance, including the factors set forth above, the
HRC recommended, and the Board approved, a 2010 annual incentive compensation
award for Mr. Stumpf of $3.3 million.

28
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1
2
3

Atkins.
In making the 2010 annual incentive compensation award
determination for Mr. Atkins, the HRC considered, among other factors, the
following:

4
5

Filed09/12/11 Page80 of 108

the recommendations of Mr. Stumpf based on his assessment of Mr. Atkins


2010 performance.

6
7
8
9
10

Mr. Atkins continued to provide the Company excellent financial leadership


in 2010. His leadership was a significant factor in the Companys financial success
and rigorous stewardship of our stockholders investments. Mr. Atkins also was a
primary spokesman for the Company with investors and his relationships and
credibility with the investment community were important for the Companys
financial success in 2010. Upon consideration of Mr. Atkins performance,
including the factors set forth above, the HRC approved a 2010 annual incentive
compensation award for Mr. Atkins of $1.7 million.

11 Investigations by the Federal Reserve System, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, and the Office of Thrift Supervision MERS Also
12 Enters Into Consent Order
13

153.

On March 31, 2011, Wells Fargo entered into a Stipulation and consent to the

14 Issuance of a Consent Order issued by the OCC. The OCC found that the Company had engaged in
15 unsound or unsafe banking practices related to its residential loan servicing and mortgage
16 foreclosure processing.
17

154.

On April 13, 2011, the results of the OCCs review and findings were made public in

18 the fully-executed Consent Order. This Consent Order states [t]he OCC has identified certain
19 deficiencies and unsafe or unsound practices in residential mortgage servicing and in the Banks
20 initiation and handling of foreclosure proceedings.
21

155.

22

(1)
The Bank is among the largest servicers of residential mortgages in the
United States, and services a portfolio of 8,900,000 residential mortgage loans.
During the recent housing crisis, a substantially large number of residential mortgage
loans serviced by the Bank became delinquent and resulted in foreclosure actions.
The Banks foreclosure inventory grew substantially from January 2009 through
December 2010.

23
24

With respect to the Companys Wells Fargo Bank, N.A., the OCC found as follows:

25
26
27
28
650452_1

(2)
In connection with certain foreclosures of loans in its residential mortgage
servicing portfolio, the Bank:
(a)
filed or caused to be filed in state and federal courts affidavits
executed by its employees or employees of third-party service providers
making various assertions, such as ownership of the mortgage note and
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mortgage, the amount of the principal and interest due, and the fees and
expenses chargeable to the borrower, in which the affiant represented that
the assertions in the affidavit were made based on personal knowledge or
based on a review by the affiant of the relevant books and records, when, in
many cases, they were not based on such personal knowledge or review of
the relevant books and records;

2
3
4

(b)
filed or caused to be filed in state and federal courts, or in local land
records offices, numerous affidavits or other mortgage-related documents
that were not properly notarized, including those not signed or affirmed in
the presence of a notary;

5
6
7

(c)
litigated foreclosure proceedings and initiated non-judicial
foreclosure proceedings without always ensuring that either the promissory
note or the mortgage document were properly endorsed or assigned and, if
necessary, in the possession of the appropriate party at the appropriate
time;

8
9

(d)
failed to devote sufficient financial, staffing and managerial resources
to ensure proper administration of its foreclosure processes;

10
11

(e)
failed to devote to its foreclosure processes adequate oversight,
internal controls, policies, and procedures, compliance risk management,
internal audit, third party management, and training; and

12
13

(f)
failed to sufficiently oversee outside counsel and other third-party
providers handling foreclosure-related services.

14
156.

15

On behalf of Wells Fargo, the Stipulation which included a waiver by the Company

16 to contest the validity of the Consent Order and its findings was entered into by Wells Fargo
17 through its duly elected and acting Board of Directors and signed by David Hoyt, Wells Fargos
18 Senior Vice President, Wholesale Banking, Michael Loughlin, Wells Fargos Senior Vice President,
19 Chief Risk Officer; Marc C. Oman, Senior Vice President of Home and Consumer Finance; Stumpf,
20 CEO and Chairman of the Board; and Carrie Tolstedt, Senior Executive Vice President Community
21 Banking.
22

157.

Though the Consent Order required the Company to begin submitting its progress

23 report and remediation plans to the OCC within 90 days of the date of the Consent Order. It has
24 been reported that none of those deadlines have been met and haven been extended.4
25
26

On September 2, 2011, counsel for lead plaintiffs wrote to counsel for Wells Fargo and the
individual defendants requesting confirmation of reports that Wells Fargo had not yet supplied the
27 OCC with action plans required by the March 31, 2011 Consent Order. Counsel for the individual
defendants responded that she could not confirm nor deny the reports.
28
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158.

Filed09/12/11 Page82 of 108

Under the terms of the Consent Order, Wells Fargo agreed to, among other things, (i)

2 to establish a Compliance Committee to monitor and coordinate the Companys compliance with the
3 Consent Order; (ii) to create a comprehensive remediation plan to achieve compliance with the
4 Consent Order; (iii) to submit an acceptable compliance plan to ensure that its mortgage servicing
5 and foreclosure operations, including loss mitigation and loan modification, comply with legal
6 requirements, OCC supervisory guidance, and the terms of the Consent Order; (iv) to submit a plan
7 to ensure appropriate controls and oversight of the Companys activities with respect to the MERS;
8 (v) to take certain other actions with respect to its mortgage servicing and foreclosure operations;
9 and (vi) to conduct a foreclosure review through an independent consultant on certain residential
10 foreclosure actions. The OCC reserved the right to seek civil penalties against the Company.
159.

11

Even though the Board and the individual defendants had long known of the

12 Companys inadequate procedures, policies, resources, and controls pertaining to its default loan
13 management functions, they did not take corrective action until forced to do so pursuant to the OCC
14 Consent Order. Further, they have failed to compensate the Company for damages caused by their
15 wrongdoing and have refused to seek remedies against anyone else who was responsible for the
16 misconduct alleged herein.
17

160.

On April 13, 2011, Wells Fargo also entered into a Consent Order with the Board of

18 Governors of the Federal Reserve5 reciting, in part:


19

WHEREAS, the Bank and the OCC have entered into a consent order to
address areas of weakness identified by the OCC in residential mortgage loan
servicing, Loss Mitigation,6 foreclosure activities, and related functions;

20
21

WHEREAS, in the consent order, the OCC has made findings, which the
Bank neither admitted nor denied, that there were unsafe or unsound practices with
respect to the manner in which the Bank handled various foreclosure and related
activities. The OCCs findings also raised concerns that WFC did not adequately
assess the potential risks associated with these activities; . . .

22
23
24
5

25

In the Matter of Wells Fargo & Company, No. 11-025-B-HC, 1 (Apr. 13, 2011).

6
The Federal Reserve Consent Order defines Loss Mitigation to collectively mean
26 foreclosure
proceedings and loss mitigation activities involving nonperforming residential mortgage
loans,
including
related to special forbearances, repayment plans, modifications, short
27 refinances, short activities
sales, case-for-keys, and deeds-in-lieu of foreclosure.

28
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161.

Filed09/12/11 Page83 of 108

The Federal Reserve Consent Order requires that the Board ensure the Companys

2 compliance with the OCC Consent Order and to submit to the Federal Reserve within 60 days:
3

(a)
a written plan to strengthen the boards oversight of WFCs enterprise-wide risk
management (ERM), internal audit, and compliance programs concerning the residential
mortgage loan servicing, Loss Mitigation, and foreclosure activities conducted through the
Bank;

4
5

(b)
an acceptable written plan to enhance its ERM program with respect to its oversight
of residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and
operations;

6
7

(c)
an acceptable written plan to enhance its enterprise-wide compliance program
(ECP) with respect to its oversight of residential mortgage loan servicing, Loss Mitigation,
and foreclosure activities and operations; and

8
9

(d)
an acceptable written plan to enhance the internal audit program with respect to
residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and
operations.

