Wells Fargo fails to end lawsuit over WestLB CDO vehicle

NEW YORK, April 1 Tue Apr 1, 2014 6:35pm EDT

NEW YORK, April 1 (Reuters) - Wells Fargo & Co failed to persuade a U.S. judge to dismiss a lawsuit accusing it of mismanaging a collateralized debt obligation vehicle created by WestLB AG, a state-owned German bank that was dissolved after the 2008 financial crisis.

While dismissing several claims, U.S. District Judge Richard Sullivan in Manhattan said Wells Fargo must face claims by House of Europe Funding I Ltd, a Cayman Islands-based CDO issuer, that its oversight led to losses that could reach $163 million. The decision was made public on Tuesday, and is dated March 31.

Created by WestLB in 2003, House of Europe accused Wells Fargo, as trustee and collateral administrator, and Collineo Asset Management GmbH, a German asset manager, of taking too much risk by allowing it to invest excessively in other kinds of CDOs at least six times from April 2006 to July 2007.

According to the complaint, most of the disputed assets have defaulted, causing $143 million of losses and $20 million of expected future losses for House of Europe and its investors. Erste Abwicklungsanstalt (EAA), a German agency created to wind down WestLB, was also a plaintiff.

Sullivan ruled that House of Europe's allegations sufficed to allow a breach of contract claim against Wells Fargo.

He also said that allegations that Wells Fargo concealed the true nature of the investments by misreporting them supported an inference at this stage of the case that the San Francisco-based bank might have acted with "gross negligence."

Sullivan also allowed House of Europe to pursue part of its case against Collineo, and dismissed much of EAA's case. The lawsuit was filed in January 2013.

Jonathan Pickhardt, a partner at Quinn Emanuel Urquhart & Sullivan representing House of Europe and EAA, said: "We are pleased that the court upheld our central claim seeking to hold Wells Fargo responsible for its repeated breaches of provisions intended to protect House of Europe I and its investors."

Wells Fargo spokesman Ancel Martinez declined to comment. The bank is the fourth-largest in the United States by assets.

Demian Ordway, a lawyer at Holwell Shuster & Goldberg representing Collineo, said: "We're very happy with the result, and are confident that HOE's remaining claim against Collineo will ultimately be dismissed."

WestLB ceased operations in 2012.

The case is House of Europe Funding I Ltd et al v. Wells Fargo Bank NA et al, U.S. District Court, Southern District of New York, No. 13-00519. (Reporting by Jonathan Stempel in New York; editing by Andrew Hay)

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