The folks at the Southeastern Pennsylvania Transportation Authority (SEPTA), which runs the financially strapped Philadelphia-area subway and commuter rail transportation system, are anxiously waiting to see what they will be getting out of a $590-million out-of-court settlement just reached with Wells Fargo Bank.
“We don’t know what our share will be,” a SEPTA spokesman told On Wall Street. “Maybe we’ll be celebrating with a banquet, or just buying everyone donuts.”
The case involved the sale of packaged mortgages by Wachovia Bank, mostly of loans originated by Golden West Financial, a California-based home loan lender which Wachovia had acquired. Wells Fargo in turn acquired North Carolina-based Wachovia in 2008, after plunging home values and rising defaults brought the latter bank close to collapse. In addition to paying $12.7 billion for Wachovia, Wells Fargo had to assume responsibility for Wachovia’s $117.3-billion Pick-a-Pay loan portfolio.
These were adjustable rate mortgages which allowed borrowers to miss payments and then add the skipped payments and interest to the principal. After the acquisition of Wachovia by Wells Fargo, it was established that some half of those mortgages were credit-impaired.
The plaintiffs, in addition to SEPTA, included a number of public agencies and pension funds, including the Orange County Employees Retirement System in California and the Louisiana Sheriff’s Pension and Relief Fund.
The plaintiffs alleged in their lawsuit that Wachovia had made “false and misleading” statements about the Pick-a-Pay mortgage securities it sold between 2006 and 2008, calling the investments “pristine” and conservative.
A Wells Fargo statement about the settlement, which still must be approved by a court, said the bank agreed to the settlement “in order to avoid the distraction, risk and expense of on-going litigation,” and adds, “The settlement agreement does not constitute an admission by Wells Fargo of liability or any violation of law by Wachovia.”
The accounting firm KPMG, which was Wachovia’s auditor, and which is also a listed defendant in the case, reached a separate $37 million settlement with the plaintiffs.
Attorneys for the plaintiffs, in a joint statement released today, said, “We believe these settlements reflect an outstanding result for bond and preferred-security purchasers who were damaged as a result of false and misleading offering materials.”