10
11

162.

On April 13, 2011, MERSCORP and MERS entered into a stipulation and consent to

12
the issuance of a Consent Order with the OCC, the Board of Governors, the FDIC, the OTS and
13
FHFA. The agency findings included that MERS and MERSCORP engaged in unsafe and unsound
14
practices that exposed them and the examined members, including Wells Fargo, to unacceptable
15
operational, compliance and legal reputational risks. The stipulation was signed by each of the
16
members of the Board of Directors of MERS, including Joe Jackson, MERS Board member, and
17
Senior Vice President of Wells Fargo. The MERS Consent Order made the following findings of
18
fact:
19
(1)

MERS is a wholly-owned subsidiary of MERSCORP. MERSCORPs


shareholders include federally regulated financial institutions that own and/or
service residential mortgages, including Examined Members, and other
primary and secondary mortgage industry participants.

(2)

MERSCORP operates a national electronic registry that tracks beneficial


ownership interests and servicing rights associated with residential mortgage
loans and any changes in those interests or rights. There are approximately
5,000 participating Members, of which 3,000 are residential mortgage
servicers. Members register loans and report transfers, foreclosures, and other
changes to the status of residential mortgage loans on the MERS System.
There are currently approximately 31 million active residential mortgage
loans registered on the MERS System. Examined Members receive a
substantial portion of the services provided by MERSCORP and MERS.

(3)

MERS serves as mortgagee of record and nominee for the participating


Members in local land records. MERS takes action as mortgagee through
documents executed by certifying officers of MERS. MERS has designated

20
21
22
23
24
25
26
27
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these individuals, who are officers or employees of Members or certain thirdparties who have contractual relationships with Members, as officers of
MERS. By virtue of these designations, the certifying officers execute legal
documents in the name of MERS, such as mortgage assignments and lien
releases.

2
3
4

Filed09/12/11 Page84 of 108

(4)

In connection with services provided to Examined Members related to


tracking, and registering residential mortgage loans and initiating
foreclosures (residential mortgage and foreclosure-related services), MERS
and MERSCORP:

6
(a)
have failed to exercise appropriate oversight, management
supervision and corporate governance, and have failed to devote adequate
financial, staffing, training, and legal resources to ensure proper
administration and delivery of services to Examined Members; and

7
8
9

(b)
have failed to establish and maintain adequate internal controls,
policies, and procedures, compliance risk management, and internal audit and
reporting requirements with respect to the administration and delivery of
services to Examined Members.

10
11
(5)

By reason of the conduct set forth above, MERS and MERSCORP engaged
in unsafe or unsound practices that expose them and Examined Members to
unacceptable operational, compliance, legal, and reputational risks.

163.

The Consent Order required MERS and MERSCORP to implement an action plan

12
13
14

and policies to ensure compliance with the law and quality assurance programs. In addition, the
15
agencies required that MERS maintain adequate litigation reserves. It has been suggested that Wells
16
Fargo, and the members of MERS will bear the cost of compliance with the Consent Order and
17
maintaining litigation reserves.
18
164.

On May 5, 2011, the Company filed its Form 10-Q for 1Q11, announcing it had

19
increased its litigation loss reserve to $1.7 billion. The Form 10-Q further confirmed that the
20
investigations by the state attorneys general and the U.S. Department of Justice were still ongoing
21
and could result in significant fines and civil penalties.
22
Government Investigations Fall Well Short of Examining the Full Extent of Well Fargos
23 Fraudulent Conduct of Robo-Signing Wells Fargo Accused of Stonewalling Government
Inquiries
24
165. On May 17, 2011, Sense on Cents issued an article entitled, Sense on Cents Calls
25
Out Jamie Dimon, Vikram Pandit, Brian Moynihan, Michael Carpenter, and John Stumpf. The
26
article emphasized that certain of the directors at these banks, including defendant Stumpf, were in
27
fact not cooperating with certain government inquiries:
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For those of us who embrace the virtues of truth, transparency, and integrity,
I have little interest in allowing the assaults on our fellow citizens to pass without
greater attention and focus. On that note, lets navigate and highlight the findings of
The New York Times fabulous journalist Gretchen Morgenson (a surefire first ballot
inductee into the Sense on Cents Hall of Fame) as she recently detailed how the Wall
Street banks would care to make A Low Bid for Fixing a Big Mess:

2
3
4

5
Clifford J. White III, director of the executive office of the United
States Trustee, discussed some of the findings in an interview last week. But
before we recount the ugly details, its worth noting the immense pushback
the banks have mounted against the trustee office.

6
7
8

Banks have repeatedly tried to thwart the programs actions, filing


lawsuits and court motions to prevent officials from compiling evidence.
Never mind that part of a trustees job is to investigate possible
improprieties in foreclosures to determine if they are poisoning the
bankruptcy system.

9
10
11

We have faced consistent opposition by all of the major servicers,


Mr. White said. We are currently facing 200 motions to quash our
discovery requests. We also are facing upwards of 20 appeals either in
district courts or in circuit courts.

12
13

Those pushing back include Bank of America, Citigroup, G.M.A.C.,


JPMorgan Chase and Wells Fargo, he said.

14

The banks typically make two arguments. First, they say the trustee
program has no legal standing to delve into individual cases between lenders
and borrowers because it is not a party to these disputes. Every court has
rejected this claim. Nonetheless, the tactic has allowed servicers to stall
trustees discovery requests.

15
16
17

In other cases, the banks agree to turn over information in specific


matters of interest to the trustee program but refuse to provide details on
their overall policies and procedures, which could show deep and systemic
flaws.

18
19
20

21
There are continued flaws in the process, and they are not merely
technical, Mr. White continued. Those flaws undermine the integrity of the
bankruptcy system. Many homeowners have been harmed, including where
the lender has come in and said we want to lift the stay and go back into
foreclosure proceedings, even though they lacked a sufficient basis to do it.

22
23
24
166.

In a release from the House Committee on Oversight of Government Reform, it was

25
revealed that as of May 24, 2011, Wells Fargo, despite having admitted to wrongdoing with respect
26
to robo-signing had failed to produce documents requested by Congress to aid in its investigation of
27
issue:
28
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Six out of ten companies are concealing documents form Congress


relating to illegal foreclosures and inflated fees:

2
3
4

. . . Today Oversight Committee Ranking Member Elijah E. Cummings sent a


letter to Chairman Darrell Issa requesting that the Committee issue subpoenas to six
mortgage servicing companies that have refused to provide documents relating to
illegal foreclosures, inflated fees, and other abuses relating to millions of families
losing their homes.

5
6
7

The foreclosure crisis has had devastating consequences for communities


across the country and continues to threaten our nations economic recovery, drain
state and local budgets, and displace families, said Ranking Member Cummings.
The banks have admitted wrongdoing, and yet they are now refusing to provide
Congress with documents that are critical to our investigation.

8
9
10

In February, Ranking Member Cummings sent letters to ten of the nations


largest mortgage servicing companies seeking documents relating to allegations of
wrongful foreclosures against military servicemembers and their families, robosigning of foreclosure documents filed with courts, inflated fees, fraud, deficient
recordkeeping, and other deceptive practices.

11

14

Four companies have begun to respond to these requests, but the remaining
six - MetLife, Inc.; SunTrust Banks, Inc.; PHH Mortgage; U.S. Bank, N.A.; Wells
Fargo and Company; and Bank of America Home Loans have failed to provide
any requested documents despite efforts to obtain their voluntary compliance. One
company, MetLife, Inc., explained in its letter that it would not provide requested
documents unless it was subject to subpoena.

15

167.

12
13

On May 26, 2011, a Los Angeles Times article, titled Scrutiny of the home seizures

16 grows; The state subpoenas a Florida firm that handles foreclosures for many major banks,
17 discussed the subpoenas and described Wells Fargos retention of Lender Processing Services in
18 California to file and record document to facilitate foreclosures:
19
20
21
22

California Atty. Gen. Kamala D. Harris is investigating an obscure Florida


firm that processes foreclosures for many of the nations major financial institutions,
as she intensifies her examination of repossession practices in the Golden State.
The states top law enforcement officer subpoenaed Lender Processing
Services Inc. of Jacksonville, Fla., a company that handles loans in default on behalf
of several major banks. The subpoena requires LPS to produce documents and
provide written answers to questions from the attorney generals office by June 24.

23
*

24
25
26
27

As part of an investigation into so-called robo-signing, Harris said she was


investigating whether employees of the company fraudulently signed key foreclosure
documents in California. LPS processes more than 50% of all mortgages in the
United States and has contracts with more than 80 financial institutions, she said.
*

28
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But Wednesday, Harris emphasized that California homeowners may have


fallen victim to robo-signers who didnt verify the accuracy of the documents they
were putting their names on and, in some cases, failed even to read the documents.
Often, individuals signed thousands of times a day, she said.

3
4

California homeowners have been exposed to fraud and crime at every


step of the mortgage process, Harris said.

5
6
7
8

Although courts in California do not oversee the foreclosure process,


certain key legal documents are necessary to take back a home. One such
document is the notice of default, which initiates the foreclosure process and must
be notarized and then filed at county recorders offices. Another key document
necessary for foreclosure is the assignment of the deed of trust, the legal term for a
mortgage, which proves that a financial institution has the right to foreclose.

9
10
11
12
13
14

LPS was used by many of the largest mortgage lenders and servicers in the
country, and former LPS employees have testified that documents were robo-signed
there, Harris said in a statement Wednesday. The company has several offices in
California.
All the states are facing a similar issue: whether questionable practices were
used to prepare, sign and notarize official foreclosure documents, said Frances
Grunder, senior assistant California attorney general. In California, foreclosure
information must be accurate, verified and properly notarized because these
documents are used to foreclose on peoples homes. The issue is whether those
laws were followed here.

15
168.

In June 2011, Mortgage Servicing News issued an article about a Regulatory Order

16
concerning MERS. Notably, one commentator noted that the reforms required to be done by MERS
17
would be expensive and that expense would be borne by its members, including Wells Fargo:
18
19
20
21
22
23
24
25
26
27

To many in the industry, federal regulators just gave Mortgage Electronic


Registration Systems a big stamp of approval.
In a recent consent order, regulators never questioned the underlying
business model of Merscorp Inc., whose private loan registry has become a lightning
rod for foreclosure litigation. (Related stories, pages 10 and 29.)
The Office of the Comptroller of the Currency did not even attempt to
address the controversy being litigated in hundreds of courts across the country:
Does MERS have the legal right to foreclose on a borrower?
*

Regulators also did not question the validity of allowing hundreds of bank
employees to be designated as certifying officers of MERS-an issue plaintiffs
lawyers maintained amounts to its own robo-signing scandal. Such certifying
officers will have to be identified and tracked, but they can still sign legal
documents such as mortgage assignments and lien releases in MERS name,
regulators said.

28
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MERS did not come out of the regulators examination completely


unscathed. Given that 31 million residential mortgage loans are recorded on the
MERS system, ensuring the accuracy and reliability of data reported by the
servicers will be a significant challenge. Banks are particularly spooked by
regulators requirements that MERS maintain adequate reserves for contingency
risks and liabilities.

5
*

6
7
8
9

Marshall said the 14 largest bank servicers face substantial costs


complying with their own consent orders and getting MERS in compliance.
The Reston, Va., company must hire significantly more staff, get its
finances in order and comply with third-party audits and added scrutiny (where
none existed before) from its 25 shareholders, including B of A, Wells Fargo &
Co., JPMorgan Chase & Co., Fannie Mae and Freddie Mac.

10

12

The staffing, reviews and audits will be costly, Marshall said. MERS will
pay for it presumably by assessing its members. (MERS revenue comes solely from
its 2,184 active members, which pay annual fees determined by their size and
transaction fees for loan registration.).

13

169.

11

On July 11, 2011, The Huffington Post published an article entitled As Government

14 Nears Accord With Banks, Questions Swirl Over Scope of Investigation strongly suggesting that
15 despite state and federal prosecutors efforts to complete a proposed settlement of approximately $30
16 billion with the nations five largest home loan companies, including Wells Fargo, over alleged
17 mortgage abuses, the underlying state and federal probes tied to the settlement have been extremely
18 limited and havent examined the full extent of the alleged wrongdoing. The article stated, in part:
19
20
21

The investigators have yet to gather many documents, conduct depositions


or assemble tallies of aggrieved homeowners. They dont yet have a good handle
on the number of wrongful foreclosures, the amount of fraudulent documents filed
in local courts or the volume of legal instruments processed by so-called robosigners, the agents that lenders employed to process foreclosure filings en masse
without examining the underlying paperwork.

22
23
24
25
26
27

The evidence a prosecutor would use is not in the possession of the prosecution,
said one person familiar with the ongoing settlement talks.
*

According to people familiar with the findings, that evidence includes:


- Two sets of confidential reports one of which was first reported by The
Huffington Post that accuse the five companies of defrauding taxpayers on
government-insured mortgages and violating the False Claims Act, a Civil War-era
law crafted as a weapon against firms that swindle the government, because defective

28
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foreclosures, reckless underwriting, flawed quality controls and inadequate


foreclosure prevention led to taxpayer losses.

2
3

- Findings from the Justice Departments U.S. Trustee Program, a unit overseeing the
integrity of bankruptcy courts, that show mortgage servicers filed inaccurate claims
in as many as 10 percent of bankruptcy cases.

4
5

- Undisclosed multi-state audits of state-regulated mortgage servicers like Ally,


which found egregious violations of consumer protection laws.

6
7

The Justice Departments bankruptcy unit only reviewed a limited number of


loans that even entered bankruptcy . . . .

8
9
10
11
12

The federal bank regulators review examined just 2,800 loan files, or 0.001
percent of homes that received a foreclosure filing last year, according to
calculations made using data from the Office of the Comptroller of the Currency and
RealtyTrac, a data provider. Only about 200 loans each were examined at banking
behemoths JPMorgan, Bank of America, Citi and Wells, Julie L. Williams, the No.
2 official at the OCC and the agencys chief counsel, told a House panel last
Thursday. Those four firms collectively service $5.7 trillion in home loans, or about
54 percent of all outstanding residential mortgages, according to Inside Mortgage
Finance.

13
170.

The Huffington Post article also noted that several state task forces that had been

14
designed to investigate Well Fargos fraudulent conduct had been eliminated due to ongoing budget
15
constraints:
16
17
18
19
20

On May 23, Kamala Harris, the attorney general of California, flanked by


advocates, homeowners, the mayor of Los Angeles and HUD representatives,
announced the formation of a Mortgage Fraud Strike Force designed to protect
borrowers and investors in her state, the nations largest housing market. California
ranked third last year on the Mortgage Asset Research Institutes Mortgage Fraud
Index.

22

But Harris announced last week that the special unit will likely lose its
investigative abilities, a consequence of a debilitating $71 million budget cut. Her
office will lose the ability to follow up on open investigations ranging from
foreclosure scams to multi-million dollar corporate fraud, she said in a
statement.

23

171.

21

On July 15, 2011, The Huffington Post published an article entitled Elizabeth

24 Warren: Government Hasnt Sufficiently Probed Foreclosure Abuses reporting that Elizabeth
25 Warren, a senior adviser to President Barack Obama and Treasury Secretary Timothy Geithner, told
26 a congressional panel that government agencies may not have sufficiently investigated claims that
27 borrowers homes were illegally seized by banks such as Wells Fargo:
28
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I think theres a real question about whether theres been adequate


investigation, said Warren, the temporary custodian of the Bureau of Consumer
Financial Protection, a new federal agency charged with protecting borrowers from
abusive lenders.

3
Despite Several Investigations Evidence Suggests that Wells Fargo Continues to Commit a Fraud
4 Upon the Court by Engaging in the Fraudulent Business Practice of Robo-Signing
5

172.

On July 18, 2011, Reuters published an article entitled Special report: Banks

6 continue robo-signing reporting that Wells Fargo was among a handful of banks that continued to
7 engage in the fraudulent practice of robo-signing. The article stated, in part:
8
9
10

Federal bank regulators signed settlements in March with 14 loan servicers


banks and other companies that perform tasks for mortgage investors such as
collecting payments from homeowners and when necessary, filing to foreclose. The
14 firms promised further internal investigations, remediation for some who were
harmed and a halt to the filing of false documents. All such behavior had stopped by
the end of 2010, they said.

11
12

Of these companies, Reuters has found at least five that in recent months
have filed foreclosure documents of questionable validity: OneWest, Bank of
America, HSBC Bank USA, Wells Fargo and GMAC Mortgage.

13
*

14
15
16
17
18

Reuters reviewed records of individual county clerk offices in five states


Florida, Massachusetts, New York, and North and South Carolina with searchable
online databases. Reuters also examined hundreds of documents from court case
files, some obtained online and others provided by attorneys.
The searches found more than 1,000 mortgage assignments that for multiple
reasons appear questionable: promissory notes missing required endorsements or
bearing faulty ones; and complaints (the legal documents that launch foreclosure
suits) that appear to contain multiple incorrect facts.

19
20

These are practices that the 14 banks and other loan servicers said had
occurred only on a small scale and were halted more than six months ago.

21

173.

On July 19, 2011, The Associated Press published an article entitled Lawmakers call

22 for hearings on robo-signing reporting that the practice of robo-signing is still a widespread
23 problem throughout the mortgage industry. The article stated, in part:
24
25
26
27
28
650452_1

Lawmakers and enforcement agencies called for hearings and further


investigation Tuesday after learning that the illegal practice known as robo-signing
has continued in the mortgage industry.
*

Sen. Sherrod Brown, D-Ohio., chair of the Financial Institutions and Consumer
Protection Subcommittee, said the subcommittee will hold a hearing on the robosigning issue.
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Wall Street and some in Washington want us to believe that robo-signing


is a thing of the past, said Brown. But the same risky practices that put our
economy on the brink of collapse continue to infect the housing market.
Rep. Maxine Waters, D-Calif., a senior member of the House Committee on
Financial Services said the lenders who continue the practice need to be
investigated and prosecuted. She told The Associated Press that she believed
regulators should step in and that the absence of stronger regulation is the reason
why the system broke down in the first place. She said the county officials
findings show lenders will not stop practices like robo-signing on their own.

6
7

(The lenders) have complete disregard for the damage they have already
caused and have no intention of changing their ways, said Waters, who also called
for more hearings on the issue.

8
9

County officials who are responsible for keeping land records, including
property deeds, say that they have received thousands of robo-signed documents filed
in their offices since October.

10
11

In Essex County, Mass., the office that handles property deeds has received
almost 1,300 documents since October with the signature of Linda Green, but in 22
different handwriting styles and with many different titles.

12
Wells Fargo Pays $85 Million Penalty and Enters into Consent Order to Resolve Allegations to
13 Predatory Lending and Steering Prime Qualified Loan Applicants Into Subprime Loans Altering
Loan Documents
14
174. On July 20, 2011, Wells Fargo & Company and Wells Fargo Financial, Inc. entered
15
into an Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon
16
Consent (the July 20 Consent Order) with the Board of Governors of the FRB which resolved an
17
investigation of Wells Fargo Financials mortgage lending activities by the FRB. In particular, the
18
Board of Governors found that Wells Fargo, through its employees, has altered and falsified loan
19
documents, which help increase sales staff income and steered prime borrowers into subprime
20
mortgages:
21
WHEREAS, in recognition of the common goals of the Board of Governors
22
of the Federal Reserve System (the Board of Governors), Wells Fargo &
Company, San Francisco, California (Wells Fargo), and its subsidiary, Wells Fargo
23
Financial, Inc., Des Moines, Iowa (Financial), each a bank holding company as
defined in the Bank Holding Company Act, 12 U.S.C. 1841 et. seq. (BHC Act),
24
to ensure compliance by the consolidated Wells Fargo organization with applicable
federal and state laws, rules and regulations related to home mortgage lending, and
25
effective management of the legal, reputational, and compliance risks of the
consolidated Wells Fargo organization associated with home mortgage lending, the
26
Board of Governors, Wells Fargo, and Financial have mutually agreed to enter into
this combined Order to Cease and Desist and Order of Assessment of a Civil Money
27
Penalty Issued Upon Consent (the Order);
28
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3
4
5
6
7

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WHEREAS, this Order is issued with respect to the following allegations:


A.
During the period from at least January 2004 to the Reorganization (the
Relevant Period), Financials business model with respect to home mortgage
lending was to sell debt consolidation, cash-out refinance loans at sub-prime rates
(nonprime loans) to customers principally through a network of more than 800
offices located throughout the United States, called stores. The principal marketing
method was sales personnel making outbound, unsolicited telephone calls to
individuals who had some existing customer relationship with Financial. Under
Financials underwriting process, the sales personnel were responsible for obtaining
income-related documents (such as pay stubs and W-2 forms) and forwarding them
to Financials centralized underwriting centers. Financial typically did not require
that borrowers fill out and sign loan applications that included the borrowers
representation of his or her income.

8
*

9
Income Document Alteration or Falsification
10
11
12

D.
Financials internal controls were not adequate to detect and prevent instances
when certain of its sales personnel, in order to meet sales performance standards and
receive incentive compensation, altered or falsified income documents and inflated
prospective borrowers incomes to qualify those borrowers for loans that they
would not otherwise have been qualified to receive.

13

17

E.
During the Relevant Period, particular instances of customer income
document alteration or falsification by individual Financial sales personnel came
to the attention of Financials compliance officers. The compliance officers
investigated the particular instances brought to their attention and disciplinary action
was taken against certain individual sales personnel if their involvement in income
document alteration or falsification was admitted or otherwise proven. In mid-2008,
Financial took steps to improve its internal controls that made it more difficult for
sales personnel to alter or falsify income-related documents.

18

Steering Potential Prime Borrowers Into Nonprime Loans

19

F.
In or around August 2005, in response to public and regulatory criticism,
Financial initiated a process, referred to as the A-Paper Filter, to provide prime
pricing to customers for qualifying debt consolidation cash-out refinancing mortgage
loans. Initially, if a transaction passed the filter and a further underwriting process,
the customer would be offered prime pricing from Financial. Beginning in or around
February 2006, the A-Paper Filter was modified so that customers with potentially
qualifying transactions instead would be referred to Financials affiliate, Wells Fargo
Home Mortgage (Home Mortgage), which would determine the customers
eligibility for prime pricing and, if eligible, originate the prime priced home
mortgage loan. At approximately the same time, Financial revised its performance
standards and compensation programs so that it generally was less advantageous for
sales personnel to sell a prime loan to the customer than a nonprime loan.

14
15
16

20
21
22
23
24
25
26
27
28
650452_1

G.
As a result of the modifications and revisions, some customers during the
Relevant Period who may have qualified for a prime priced home mortgage loan at
Financial or through referral to Home Mortgage were sold loans by sales
personnel priced at nonprime rates, primarily through upselling prospective
borrowers so that the borrowers requested cash-backloans that were sufficiently
large that the borrowers transactions no longer qualified for prime pricing. While the
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customers received disclosures regarding the nonprime rates they were being
charged, the customers were not advised that they may have qualified for prime
priced loans or that it was generally more advantageous for the salesperson to sell
a nonprime, rather than a prime, loan.

3
4

H.
Financials internal controls, including controls relating to Financials sales
performance standards and compensation programs, were not adequate to detect and
prevent incidents of evasion of the A-Paper Filter by Financial sales personnel.

5
I.

Deficiencies specified in paragraphs D. through H. above resulted in:

6
a.

Unsafe or unsound banking practices;

7
8
9

b.
Unfair or deceptive acts or practices within the meaning of section
5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. 45(a)(1);

10

c.
Violations of various state laws pertaining to fraud and false or
misleading statements in home mortgage loan-related documents, and to unfair or
deceptive acts or practices.

11

175.

The July 20 Consent Order provides, among other things, that (i) Wells Fargo shall

12 submit to the FRB within 90 days of the July 20 Consent Order a plan, acceptable to the FRB, for
13 overseeing fraud prevention and detection and for compliance with certain federal and state laws
14 applicable to unfair and deceptive practices and certain other laws applicable to mortgage lending;
15 (ii) Wells Fargo shall submit to the FRB within 90 days of the July 20 Consent Order a plan,
16 acceptable to the FRB, for overseeing the implementation and modification of incentive
17 compensation and performance management programs for sales, sales management and underwriting
18 personnel with respect to mortgage lending within the Wells Fargo organization; (iii) Wells Fargo
19 shall submit within 90 days of the July 20 Consent Order a plan, acceptable to the FRB, for the
20 remediation to borrowers who entered into loans with Wells Fargo Financial beginning January 1,
21 2004 through September 2008 where the loans were based on income documents that were altered or
22 falsified by sales personnel; (iv) Wells Fargo shall submit within 90 days of the July 20 Consent
23 Order a plan, acceptable to the FRB, for the remediation to borrowers who received mortgage loans
24 through Wells Fargo Financial at non-prime prices during the period from January 1, 2006 through
25 September 2008, but whose mortgage loans may have qualified for prime pricing. In addition to
26 these provisions to submit plans for compliance and compensation changes and for remediation
27 payments to certain Wells Fargo Financial borrowers, the July 20 Consent Order imposes a civil
28 money penalty of $85 million on Wells Fargo.
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On July 21, 2011, according to reports from Reuters, and in conjunction with the

2 April 13, 2011 Consent order between MERS and the OCC, MERS adjusted its operating procedures
3 disallowing its service members from filing assignments and foreclosure documents in court in the
4 name of MERS. This adjustment will indeed increase the costs associated with conducting
5 foreclosures:
6

Facing Criticism, MERS Cuts Role in Foreclosures

Wed, Jul 27 2011


By Scot J. Paltrow

8
9

NEW YORK (Reuters) MERS, the electronic mortgage registry that faces
multiple investigations for its role in thousands of problematic foreclosure cases,
changed its rules to lower its profile in court-supervised foreclosures.

10
*

11
12
13

In rule changes announced to MERS members on July 21, the company


forbade members to file any more foreclosure actions in MERSs name.
It also required mortgage servicers to obtain mortgage assignments and
record them with county clerks before beginning foreclosures.

14
15

Mortgage-loan servicers perform routine duties for the investment trusts that
own pools of mortgages, including collecting mortgage payments and, when
necessary, filing foreclosures.

16
17
18
19
20
21
22
23
24
25
26
27
28
650452_1

Although these trusts are legally required to own the mortgages when they
file to foreclose, the servicers in many cases did not obtain documents known as
assignments on their behalf until weeks or months after launching a foreclosure
action in court, a recent Reuters Special Report found. (link.reuters.com/kyb72s)
Since the collapse of the housing boom, many foreclosure cases were filed in
MERSs name, even though the registry doesnt really own either the mortgage or
the promissory note, the document which states the terms of the mortgage loan.
MERSs role in foreclosure cases has made it a lightning rod in recent months
in court decisions which have held that loan servicers use of the registry violates
basic real estate and mortgage laws.
*

Under the new rules, servicers are required to stop filing foreclosures in
MERSs name, but MERSs role in foreclosures wont actually be eliminated. The
servicers will continue to obtain the needed mortgage assignments from MERS. In
past cases examined by Reuters, such assignments have included ones of
questionable legitimacy, such as mortgages owned by now-defunct lenders.
O. Max Gardner III, a North Carolina lawyer who is specialist in foreclosure
actions in bankruptcy courts, said the change will have the effect of making MERSs
role in assigning mortgages invisible in court.
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The assignments will still come from MERS, but they just wont be in the
court files any more, he said.

2
3
4
5

MERS spokeswoman Janice Smith said the new rules make mandatory a
trend that already was under way.
She noted that Fannie Mae, Freddie Mac and several large banks already had
stopped filing foreclosures in MERS name. Smith said the change would avoid
confusing homeowners facing foreclosure by eliminating MERS, a company they
had never heard of, from court documents.

6
7

She also said that MERSs original purpose was to keep track of changes in
servicers and mortgage ownership. Foreclosure really was not central to MERSs
core business, she said, adding that MERS received no income from foreclosures.

8
9
10
11
12
13
14
15
16

Mortgage-law specialists say that lenders and servicers for a long time relied
heavily on bringing foreclosures in MERSs name. This helped make possible
foreclosures that otherwise might not have taken place because the necessary original
documents were missing.
MERS says that it is the holder of record of 32 million, or 60 per cent, of U.S.
mortgages. But it has only a handful of employees. Instead, it has designated some
20,000 employees of banks and other servicers as MERS officers.
Some courts and homeowners lawyers have criticized this system because in
effect it enables servicers to assign mortgages to themselves whenever they needed
one to foreclose.
The rule change also comes amid a growing movement against MERS among
county clerks around the U.S. They have been pressing state attorneys general and
local prosecutors to investigate MERS for allegedly failing to record documents with
them and pay the associated filing fees.

17
177.

On August 5, 2011, the Company filed its Form 10-Q for 2Q11, announcing that the

18
Companys liability for probable and estimable losses related to litigation was $1.6 billion as of
19
June 30, 2011. The Form 10-Q also reported that the Company incurred $428 million of operating
20
losses in 2Q11, substantially all from litigation accruals for mortgage foreclosure-related matters.
21
The Form 10-Q further confirmed that the investigations by the state attorneys general and the U.S.
22
Department of Justice were still ongoing and could result in significant fines and penalties.
23
DAMAGE TO WELLS FARGO
24
178.

During the Relevant Period, Wells Fargos directors and top officers have severely

25
injured Wells Fargo and exposed the Companys business, goodwill and reputation by breaching
26
their fiduciary duties of candor, loyalty and good faith, which has exposed Wells Fargo to massive
27
28
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1 fines, penalties and damages, while lining their own pockets with excessive salaries and other perks
2 not justified by Wells Fargos dismal financial performance while under their stewardship.
3

179.

By this action, plaintiffs seek to remedy defendants misconduct and recover damages

4 for Wells Fargo.


5

CONSPIRACY, AIDING AND ABETTING, AND CONCERTED ACTION

180.

In committing the wrongful acts alleged herein, defendants have pursued, or joined in

7 the pursuit of, a common course of conduct, and have acted in concert with and conspired with one
8 another in furtherance of their common plan or design. In addition to the wrongful conduct herein
9 alleged as giving rise to primary liability, defendants further aided and abetted and/or assisted each
10 other in breaching their respective duties.
11

181.

During all times relevant hereto, defendants, collectively and individually, initiated a

12 course of conduct that was designed to and did: (i) enhance the defendants executive and directorial
13 positions at Wells Fargo and the profits, power, and prestige that the defendants enjoyed as a result
14 of holding these positions; and (ii) deceive the public, including Wells Fargos shareholders, via
15 false and misleading statements regarding the defendants management of Wells Fargos financial
16 results and operations, and its future business prospects. In furtherance of this plan, conspiracy, and
17 course of conduct, defendants, collectively and individually, took the actions set forth herein.
18

182.

Each of the defendants aided and abetted and rendered substantial assistance in the

19 wrongs complained of herein. In taking such actions to substantially assist the commission of the
20 wrongdoing complained of herein, each defendant acted with knowledge of the primary wrongdoing,
21 substantially assisted the accomplishment of that wrongdoing, and was aware of his or her overall
22 contribution to and furtherance of the wrongdoing.
23
24

DERIVATIVE AND DEMAND FUTILITY ALLEGATIONS


183.

Plaintiffs bring this action for the benefit of Wells Fargo to redress injuries suffered,

25 and to be suffered, by Wells Fargo as a result of defendants violations of law, as well as the aiding
26 and abetting thereof. This action is not a collusive action designed to confer jurisdiction on a court
27 of the United States that it would not otherwise have. Wells Fargo is named as a nominal party in
28
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1 this action. Plaintiffs will adequately represent the interests of Wells Fargo in enforcing and
2 prosecuting their rights.
3

184.

The Wells Fargo Board at the time this action was initiated currently consisted of the

4 following 14 individuals: Stumpf, Baker, Chen, Dean, Engel, Hernandez, James, McDonald,
5 Milligan, Moore, Quigley, Runstad, Sanger and Swenson.
6

185.

Plaintiffs have not made a pre-suit demand on the Wells Fargo Board to bring these

7 derivative claims because such demand would be a futile and useless act and, therefore, is excused
8 for the reasons set forth above in 1-184 and below in 186(a)-(e).
9

186.

The members of the Board have presided over a business practice of policies and

10 procedures that is alleged and at times found and proven to prey upon those with the least amount of
11 leverage in order to expand profits. The Board all the while has permitted the Company and its
12 management to publicly deny facts it knew to be true and engage in public relations and litigation
13 strategizes designed to avoid responsibility and accountability for violations of both federal and state
14 laws.
(a)

15

A pre-suit demand on the Board is excused as a useless and futile act because

16 a majority of the Board is not independent. According to Wells Fargos Proxy Statement dated
17 March 21, 2011, the Company has already determined defendant Stumpf is not considered an
18 independent director, even as defined by the lenient NASDAQ rules. Moreover, many of Wells
19 Fargos directors and their business or family associates have had and still have loans or
20 commitments with the Company and its subsidiaries. In addition, the defendants have engaged in or
21 permitted the other defendants to engage in related-party transactions with Wells Fargo, including
22 the following:
23

(i)

Defendant Hernandez is Chairman, President, CEO and a director of

24 Inter-Con Security Systems, Inc. (Inter-Con). Defendant Hernandez owns a 26% interest in Inter25 Con. Since 2006, Wells Fargo has paid Inter-Con over $13.3 million in exchange for guard services
26 at certain of the Companys branches:
27

(ii)

Defendant Milligans brother has worked for Wells Fargo since 2004,

28 as a private client advisor. His salary for 2010 was $210,000; and
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(iii)

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Defendant Quigleys son has worked for Wells Fargo since 2006, as an

2 institutional relationship manager in the Companys Wholesale Banking Group. His salary for 2010
3 was $450,000.
4

(b)

All of the Board members at the time this action was initiated (defendants

5 Stumpf, Baker, Chen, Dean, Engel, Hernandez, James, McDonald, Milligan, Moore, Quigley,
6 Runstad, Sanger and Swenson) reviewed and caused to be filed the Companys 2010 and 2011 false
7 and misleading SEC filings detailed herein, which repeatedly failed to properly address and reveal
8 the true extent of Wells Fargos fraudulent foreclosure practices.
9

(c)

Of the current Board members, seven (defendants Baker, Dean, Hernandez,

10 Milligan, Moore, Quigley and Swenson) serve[d] on the Companys Audit and Examination
11 Committee during the Relevant Period. All of these members have been determined to be audit
12 committee financial experts as defined by SEC regulations. Under the Audit & Examination
13 Committees charter, each of these defendants was responsible for assisting the Board of Directors
14 in fulfilling its responsibilities to oversee Company policies and management activities related to . . .
15 internal controls, . . . operational risk and legal and regulatory compliance[.] These seven Board
16 members failed to properly discharge such duties, as discussed herein.
17

(d)

Of the current Board members, five (defendants Baker, Dean, Hernandez,

18 Milligan and Runstad) serve on the Corporate Responsibility Committee. Under this Committees
19 charter, each of these defendants was responsible for: overseeing the Companys policies,
20 programs, and strategies regarding social responsibility matters of significance to the Company and
21 the public at large, including the Companys community development and reinvestment activities
22 and performance, fair and responsible lending, government relations, support of charitable
23 organizations, and environmental issues; and, monitoring the Companys reputation and
24 relationships with external stakeholders regarding significant social responsibility matters, and
25 advis[ing] the Board and management on strategies that affect the Companys role and reputation as
26 a socially responsible organization[.] These defendants cannot impartially consider a demand
27 because they face a substantial likelihood of liability.
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(e)

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The Board has made a number of decisions that give rise to a reasonable doubt

2 that they are entitled to protection under the business judgment rule. Such decisions include, inter
3 alia, the Boards recommendation in the Companys March 21, 2011 Proxy Statement that the
4 Companys shareholders vote against Lius stockholder proposal and the reasons given therefore.
5 See 149. Additionally, the factual bases of these consent orders demonstrate that the Board was
6 unwilling to take any action to curtail the Companys fraudulent foreclosure practices until forced to
7 do so by the government. Further, the Board neither admitted nor denied the factual bases for such
8 orders, and declined to agree to or otherwise pursue pecuniary relief for the wrongdoing on behalf of
9 the Company, or agree that any of the persons responsible for the wrongdoing pay any financial
10 penalties to the government. The Boards unwillingness to seek compensatory redress for the
11 Company raises a reasonable doubt that its decisions to enter into the foregoing consent orders were
12 the products of valid business judgment.
13

187.

Members of the Board during the time period relevant to the Gutierrez, 730 F. Supp.

14 2d at 1124, approximately 2002-2007, and its litigation permitted and or approved the policies and
15 procedures found to have been violative of law. These directors include at least defendants Dean,
16 Engel, Hernandez, Milligan, Moore, Quigley, Runstad, Sanger and Swenson. On August 10, 2010,
17 Wells Fargo was found liable after a trial in the United States District Court for the Northern District
18 of California for fraudulent and unfair business practices under California Business and Professions
19 Code 17200, for, among other things, misleading its customers and engineering processes designed
20 to fraudulently maximize the overdraft fees collected from consumers for no purpose other than
21 profiteering. Gutierrez, 730 F. Supp. 2d at 1124. With respect to the Companys misleading
22 materials and inadequate disclosures, the Court noted Wells Fargos intent to hide its deceptive
23 practices:
24
25
26

Given the harsh impact of the banks high-to-low practices, the bank was obligated to
plainly warn depositors beforehand. Instead, the bank went to lengths to hide these
practices while promulgating a facade of phony disclosure. The banks own
marketing materials were deceptive in leading customers to expect purchases to be
debited in the order made (rather than to be resequenced in high-to-low order).

27 Id. at 1112-13.
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188.

Filed09/12/11 Page100 of 108

The Court went further, finding that Wells Fargos undisclosed overdraft sequencing

2 process constituted a gimmick and a trap to make profits off the backs of the working poor:
3
4
5

Wells Fargo constructed a trap a trap that would escalate a single overdraft into
as many as ten through the gimmick of processing in descending order. It then
exploited that trap with a vengeance, racking up hundreds of millions off the backs
of the working poor, students, and others without the luxury of ample account
balances.

6 Id. at 1119.
7

189.

Wells Fargo was enjoined from engaging in the practices alleged and ordered to pay

8 injunctive relief totaling approximately $200 million.


9

190.

On July 20, 2011, Wells Fargo and Company and its subsidiary, Wells Fargo

10 Financial Inc., Des Moines, Iowa, entered a Cease and Desist Order and Order of Assessment of
11 Civil Money Penalty Issued Upon Consent with the United States Board of Governors of the Federal
12 Reserve. See 174-175. The Consent Order resolved In the Matter of Wells Fargo & Company,
13 San Francisco, California, and Wells Fargo Financial Inc., Des Moines, Iowa, Nos. 11-094-B14 HC(1), Order to Cease and Desist and Order of Assessment of Civil Money Penalty Issued Upon
15 Consent (July 20, 2011). The Consent Order resolved conduct between at least 2004 and 2008,
16 wherein Wells Fargo, San Francisco, subsidiary Wells Fargo Financial and its employees, falsified
17 and/or altered documents to inflate borrowers income on loan applications in order to qualify for
18 loans they would not have otherwise have qualified. Separately, Wells Fargo employees were
19 steering borrowers into subprime loans who would have, but for upselling by Wells Fargo
20 qualified for prime pricing. The Cease and Desist Order found that the Companys internal controls
21 were not sufficient to detect this conduct of employees.
22

Financials internal controls, including controls relating to Financials sales


performance standards and compensation programs, were not adequate to detect and
prevent incidents of evasion of the A-Paper Filter by Financial sales personnel.

Deficiencies specified in paragraphs D. through H. above resulted in:

23
24
25

(i)

Unsafe or unsound banking practices;

26

(ii)

Unfair or deceptive acts or practices within the meaning of section

27 5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. 45(a)(1);


28
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(iii)

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Violations of various state laws pertaining to fraud and false or

2 misleading statements in home mortgage loan-related documents, and to unfair or deceptive acts or
3 practices.
4

(a)

The current directors who were also directors during the period in which the

5 deceptive acts were carried out were Chen, Dean, Hernandez, Sanger, Quigley, Moore, Runstad,
6 Milligan and Swenson. As demonstrated, a majority of Wells Fargos directors knowingly
7 participated in and authorized the wrongful acts and omissions, or recklessly disregarded the wrongs
8 which are complained of herein. Thus, despite knowledge of the claims asserted by plaintiffs, the
9 defendants have knowingly chosen not to exercise the fiduciary duties of loyalty and due care owed
10 to the Company and protect Wells Fargo or to rectify the illegal practices complained of herein.
11

(b)

The acts complained of constitute waste and are violations of the defendants

12 fiduciary duties owed to Wells Fargo and, therefore, are not protected by the business judgment rule
13 and/or subject to ratification by shareholders.
14

(c)

The defendants have not taken any legal action against themselves and/or any

15 other director and/or current or former officers for failing to implement adequate internal controls
16 and engaging in conduct that has exposed Wells Fargo to liability for violating state and federal
17 laws. Any suit by the Board to remedy the wrongs complained of herein would expose the
18 defendants and their friends and business allies to significant personal liability for their breaches of
19 fiduciary duties and other misconduct. The defendants have demonstrated their unwillingness and/or
20 inability to act in compliance with their fiduciary obligations and/or to sue themselves and/or their
21 fellow directors for the wrongful conduct described herein.
22

(d)

The defendants have close personal and business ties with each other and are,

23 consequently, interested parties who cannot in good faith exercise independent business judgment to
24 determine whether to bring this action against themselves or any other member of the Board. For
25 example, the Company routinely makes charitable donations to different tax-exempt organizations
26 on which one or more of the defendants serve as an officer, board or trustee chair and the Company
27 purchases software from companies where defendants Chen and Swenson serve as CEOs.
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(e)

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Each defendant had the ability and/or opportunity to prevent the unlawful

2 practices complained of herein. As members of the Board, the defendants are responsible for
3 overseeing the Companys compliance with legal requirements and, therefore, all directors are liable
4 for not ensuring that the officers and employees of the Company did not expose Wells Fargo to
5 unnecessary risk. Because the defendants are liable for approving and directing the illegal conduct
6 described herein, demand would be futile.
7

(f)

Wells Fargos officers and directors are protected against personal liability by

8 a large directors and officers liability insurance policy. They caused the Company to purchase that
9 insurance for their protection with corporate funds, i.e., monies belonging to the shareholders of
10 Wells Fargo. However, the directors and officers liability insurance policy covering the defendants
11 contains provisions which eliminate coverage for any action brought directly by Wells Fargo against
12 these defendants, known as, inter alia, the insured-versus-insured exclusion. As a result, if these
13 directors were to sue themselves, no insurance protection would be provided for the derivative
14 claims. Thus, this is a further reason why the defendants will not bring such a suit, for to do so
15 would subject them and their colleagues and/or friends to a judgment of millions of dollars that
16 would have to be paid from their individual assets alone. On the other hand, if the claims are
17 brought derivatively, such insurance coverage will provide a basis for the Company to effectuate a
18 recovery.
19

(g)

The defendants refused (and continue to refuse, as evidenced by the recent

20 reports of continued robo-signing by Wells Fargo) to put into place adequate internal controls and
21 adequate means of supervision to stop the wrongful conduct alleged herein despite the fact that the
22 Board knew and/or recklessly ignored such wrongful business practices. These acts, and the acts
23 alleged in this action, demonstrate a pattern of gross misconduct, which conduct is not taken
24 honestly and in good faith.
25

COUNT I

26

Against All Defendants for Breach of Fiduciary Duty

27

191.

Plaintiffs incorporate 1-190.

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192.

Filed09/12/11 Page103 of 108

Each defendant owed to the Company the duty to exercise candor, loyalty and good

2 faith in the direction and administration of Wells Fargos business and affairs.
3

193.

Defendants misconduct was not due to an honest error or misjudgment, but rather to

4 their intentional breach or reckless disregard of the fiduciary duties they owed to the Company.
5 Defendants intentionally breached or recklessly disregarded their fiduciary duties to protect the
6 rights and interests of Wells Fargo.
7

194.

In breach of their fiduciary duties owed to Wells Fargo, defendants knowingly

8 participated in and caused Wells Fargo to waste its valuable assets and otherwise to expend
9 unnecessarily its corporate funds, and failed to properly direct Wells Fargos business, rendering
10 them personally liable to the Company for breaching their fiduciary duties.
11

195.

As a direct and proximate result of defendants breaches of their fiduciary obligations,

12 Wells Fargo has sustained and continues to sustain significant damages. As a result of the
13 misconduct alleged herein, defendants are liable to the Company.
14

COUNT II

15

Against All Defendants for Abuse of Control

16

196.

Plaintiffs incorporate 1-195

17

197.

Defendants misconduct constituted an abuse of their ability to control and influence

18 Wells Fargo, for which they are legally responsible.


19

198.

As a direct and proximate result of defendants abuse of control, Wells Fargo has

20 sustained significant damages.


21

199.

As a direct and proximate result of defendants abuse of control, Wells Fargo has

22 sustained and continues to sustain significant damages. As a result of the misconduct alleged herein,
23 defendants are liable to the Company.
24

COUNT III

25

Against All Defendants for Gross Mismanagement

26

200.

Plaintiffs incorporate 1-199.

27
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201.

Filed09/12/11 Page104 of 108

Defendants have grossly mismanaged Wells Fargos business and affairs, and

2 exposed and subjected Wells Fargo to damages, fines and penalties, by causing the Company to
3 violate state and federal laws applicable to Wells Fargos business.
4

202.

By their actions, defendants breached their fiduciary duties to direct and control Wells

5 Fargo in a manner consistent with the legal duties of directors and officers of a publicly held
6 company.
7

203.

As a result of the defendants gross mismanagement, Wells Fargo has sustained and

8 will continue to sustain damages and irreparable injury, for which it has no adequate remedy at law.
9

COUNT IV

10

Against All Defendants for Corporate Waste

11

204.

Plaintiffs incorporate 1-203.

12

205.

As a result of the foregoing misconduct, defendants have caused Wells Fargo to waste

13 valuable corporate assets.


14

206.

As a direct and proximate result of defendants corporate waste, Wells Fargo has

15 sustained and continues to sustain significant damages. As a result of the misconduct alleged herein,
16 defendants are liable to the Company.
17

PRAYER FOR RELIEF

18

WHEREFORE, plaintiffs demand judgment as follows:

19

A.

Declaring that plaintiffs may maintain this action on behalf of Wells Fargo and that

20 plaintiffs are adequate representatives of the Company;


21

B.

Declaring that the defendants have breached and/or aided and abetted the breach of

22 their fiduciary duties to Wells Fargo;


23

C.

Determining and awarding to Wells Fargo the damages sustained by it as a result of

24 the violations set forth above from each of the defendants, jointly and severally, together with
25 interest thereon;
26

D.

Determining and awarding to Wells Fargo exemplary damages in an amount

27 necessary to punish defendants and to make an example of defendants to the community according
28 to proof at trial;
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E.

Awarding Wells Fargo restitution from defendants, and each of them;

F.

Awarding plaintiffs the costs and disbursements of this action, including reasonable

3 attorneys and experts fees, costs and expenses; and


4

G.

Granting such other and further equitable relief as this Court may deem just and

5 proper.
6
7

JURY DEMAND
Plaintiffs demand a trial by jury.

8 DATED: September 12, 2011


9

ROBBINS GELLER RUDMAN


& DOWD LLP
SHAWN A. WILLIAMS

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s/ SHAWN A. WILLIAMS
SHAWN A. WILLIAMS
Post Montgomery Center
One Montgomery Street, Suite 1800
San Francisco, CA 94104
Telephone: 415/288-4545
415/288-4534 (fax)
ROBBINS GELLER RUDMAN
& DOWD LLP
TRAVIS E. DOWNS III
BENNY C. GOODMAN III
ERIC I. NIEHAUS
655 West Broadway, Suite 1900
San Diego, CA 92101-3301
Telephone: 619/231-1058
619/231-7423 (fax)
BARRETT JOHNSTON, LLC
GEORGE E. BARRETT
DOUGLAS S. JOHNSTON, JR.
TIMOTHY L. MILES
217 Second Avenue, North
Nashville, TN 37201-1601
Telephone: 615/244-2202
615/252-3798 (fax)
Co-Lead Counsel for Plaintiffs

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VERIFICATION

I, SHAWN A. WILLIAMS, hereby declare as follows:

1.

I am a member of the law firm of Robbins Geller Rudman & Dowd LLP, one of the

4 counsel of record for plaintiffs in the above-entitled action.

I have read the VERIFIED

5 CONSOLIDATED SHAREHOLDER DERIVATIVE COMPLAINT FOR BREACH OF


6 FIDUCIARY DUTY, ABUSE OF CONTROL, GROSS MISMANAGEMENT AND CORPORATE
7 WASTE, filed on September 12, 2011, and know the contents thereof. I am informed and believe
8 the matters therein are true and on that ground allege that the matters stated therein are true.
9

2.

I make this Verification because Lead Plaintiffs are absent from the County of San

10 Francisco where I maintain my office.


11

Executed this 12th day of September, 2011, at San Francisco, California.

12
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s/ SHAWN A. WILLIAMS
SHAWN A. WILLIAMS

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Filed09/12/11 Page107 of 108

CERTIFICATE OF SERVICE
I hereby certify that on September 12, 2011, I authorized the electronic filing of the foregoing

3 with the Clerk of the Court using the CM/ECF system which will send notification of such filing to
4 the e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I
5 caused to be mailed the foregoing document or paper via the United States Postal Service to the non6 CM/ECF participants indicated on the attached Manual Notice List.
7

I certify under penalty of perjury under the laws of the United States of America that the

8 foregoing is true and correct. Executed on September 12, 2011.


9

13

s/ SHAWN A. WILLIAMS
SHAWN A. WILLIAMS
ROBBINS GELLER RUDMAN
& DOWD LLP
655 West Broadway, Suite 1900
San Diego, CA 92101-3301
Telephone: 619/231-1058
619/231-7423 (fax)

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E-mail: shawnw@rgrdlaw.com

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Page 1 of 1
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Mailing Information for a Case 3:11-cv-02369-SI


Electronic Mail Notice List
The following are those who are currently on the list to receive e-mail notices for this case.
z

George E. Barrett
gbarrett@barrettjohnston.com

Stephen R. Basser
sbasser@barrack.com,lnapoleon@barrack.com,cfessia@barrack.com

Travis E. Downs , III


travisd@rgrdlaw.com,e_file_sd@rgrdlaw.com,e_file_sf@rgrdlaw.com

Sarah A. Good
sgood@howardrice.com,bhastings@howardrice.com

Douglas S. Johnston
djohnston@barrettjohnston.com

Alan M. Mansfield
alan@clgca.com,sally@clgca.com

Timothy L. Miles
tmiles@barrettjohnston.com

Eric Ian Niehaus


ericn@rgrdlaw.com

Gilbert Ross Serota


gserota@hrice.com,nprince@howardrice.com

Samuel M. Ward
sward@barrack.com,lxlamb@barrack.com

Shawn A. Williams
shawnw@rgrdlaw.com,khuang@rgrdlaw.com,erinj@rgrdlaw.com,e_file_sd@rgrdlaw.com,lmix@rgrdlaw.com,e_file_sf@rgrdlaw.com

Marc Joel Price Wolf


mpricewolf@howardrice.com

Barbara Wright
barbara.wright@wellsfargo.com

Manual Notice List


The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You
may wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these
recipients.
Joe Kendall
Provost & Umphrey Law Firm, LLP
3232 McKinney Avenue
Suite 700
Dallas, TX 75204
Joe McKey
Kendall Law Group, LLP
3232 McKinny Avenue, Sutie 700
Dallas, TX 75204
Barbara H. Wright
Wells Fargo & Co.
One Wells Fargo Center
32nd Floor
D-1053-300
Charlotte, NC 28202

https://ecf.cand.uscourts.gov/cgi-bin/MailList.pl?818974292070897-L_366_0-1

9/12/2011